Idea on Fee Distribution & Ensuring Deep Liquidity

General Commons DeFi
1

Hello everyone,

As per the heading, I would like to share my ideas on two topics, fee distribution model and vesting liquidity mechanism to ensure deep liquidity for the protocol.

For fee distribution model, I realised it is important to ensure both bitocracy stakers and LP are incentivised to commit in the long run.

Proposed Fee Distribution Model:
For V1 pools,
LP: 0.25%
Stakers: 0.05% (1/5)
This is common fee distribution for other projects

For V2 pools,
LP: 0.09%
Stakers: 0.01% (1/10)

Trades (Futures)
Stakers: 0.15%
LP: 0% (Why are they getting this?)

If we can remove LP involvement in this, we can offer tiered discounts on this to encourage more stakers to stake for discounts which lead to more volume on margin trading which serves the true purpose of defi on btc. The tiering can be based on voting power. Voting power is measured based on time and stack, so for poor folks, if they staked long enough, they can enjoy premium discounts. For rich folks, they can stake shorter periods with larger stacks. This allows flexibility in commitment.

The next topic is ensuring deep liquidity in protocol. Defi protocols usually incentivise LP by provision of liquidity mining rewards to bootstrap the initial phase. Ideally, a sufficiently deep liquidity will bring in high volume of transactions which will generate sufficient fees to keep LP incentivised to keep it sustainable in the long run when there is no longer any liquidity mining reward. The problem is that LP can withdraw liquidity at any time which will cause a liquidity shock in the protocol.

We need to preserve deep liquidity as long as possible and for community to keep track of liquidity movement to introduce liquidity mining reward to entice ppl to LP again, ensuring deep liquidity.

So how do we do it? Some ideas below:

  1. Liquidity Lockup Period
    Mentioned earlier, we can make LP indicate a timeframe to lock their liquidity when they first LP. In this matter, fee distribution of 0.25% will need to adjust to tier it based on their commitment. In order to incentivise this, we use liquidity reward mining to bootstrap this process. Ideally, huge volume will keep it sustainable.

1 mth - 0.2%
6 mth - 0.25%
1 year - 0.3%
2 years - 0.35%
3 years - 0.4%

  1. Vesting Liquidity Withdrawal
    LP initiate withdrawal of liquidity. They are asked to select a timeframe to unvest their liquidity. Once a date is selected, a portion of their liquidity is unvested each day until the D day arrives. During this unvesting period, LP can continue to earn fees from his remaining liquidity.

1 mth - 0.2%
2 mth - 0.21%
3 mth - 0.22%
4 mth - 0.23%
5 mth - 0.24%
6 mth - 0.25%
1 year - 0.3%
2 years - 0.35%
3 years - 0.4%

The idea is to have ppl select 6 months option to retain their 0.25% fee. Otherwise they are getting less fees during unvesting period. During lull period where lots of liquidity are exiting, introduce liquidity mining rewards again to get LP back in. This will keep it cyclical.

Would like to hear from the community and the team on the above ideas.

Cheers!

7 Likes
2

Thanks and applaud your effort on it!

It’s rewarding doing good to the protocol, while maintaining very high degree of freedom.

I find your idea well balanced and enticing to all involved parties, but I’m not sure if I see the (are there any?) drawbacks - so hope your idea gets discussion started.

4

Regarding your point number 2: “During this unvesting period, LP can continue to earn fees from his remaining liquidity.”

Users unvested liquidity should remain as liquidity but they will be able to withdraw at will or at no penalty. (if this is not what you originally meant).

Also, penalties charged - if any - can be included as permanent liquidity provided infinitely vested in the protocol (and maybe also earn further for that liquidity provision adding to its liquidity provision)

This way, the protocol will have a type of insurance fund kind of liquidity build up over time that’s locked in the protocol.

That can also apply to penalties charged on the staking part of Sovryn.

3 Likes
5

Perhaps let me clarify on this. If LP chooses 1 month for example, everyday 3.33% of his liquidity will be withdrawn and the remaining liquidity will continue to gain 0.2% fees until the last day.

As for permanent liquidity aka locked liquidity, it will cannibalise fees with existing LP, hence I am reluctant to propose that as a solution. But I totally get your point.

Thanks for the feedback! Hope the team see this.

3 Likes
6

Solid concepts, keep 'em coming. It would, of course, be great to know a bit more about how rewards are currently structured for SOV stakers.

I like the idea of vested liquidity withdrawals. While, at a certain level, it goes against the spirit of completely autonomous money management, I think it offers important stability benefits to a protocol. The sudden, direct removal of sizable liquidity during downturns can really contribute to a death spiral. It would serve as a strong dampener during peak volatility. Whether there are significant downsides to that, needs to be thought about carefully.

7

I love the dive into the concept. As a reality check for the new guy, I staked Polkadot at 12% , Kava at 20% both with lockups of only a few weeks, USDC offers 4.9% with no lockup, etc. I have friends with deep pockets looking for the short term commit while I tend to think longer term - but both of parties are looking at these as benchmark opportunities. One of those is claiming 20% apr yields paid out daily. While I believe in the inherent freedom of this platform - it is a tough sell to have people walk away from such compelling returns. Anything like the proposed matrix that can give participants clarity and faith in returns will go a long way to kicking this off!

2 Likes