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LIQUIDITY BLACK HOLE THEORY There exists a token-based AMM design
That threatens to create a liquidity blackhole
Pulling in assets from everywhere
CEXs, DEXs, Cold Storage, etc.
I'll break it down
First, understand that liquidity can create feedback loops:
Trading Volume > MM Profits > Capital Dedicated to MM > Liquidity > Tighter spreads > 
Liquidity begets Liquidity
This is true for any market, and for both CLOB exchanges & Pooled Liquidity models
Trading Volume > MM Profits > Capital Dedicated to MM > Liquidity > Tighter spreads > Liquidity begets Liquidity
This is true for any market, and for both CLOB exchanges & Pooled Liquidity models
However, upstart exchanges face a chicken or the egg problem where they begin with both low liquidity & trading volumes
Many face a hard time kicking off the feedback loop
Liquidity mining presents a novel mechanism to bootstrap network effects
Read https://insights.deribit.com/market-research/supercharging-network-effects-in-crypto/?utm_source=Twitter&utm_medium=Andrew&utm_campaign=InsightTweets
Many face a hard time kicking off the feedback loop
Liquidity mining presents a novel mechanism to bootstrap network effects
Read
https://insights.deribit.com/market-research/supercharging-network-effects-in-crypto/?utm_source=Twitter&utm_medium=Andrew&utm_campaign=InsightTweets
In short, liquidity mining incentivizes liquidity provisioning through token rewards
This allows liquidity to flourish and attract greater trading volumes.
After Liquidity Mining:
- @synthetix_io sETH Pool = 1/3 Total Uniswap Liquidity
- @BalancerLabs = $30M TVL in 1 week
This allows liquidity to flourish and attract greater trading volumes.
After Liquidity Mining:
- @synthetix_io sETH Pool = 1/3 Total Uniswap Liquidity
- @BalancerLabs = $30M TVL in 1 week
Now consider an AMM where the central asset in liquidity pools is a native network token
E.g., ETH is the central asset for all Uniswap markets. Imagine if Uniswap launched its own network token and this replaced ETH.
This is the model used by @Bancor and @thorchain_org
E.g., ETH is the central asset for all Uniswap markets. Imagine if Uniswap launched its own network token and this replaced ETH.
This is the model used by @Bancor and @thorchain_org
Now things get really crazy when you throw in liquidity mining (LM)
But in order to LM these pools, LPs need to own/stake $RUNE or $BNT as they make up 50% of each pool
Buying $BNT/$RUNE increases the price meaning the pools get deeper & more liquid attracting more traders
But in order to LM these pools, LPs need to own/stake $RUNE or $BNT as they make up 50% of each pool
Buying $BNT/$RUNE increases the price meaning the pools get deeper & more liquid attracting more traders
What I just described is the liquidity feedback loop ON STEROIDS
Get what else increases with liquidity mining as price increases? LM YIELD
A virtuous cycle of increasing price and deeper liquidity and higher yield resulting in a black hole sucking in all crypto assets
Get what else increases with liquidity mining as price increases? LM YIELD
A virtuous cycle of increasing price and deeper liquidity and higher yield resulting in a black hole sucking in all crypto assets
Now sprinkle in a bit of meth by considering the concept of REFLEXIVITY
If people anticipate large $BNT or $RUNE LP yield, they will buy more increasing the price creating a self-fulfilling prophecy
This is why $SNX did a mind-blowing 50x pump over 9 months
If people anticipate large $BNT or $RUNE LP yield, they will buy more increasing the price creating a self-fulfilling prophecy
This is why $SNX did a mind-blowing 50x pump over 9 months
Me shilling you this concept right now is actually creating even more reflexivity
But WAIT, there's more.
@thorchain_org have liquidity pools that use an alternative fee model described in detail in this thread: https://twitter.com/Rewkang/status/1232414958706520064
@thorchain_org have liquidity pools that use an alternative fee model described in detail in this thread: https://twitter.com/Rewkang/status/1232414958706520064
Essentially, instead of a standard 30bp fee, fees are proportional to the slippage created by a trade (scale of 1 to 10000 bps)
Patient traders can split trades to minimize fees
Impatient traders will execute large trades with large fees because they are lazy or can profit
Patient traders can split trades to minimize fees
Impatient traders will execute large trades with large fees because they are lazy or can profit
What most people don't realize is that most volume in Uniswap and Balancer comes from arbitrage at the expense of LPs
However, arb competition doesn't benefit LPs, only miners.
Alternatively, CLPs allow LPs to capture more value from arbitrage trades due to higher fees
However, arb competition doesn't benefit LPs, only miners.
Alternatively, CLPs allow LPs to capture more value from arbitrage trades due to higher fees
READ THIS QUOTE
MASTERCLASS IN INCENTIVE DESIGN
MASTERCLASS IN INCENTIVE DESIGN
You guys know what to do
Footnote*
Now of course, reflexivity could always reverse in the other direction, but the goal is that the liquidity black hole creates pools that act as impenetrable liquidity moats
Now of course, reflexivity could always reverse in the other direction, but the goal is that the liquidity black hole creates pools that act as impenetrable liquidity moats
