Liquidity Reward Update

[patrickdugan]

The first version of liquidity reward had a few key assumptions:

1) only maker orders should get the reward 2) trade channels are prone to wash trading so should not be included 3) very high early inflation which rewarded the trade for 1-5% of its value.

Such a huge subsidy, makes the early inflations seem almost pre-miney due to how intense it is. Also, inflating the coin at a rate higher than the value-added by the action is a bad idea at any point, this airdrop promo mentality is stupid, design emission to make continous economic sense at all times or don't do it.

Based on this realization, and the fear of wash trading nuetering the economics of this thing out the gate, I realized that if the reward is a consistent % of the cost, e.g. 1/2, then to wash-trade for the subsidy is tantamount to buying ALL/TOTAL at double the current LTC price. By defining the fee in terms of the LTC volume equivalent, we can assume some ALL/LTC price or BTC/TOTAL price as a salient ratio and have the emission go from there. The point is that you will always spend 0.001 LTC in fees to earn 0.0005 ALL * the ratio. ALL long-term supply to be ~1/8th LTC's, more scarce for TOTAL/BTC. So at 8 LTC/ALL we get into dangerous territory where 51% attacks have added rewards. At 1 LTC/ALL probably is sane. So as a rule of thumb, we're talking 0.0005 ALL per 1 LTC traded paying a 1 bps fee (1/2 of which is returned to a wash trader as a rebate, making it == going long ALL/LTC futures with no premium in the contract).

Here is the spreadsheet model I did in August to show the results:

https://docs.google.com/spreadsheets/d/1qMF3RbsdNRd8n862adkk-IPE06ahANUexdEnHk52-Fw/edit?usp=sharing

There is some promo rate inflation in the first 100k LTC and so on, the formulas in the spreadsheet spell this out:

=(B2-B3)0.0025+B30.005

B2 is total LTC volume and B3 is the on-chain volume. B2 is the total volume including Trade Channels. So TCs are paid less because they can wash trade easily that way so the total fees for wash trading are 2 bps, you get lower subsidy, to wash trade on-chain involves taking the risk that someone else will match with you and create real market risk.

Next one:

=(C3-B3)0.005+(C2-B2-C3)0.0025

Here we're assuming a lot of LTCs traded in 2020, >20 million, the threshold for LTCs traded to take the subsidy leaner is really high, ~10M. This is to offset for the meager per-trade inflation that this model gives, to generate most of the ALL money supply, a lot of trade must occur. This way, we're maintaining some scarcity and not overpaying for liquidity. Plenty of exchanges using tokens and other schemes to subsidize their volumes but how reliable is it if the economics are injurious long-term. The numbers aren't totally accurate for this formula because it exceeds the 10M threshold.

=(D3-10000000)0.001+(D2-100000000-D3)0.00005+50000+25000

So we're taking a baseline, we've dropped the subsidy over 10M LTC cum. volume from 50 basis points to 10, and the subsidy on TC volume from 25 basis points to half a basis point, and the results from the early rates are added on. The threshold for Trade Channel volume is 100M LTC.

So to correct my earlier statement, the protocol is a bit generous with subsidy early on because that was the only way to get the totals up, proportionate to Node Reward and Founder Reward. In the long-term, at these reduced levels, there's no-arb in pumping volume on TradeLayer. In the short-term though, early adopters who run high/medium frequency algos will become enfranchised as "seat-holders" in TradeLayer and have a decent position, or will sell the coins and see the whole thing as a USD arbitrage. If, for the sake of argument, these traders are fair-weather users of the protocol and vanish when we hit 10M/100M LTC traded, well, at least we're only diluted ~50%. Instead of 90%. And at these rates, the protocol can affordably reward liquidity for a long time while having a disinflationary total supply (and deflationary if insurance fund additions are accounted for as a reduction in supply, which because the insurance fund can always be tapped by hyperbolic volatility, is not a great assumption). The balance between disinflationary and deflationary is the art in it.

=(E3-100000000)0.0005+(E2-100000000)0.00005+50000+25000+90000

The on-chain liquidity subsidy drops to 5 basis points. This is still lucrative. The TC subsidy is still less than the net-cost of washing trades that way. The on-chain liquidity has a lot of risks in the timing of execution, and they are the bidders of last resort that fill margin call stacks during extreme moves, so it merits that there is a good, long-term incentive to take that risk, you hope to get filled, you accept the risk of the market going right through your order and putting you in a drawdown for some period of time. Since these people are backstopping the whole system with that risk, best to align their incentives towards the long-term. HFT arb systems can throw these on-chain orders out wider and cancel them/edit periodically, in addition to using Trade Channels for fast, tight hedging of orderflow on rebate-paying venues, and the 5 bps subsidy is rich enough that when they get filled (or their model concludes the order is highly likely to fill) they can pay 5 bps to hedge off elsewhere. There's also arbitraging orderflow from on-chain orders vs. TC signatures in short time-frames.

=(G3-1000000000)0.0001+(G2-100000000)0.00005+50000+25000+90000+450000

Here's the last shift, after 1 beeelion litecoins the on-chain order subsidy drops to 1bps.

To implement this litecoin::ALL conversion take the ALL price, the price of the asset, and triangulate, the logic for this was already implemented. Assume 1bps means 0.0001 ALL e.g. LTC/ALL 1.

Disclaimer: the embedded LTC/ALL and BTC/TOTAL pricings are heuristic in nature and not an attempt to suggest to market participants what the values of these things should be, or to suggest that they will ever trade at such values, sustainably, or at all. If the ALL/TOTAL emission were based on a volatile price, the emission rates would become utterly unpredictable hence the erring on the side of this approach. The downside is that if ALL/LTC <1 the effective basis point subsidy is lower, and if ALL/LTC >1 then it's higher. It being lower when the coin is lower priced is at least counter-cyclical to a cynical debasement of the money supply flipping the coin at those low prices. Conversely lots of trading activity when prices are higher may result by arbitrageurs trying to create the coin to sell, which normalizes the price in ALL/LTC terms. Were this math indexed to price, it would be pro-cyclical, an impoverished ALL/LTC rate would accelerate inflation in ALL, further suppressing the price, like those penny stocks where they raise money from sharks who get issued tons of new shares to make them whole+interest and they just pummel the market with sometimes 100,000%+ expansions in float - which is legal but should not be! Here we're aiming for minimal long-term instability, maximal long-term resiliency.

[patrickdugan]

Correction: with this revised emissions schedule we actually see 1.5M ALL supply in a long-term where lots and lots of volume is done on TradeLayer, so a "2050 diluted supply" might be more like 1/32nd the total LTC supply.

[patrickdugan]

After careful investigation it seems that there are chunks in the tx.cpp under the parse trades functions where Node Reward logic is placed or commented out, and doesn't belong, while the liquidity reward has not been implemented. So a great time to do so now.

[patrickdugan]

We still don't have liquidity reward in but the industry has run through this idea so much, it's pretty clear the disinflationary model is better, and we will add this on after launch and hopefully getting some PMF based on the low fee execution, before incentivizing power users and hot money short-term adoption.

[patrickdugan]

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