Summary
This proposal aims to bring liquidity back on-chain and increase on-chain transactions BY investing funds in community pool into liquidity pools as liquidity provider, to generate steady cashflow and growth for community pool for future on-chain development needs.
Motivation
As funds sitting in the community pool yields nothing, it is better for us to invest on our own chain.
With lack of trust & capital, we should avoid active trading.
While active trading don’t work, this doesn’t mean funds have to just sit in community pool.
We can use these funds to provide liquidity to “LUNC - USTC” pool, utilizing several dapps on-chain we currently have such as Terrawap or TFM, this can increase the Total Liquidity (TL) of “LUNC - USTC” pair in pool, and increase number of transactions on-chain result in increased tax proceed.
Current liquidity over last month ( 01-Jan-2022 to 31-Jan-2023 )
***Price used for calculations: LUNC $ 0.00017 & USTC $ 0.023***
Terraswap “LUNC - USTC” pool is USD$ 56,800 with an average Daily Transaction Volume of USD$ 8,700 / day, around 15% TL in pool ( 0.3% swapping fees for liquidity provider USD$ 26.1 / day ) // APR approx. 16.7%
TFM “LUNC - USTC” pool is USD$ 330,000 with an average Daily Transaction Volume of USD$ 40,200 / day, around 12% TL in pool ( 0.2% swapping fees for liquidity provider USD$ 302.3 / day ) // APR approx. 33.4%
Higher volatility in price of LUNC & USTC can generate even more fees as more arbitrage opportunities will be presented to traders.
These swap fees can generate constant cashflow that either be re-invested in liquidity pool to provide more liquidity or return to community pool.
While the swapping fees may sound little, we should see this as longer term investments ( >1yr ) and let time work for us, with the help of compound interest to achieve greater growth for community pool.
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Average daily trading volume for LUNC ( 391.047B LUNC ) and USTC ( 379.581M USTC ) on Binance over last month.
This equates to USD$ 66.48M & USD$ 8.73M of daily trading volume for LUNC & USTC respectively.
When compared with above liquidity pools in dapps, we are talking thousands about average Daily Transaction Volume for “LUNC - USTC” in liquidity pools while millions for average Daily Trading Volume on Binance’s LUNC & USTC spot market.
There is a large arbitrage market to be captured and we should take advantage of the opportunity to build up capital before demand for LUNC & USTC can be rebuild through utilities on-chain for the years to come.
Procedure
First, creating a separate community pool ( SCP ) ( similar to current community pool ) such that SCP acts to separate funds to be put into liquidity pool and community pool for transparency. Not sure if there is Key for current community pool, SCP should be treated same as current community pool that no single entity or person should have control on but the community only.
LUNC & USTC in SCP should be seen as Noncurrent assets, although there is no lockup period in liquidity pool, constant transaction in and out liquidity pools will increase the Impermanent Loss realized and transaction costs.
***Price used for calculations: LUNC $ 0.00017 & USTC $ 0.023***
Initially 500M LUNC ( USD$ 85,000 ) & 1M USTC ( USD$ 23,000 ) ( to be decided through discussion ) of LUNC & USTC from community pool will be send to SCP. Funds in SCP adds liquidity to “LUNC - USTC” liquidity pools in, but not limited to above dapps mentioned, by splitting the fund equally into “LUNC - USTC” pools in these dapps to avoid biases favoured particular dapp.
10% ( to be further discussed acceptable % by community ) of burn tax proceed ( approx. $700 / day, assuming 4M LUNC and 1K USTC ) will be send to SCP as continuous contribution to speed up the growth of fund and further increase liquidity.
Rough calculations for SCP growth over time by above assumptions
( breakdown will be shown by clicking Monthly Schedule )
Over / Underestimate interest, end balance, end principal by not accounting in below resulting estimation error:
Over Estimate
- Assumed interest rate ( swap fees ) - 25%, APR is depending on transaction volume in “LUNC - USTC” liquidity pool, affected by market situations
- Exchange fees for swapping LUNC to USTC for equivalent value to be added to liquidity pools
Under Estimate
- Daily / Weekly Continuous Contribution amount will be greater as higher on-chain volume and transaction as time goes on
- Contributions are made Daily / Weekly instead of Monthly, compound interest on these will be neglected [ Sorry but I am too lazy to do calculations in the spreadsheet myself ]
Codes will be needed for SCP to automatically adds liquidity to liquidity pools periodically ( by time [ daily / weekly ] or triggered by accumulated amount of LUNC & USTC in SCP [ once reached certain amount of LUNC in SCP ] ) with a switch for community to vote if the switch should be turned off ( Pause / Stop contribution 10% tax proceed to SCP & liquidity pool ) AND conditional switch to switch off automatically if community pool has less than 500M LUNC ( or certain amount to be discussed ) to ensure community pool has enough liquid assets for operational expenses AND other conditionals deemed necessary for security reasons to protect SCP.
Below should be coded as parameters that can be changed by governance
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% of tax proceed to be contributed to SCP
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Total Value Cap for SCP to stop contribution
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On / Off switch for Tax proceed to be contributed to SCP
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Codes for withdrawing liquidity from liquidity pools to SCP and SCP to community pool
Note: Although I am not a developer, but point 4. transactions from Liquidity pools to SCP and SCP to community should be hard coded to avoid malicious attempts to steal community funds?
