AIP 11: Automated AirSwap Vaults

[Hardwood6969]

Summary

To offset the opportunity cost incurred by liquidity providers on Airswap, we suggest opt-in automated vaults to manage and grow their capital in the time that their quotes are waiting to be filled.

Said vaults will employ yield farming, lending, and other proven low-risk strategies aimed at providing consistent returns with high time flexibility.

Specification

We suggest an optional (opt-in) feature for Airswap liquidity providers to allow their capital to participate in automated low-risk strategies. When quotes are taken, the capital would be pulled out of these strategies along with any returns gained via management in that time period. These low-risk strategies would be represented as contracts, voted on by governance and subject to audit by Airswap. Gas fees would be paid by participants. Participants would also take on any risks of losing money due to vault participation. A small performance fee, initially set at 0%, subject to change by future governance, would be charged on the returns of these vaults. These performance fees would be distributed to AST+ stakers along with other protocol fees, earned and claimed in the same way.

Rationale

• Liquidity providers on Airswap give up the opportunity to grow their capital through other strategies than providing liquidity while their quotes are waiting to be filled on Airswap.
• We believe that the prospect of attractive low-risk, high-reward, time-flexible returns would attract more liquidity providers to use Airswap.
• Higher liquidity on the Airswap protocol makes Airswap a more attractive option for takers, thereby attracting more users.
• More users on Airswap means more fees to reward AST+ participants with, incentivizing more AST holders to participate in governance, thereby increasing the robustness of the protocol.
• One possible concern would be that it would be possible to grief liquidity providers by creating many small taker orders on the same quote, forcing them to lose money through gas. Some sort of countermeasure to this should exist, perhaps in the form of a mechanism to rate limit taker orders.

Copyright

Copyright and related rights waived via CC0.

[Blastwv]

Offsetting opportunity cost this way is super smart and would definitely attract liquidity from people inclined to move and utilize their stack more freely, like for example speculators, regardless of their stack size imho. I'm speaking for personal experience btw, since opportunity cost is something that made me wary of providing liquidity before, so I think this would be a very attractive feature to implement!

[Hardwood6969]

Basically even if it’s a low APY or fed from elsewhere, it’s still better than nothing. LPs get the additional benefits of Airswap audit and ability to basically place limit orders on their liquidity, as opposed to an AMM model. It should be possible to ship a MVP for this if the AIP is passed, and keep improving it from that point. If the vault APY is very good, perhaps users will be incentivized to use Airswap just for the sake of these vaults. If the feature is optional, there should be no conflict with users who simply want to provide liquidity with nothing extra.

[ejwessel]

Overall, this AIP follows the notion that “capital wants yield, and markets want liquidity”; it tries to motivate liquidity providers by providing a return while waiting for liquidity to be taken.

We are currently scoping out a design that lets people set up limit orders to be funded by their balances on compound.finance markets as a proof of concept.

A few considerations:

• Gas costs associated with depositing and removing liquidity that is deployed through various DeFI protocols could negatively impact proceeds from each trade.
• During times of high volume, the cost of deploying liquidity to various DeFi protocols may outweigh the yield as there is not ample time to make any sizable return before liquidity is taken.
• Liquidity taken during times of high yield might disincentivize liquidity providers moving funds in, as they likely would want that liquidity accruing even during times of low volume.