KeeJef commented 3 years ago

ORC-6 Liquidity Provider Rewards

Introduction

Since its launch years ago as Loki, the $OXEN coin has been characterized by relatively thin market order books on its available exchanges. When compared with coins of a similar market cap, $OXEN’s liquidity is noticeably lower, meaning that buys or sells can shift the price by 2-4 times as much as other cryptocurrencies with comparable market capitalizations. This is due in no small part to the amount of $OXEN locked up in Service Node stakes, and thus rendered relatively illiquid by design. This ORC (which previously would have been known as an LRC) proposes enacting a persistent liquidity block reward to induce holding of liquid $OXEN and better serve market needs.

Motivation

Low liquidity on exchanges discourages new investment into $OXEN, particularly by investors looking to obtain large amounts of $OXEN. The significant price premium required to execute any large order deters investment, but more significantly low liquidity has also deterred investment because low liquidity makes it more difficult and more expensive to sell should an investor decide to liquidate their Oxen position in the future.

Thus far, the Oxen Foundation has supported liquidity by acting as a market maker using its own reserves of Oxen and BTC. The Foundation also, on occasion, acts as an OTC broker, handling larger $OXEN orders and then moving those orders more slowly onto existing exchanges. We feel, however, that these approaches are far from sufficient, and such approaches also incur ongoing costs. We believe the entire $OXEN holder base would benefit from additional liquidity support beyond what already exists, and we intend to provide this support by pursuing a more robust incentive structure to encourage decentralized provision of market liquidity.

Proposal

The Oxen Foundation proposes that a portion of the block reward be permanently allocated to liquidity incentives focussed on decentralized liquidity pool(s). As an initial proposal (subject to discussion), we suggest a reward of 800 OXEN per day (1.111 per block) be added to the block reward at the next hardfork exclusively for this purpose. To put these amounts into perspective, 11,800 OXEN per day, or 16.5 per block, is currently allocated to service node rewards.

Prior to enacting this change, the Oxen Foundation intends to directly provide the proposed amount (800 $OXEN per day) over a two-month period to act as a reward for liquidity providers to the USDT-WOXEN Uniswap liquidity pool. This is intended to act as a medium-term experiment to ascertain how much liquidity is generated when a significant reward is offered for an extended period of time, to better inform the expectations and likely success of the proposed ongoing rewards program. While we did run a similar experiment last year with wLOKI, that experiment unfortunately coincided with the KuCoin exchange hack and account freeze, limiting the data we could gather. That experiment was also not remotely long enough to assess its long term effects, and the value was not sustainable without putting significant inflationary pressure on the coin.

Even though trading wOXEN on Uniswap does not appear at face value to have a direct impact on the practical liquidity on pairs which support native OXEN, this is actually not the case. By encouraging greater aggregate liquidity we allow arbitrage to quickly and efficiently extend that liquidity across pairs; thus price increases in non-wOXEN markets will be quickly filled by the increased liquidity in the wOXEN pool through arbitrageurs. Thus arbitrage allows greater liquidity on one pair to effect greater liquidity and volume across all pairs, and liquidity pools encourage arbitrage due to their ‘blind’ nature. This proposed reward could also be redirected to new DEX environments as well if more appropriate platforms appear — such as when Chainflip launches. In the current market we feel that the wOXEN Uniswap pool presents the lowest friction option.

Our goal for this experiment is to attract at least 1,000,000 USD worth of liquidity into the Uniswap liquidity pool. The actual resulting liquidity will, of course, be determined by the market’s willingness to provide it in exchange for the given reward. Ignoring any transaction fees, at a price of $1/OXEN, a $1M USD liquidity pool would represent an annual rate of return of about 29% on liquidity pool investment from the liquidity portion of the block reward — a notably higher amount than would be currently earned (around 20%) from staking into service nodes.

These reward funds (48k $OXEN for the 60-day program) will be provided by the Oxen Foundation, drawn from existing Foundation reserves. Should this experiment fail to achieve significant liquidity, or should the community decide not to back the block reward proposal, the Oxen Foundation will incur the entire cost of the program. (Note that the experiment reward funds are not being taken from the Chainflip liquidity provider rewards that are currently being minted: the Foundation has pledged to publicly burn those funds, and will follow through on that commitment.)

We hope that this experiment provides valuable data toward understanding effective methods of boosting liquidity; the results of this experiment will inform how much liquidity we can attract, and indeed whether it is worthwhile incentivizing liquidity via the block reward at all. We hope that the results can help inform a community consensus on enacting an ongoing liquidity reward program, as well as informing the final size of such a liquidity block reward.

sssswordhill commented 3 years ago

why not we list bridge on a low fee layer2 dex or other low fee eth-like chain.The fee on eth is too high to trade for normal people.

Lucifer1903 commented 3 years ago

I feel like this is a good experiment to base future discussion on.

jagerman commented 3 years ago

Someone on Telegram asked about inflation numbers:

Currently scheduled coin emission inflation over the next year, based on the 18.333 block reward is 9.1% measured against today's circulating supply, will be 8.3% in one year.
Under the 800/day reward proposal total block reward emission will be 19.567901234/block, which works out to 9.7% against today's circulating supply, 8.8% against circulating supply one year from now.

Note also that these are upper bounds for coin inflation: any burned fees (txes, ONS registrations, Session monetization burned amounts) directly subtract from coin emission.

Lucifer1903 commented 3 years ago

If this experiment doesn't work this time I feel like a better option for Oxen liquidity on chainflip would be to mint 1 million Oxen and have the Foundation provide corresponding 1 million DAI.

It's unlikely the foundation would lose the 1 million dollars that they put in and 1 million Oxen minted all at once is the same as 800 Oxen minted daily for 3.5 years.

After 3.5 years we're at a net positive. And can again look into similar experiments to see what works best.

If anyone disagrees with this it would be good to explain why you disagree.

Edit: although I guess this is better to be discussed after the results from the current experiment.

oxen-io / oxen-improvement-proposals