As equivalent value of assets have to be put into liquidity pools ( e.g. USD$ 100 LUNC + USD$ 100 USTC ), this will create an argument if the community agree to turn LUNC into USTC to have equivalent value to be put into liquidity pool and increases the exposure to USTC. We will need to swap USD$ 31,000 worth of LUNC to USTC initially and USD$ ~350 worth of LUNC to USTC per day.
Current ratio of LUNC : USTC in community pool is USD$ ~195,500 : ~32,200, until ratio for LUNC & USTC in community pool is more balanced, this will potentially create constant selling pressure for LUNC, although doubtfully, given Binance’s daily trading volume for LUNC & USTC is in the millions USD, this should not be a problem until much further down the line if the contribution amount is too large, in any case if needed, adjusting contributions from % of tax proceed should ease the situation.
There are arguments if LUNC needs USTC to survive? In my personal opinion, USTC is what makes LUNC stands out from other chains, if we want to have a shot at reviving LUNC, we have to get ourselves together and also revive USTC.
At the end of the day, we are aiming to bring LUNC & USTC back to USD$ 1, and for the prior, much higher. While we are still finding sustainable ways to re-peg LUNC - USTC, why not utilize what resources we have on hand in community pool?
Pros
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Increase TL in liquidity pools can reduce slippage and price impact to pool
When trading the same size in a pool with higher TL, allowing arbitrage traders / algorithmic trading bots to trade in larger positions
→ generates more tax proceeds and on-chain transactions when prices for LUNC & USTC spikes or did not move in proportion to each other in the market -
Utilize idling funds in community pool before other utilities come back and build on LUNC
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Funds in liquidity pools are still owned by the community in the SCP
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Different from staking community pool funds on LUNC, this do not dilute current staker’s shares to staking rewards and will be able to bring in money from outside of LUNC’s ecosystem by providing better arbitrage opportunities
Cons
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Current liquidity provider’s pool share will be diluted
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Funds will be exposed to Impermanent Loss and will be realized if at the time of withdrawal from liquidity pools, price deviation for LUNC - USTC is large from the time of providing to liquidity pools
Addressing Risks for being Liquidity Providers
- Bugged smart contracts
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Reducing risk of Bugged smart contracts in Liquidity pools
Smart contracts for selected dapps need to be audited by multiple Trustworthy developers with good track record for funds to be added to LUNC - USTC pool in those dapps -
Diversify funds onto different dapps’s “LUNC - USTC” liquidity pool
If bugs are in one of the smart contracts in one dapp, this projects do not suffer total loss -
Create LUNC’s own liquidity pool on Terra Station
Alternatively, not sure if this is feasible, but we may create our own liquidity pool on station if we have the resources to do so, but this will increase work to be done significantly as creating whole Automated Market Makers (AMMs), which are essentially mathematical functions that dictate prices in accordance with supply and demand to be integrated to station is a whole different level.
- Impermanent Loss
Reducing the frequency of adding / withdrawing liquidity to / from liquidity pool
We can minimize loss incurred from frequent transactions and impermanent Loss realized caused by withdrawal from liquidity pool to SCP by avoiding unnecessary withdrawal.
- By separating funds into SCP from community pool, we can have a clearer view of liquid assets ( community pool ) & Noncurrent assets ( SCP ) on hand available for disposal by community.
This comes back to avoid over investing and leaves enough liquid assets in community pool for daily operations expenses ( i.e. TGF foundation, paying developers, for utility projects to apply for )
Pause / Stop contribution tax proceed to liquidity pool
When there are projects with higher priority requires large funding causing community pool drops below certain level, 10% of tax proceed originally going into SCP ( liquidity pool ) can be automatically directed to community pool instead. This is to address
avoid over investing and leaves enough liquid assets in community pool
We can also set the goal for the exposure we would like in liquidity pool and once Total Value / Quantity of ( LUNC + USTC ) in SCP has been reached, stop continuous contribution and direct the 10% tax proceed to community pool.
Withdrawal from liquidity pool
When trust & other utilities on-chain have been rebuild sufficiently and enough liquidity in liquidity pools provided by market participants except SCP, the community can vote on whether to keep the funds in the liquidity pools to remain this income stream or to gradually remove liquidity provided by SCP, from liquidity pools to SCP and return into community pool if desired.
If this proposal is implemented and given enough time let’s say " one year ", while liquidity, number of transactions and tax proceed on-chain has not increased as expected, we can always scrap this project by community votes and return funds from SCP into community pool for other uses.
Conclusion
To be clear, there is no defined amount of funds required to kick-start SCP, we can start as small and as big as the community want and do the adjustments. The importance is to bring liquidity back on-chain and increase on-chain transactions sustainably before more utilities are back. Before that, keeping the heat up and our heads above the water should be the main goal, and increasing tax proceed in my point of view will do just that.
Thank you for your time reading this proposal if you have reached here, please feel free to comments any thought or questions regarding above proposal!!
Disclaimer:
I do not have any relationship or financial interest with dapps mentioned in this proposal.
I am pretty sure similar ideas have been mentioned by others before. Just trying to initiