Protocol Owned Liquidity - 'POL'- DAO Treasury

ConkeyKong · March 20, 2024, 1:47am

Summary:
The goal is to launch the Protocol-Owned Liquidity—’ POL’— LQ/ADA with the basics, which can be enhanced with future Proposals and votes. The community has shown support for a POL and has actively solved how to create a POL. Previous liquidity programs were scraped, and recent Triple Farm and DAO token swaps met general rejection. This proposal suggests a baseline POL that can grow as the DAO needs and provides some information and analytics to test the most Captial Efficient way to build a POL and support long-term Liqwid Health.

Exploring a simple LQ POL due to the ‘soft rejection’ from Minswap DAO.

See soft rejection here —> Discord

Revision to the previous proposal as follows:

*** POL proposal that uses less than more.***

DAO ADA revenue from 10% share and 1% Origination fee
DAO Treasury LQ
LP Fee earnings invested back into POL
Move the POL to a higher LP % Fee V2 DEX rollout.

Utilize current resources of DAO and Community that align with the majority of the feedback from past POL discussions and incentivization to bring people to farm and increase DEX liquidity.
Some, but not all, concerns to mitigate are increased LQ emissions, Sell Pressure from LP Farm rewards, Impermanent Loss, Funding of POL, and Organic liquidity growth. Please share others that were missed on the list.

Liqwid DAO Protocol Owned Liquidity (POL)

Gathering observational feedback from Discord and forum responses, there is an opportunity to provide a holistic POL approach using the DAO’s current holdings and revenue stream. This would provide a liquidity trickle, allowing an organic liquidity threshold to be discovered. Eliminate LQ emissions for LP farms,

This Proposal curated from:
Community Discord conversations supporting POL

Previous Forum Liquidity Proposals that have been paused, declined or in stalemate.

[**Florian’s questions about POL. DEC/2023 from Proposal Update Net Margin Parameters **](Update Net Margin Parameters - #6 by FlorianVolery)

Advantages / Disadvantages of LQ/ADA on DEX.

Advantages: deeper liquidity, LP Fee earnings, DAO control, opportunity to withdraw funds, reduced LQ dilution from LQ rewards, DEX tokens revenue.
Disadvantage: choosing a DEX, Impermanent Loss, more contract risk…

From where is the Initial funding coming from & Eventual limit order to supply and buy?

Funding current DAO Treasury of ADA and LQ to pair for a DEX LP
DAO monthly 10% revenue share with DAO Treasury LQ to Pair for DEX LP
LP FEEs earned and rolled into DEX LP
Convert Non-ADA CNTs in DAO Treasury and Pair with DAO Treasury LQ to Pair for Dex LP

Profit-taking strategy (if any)

Generate 12 months of LP deposits as stated above(from) or until max 2% of DAO Treasury’s LQ (420k) has been used.
- Whichever comes first and then revisit with another DAO proposal for next steps
DAO to vote on next steps of profit taking:
Examples:
LP Fees are to replenish DAO Treasury’s ADA Value used to create the LP position.
- When 1:1 replenishment is complete, return to Vote for what to do next with LP Fees. i.e., 50:50 split with DAO:LQ stakes, LQ buyback, more LP’ing, etc.

How long should this work?

Minimum 12 months or Maximum amount of 2% of DAOs Treasury LQ supply.

This spreadsheet DAO POL CALCULATOR analyzes different scenarios. It determines how long it would take to increase liquidity with different inputs, such as LP volume, LP Fees, Revenue growth, Origination fee revenue, and more.

Couple takeaways.

Maximizing Capital Efficiency for a POL:

Volume needs to increase from the current $3-4million a month to achieve realistic ROI
Higher LP FEE increases ROI of POL and capital efficiency input
Trickling in LQ via Zapin Versus paying out LP farm rewards manages LQ sell pressure while guaranteeing increased liquidity. *Liquidity from LP’s incentivized farm rewards can diminish once rewards end, whereas POL liquidity only diminishes when DAO votes to remove liquidity.

Capital efficiency should be expected to decrease while the POL grows from DAO/ LQ resources. Once the POL reaches maturation, ROI into the POL will occur.

DAO POL CALCULATOR use this to create custom examples

Bold denotes changes in Examples below

Examples:

Current Minswap setup
Trading Volume 110K a day(this month’s average)
LP Fee 0.25%(current fee)
Monthly Loan total $ 1 million
1% month-over-month Revenue growth from 10%
Equals @12months ~358k ADA & 70K LQ
LP fee earned monthly at 4K ADA (48K a year)
ROI 186 months(93 months for ADA and 93 months for LQ)

Trading Volume 110K a day(March 2024 average)
LP Fee 1%
Monthly Loan total $ 1 million
1% month-over-month Revenue growth from 10%
Equals @12months ~358k ADA & 70K LQ
LP fee earned monthly at 12K ADA (144K a year)
ROI 58 months(29 months for ADA and 29 months for LQ)

Trading Volume 222K a day
LP Fee 0.25%(current fee)
Monthly Loan total $ 1 million
1% month-over-month Revenue growth from 10%
Equals @12months ~358k ADA & 70K LQ
LP fee earned monthly at 7K ADA (84K a year)
ROI 100 months(50 months for ADA and 50 months for LQ)

Trading Volume 500k a day
LP Fee 0.25%
Monthly Loan total $ 1 million
1% month-over-month Revenue growth from 10%
Equals @12months ~347k ADA & 69K LQ
LP fee earned monthly at 13K ADA (169K ADA a year)
ROI 52 months (26 months for ADA and 26 months for LQ)

Replenishing the DAOs invested in ADA in the POL would take 26-50 months.
-depending on LP setup & volume

However:
Farming rewards of 420,000 LQ; ROI ~32-60 months to recover from LP Fees from POL plus the additional time for the initial investment into the POL to achieve an ROI.*

The significant difference between distributing LP farm rewards and holistically using DAO resources for a POL is that we can guarantee that the liquidity created after 12 months is permanent in the POL case. In contrast, the liquidity created by farming LQ rewards could disappear/reduce once rewards end.

The goal is to launch the POL with the basics that can be enhanced with future Proposals and votes.

Do you support a Protocol Owned Liquidity utilizing solely Liqwid Dao’s Treasury and Revenue streams?

Yes
No

0 voters

proposal as follows:

*** POL proposal that uses less than more.***

DAO ADA revenue from 10% share and 1% Origination fee
DAO Treasury LQ
LP Fee earnings invested back into POL
Move the POL to a higher LP % Fee V2 DEX rollout.

FlorianVolery · March 20, 2024, 9:57am

Thank you for providing such a comprehensive summary and laying out the information regarding the POL topics. Understanding all the dimensions linked to it can be challenging, and your post’s clarity and insights are greatly appreciated.

Yes, a POL position presented a lot of advantages, but I think that before it takes places, 2 things need to happened:

Stabilize the LQ emissions rate to have a stronger LQ price
Finance the ADA used for the POL allocation

If we want a big POL position with 2% LQ ( =420k LQ @~$3-5 is $1.2-2.1M), it means that the same amount of ADA should be available to match the LQ part.

As of now, I don’t believe we have such a large amount of ADA readily available. Therefore, one potential strategy could involve utilizing LQ as collateral on Liqwid, where this loan possibility would be opened only for the DAO treasury at first. This would enable us to borrow ADA and finance the ADA portion of the POL.

I am illustrating the following with some data as example:

Assumptions: If we need to borrow $1M ADA, this could be covered by $4-5M of LQ (LTV40%) to have a health factor around 2 for maximum safety.

->In this case, having a strong LQ price is very important, same as for the POL.

DC1 · March 21, 2024, 2:48pm

I agree strongly with these points and specifically the order of events that can best optimize liqwid DAOs POL implementation.

ConkeyKong · March 21, 2024, 2:59pm

Hi Florian,

Great additional points. Especially regarding using the LQ to finance the program. financing the borrow with a LTV is smart. A few other points we will want to consider could be.

The borrower’s interest rate should be lower/natural to the LP fees generated, allowing the POL to pay the interest at a minimum.
Payback for the borrow, in general, would need to be figured out; most obvious seems to be LP Fees.
Fees earned from lending LQ as collateral from the revenue share.
This will be extremely cpatial efficient since we are borrowing and the interest is the part to deal with.

I agree that a stable price is important and noted in the discussion in Liqwid Protocol - Data analystics over the last 12 months

a POL will help this as it will increase the Spread and Depth of the pool to handle the orders placed on LQ. Measuring Liquidity: Spread and Market Depth (And Why Trade Volume is Unreliable) similar to idweas shared in this blog.

Along with considering the LP fee. Snek price today, SNEK to USD live price, marketcap and chart | CoinMarketCap We can see that in the coinmarkets Liquidity score for Snek, we can get an idea of how deep of an LP amount we might need. Snek is also a great use case as they rolled their POL into Spectrum at a 1% fee, but the volume is still at Minswap with 0.25% for the time being. Good to check in a few months and see how it changes, as Spectrum is a new pool. We can also use Coinmarkets liquidity score to compare it with Minswap and see that there can be diminishing returns with a super high LP. Minswap price today, MIN to USD live price, marketcap and chart | CoinMarketCap

I agree with the ordering you have laid out, especially if we want to make it happen in a short period of time, i.e., one month versus over 12-24 months. I would add that the POL #3.

Will keep playing around with the numbers, I like the concept you put out here.

TNT1 · March 30, 2024, 6:26pm

Since I opposed the previous proposal, I want to express that if it is done so that the undervalued LQ token is not exchanged for the overvalued MIN, it seems like a very good idea to me and I support it. I voted yes

FlorianVolery · May 16, 2024, 7:21am

@ConkeyKong
The proposal for a POL (LQ/ADA) as mentionned in this proposal has been finalized here: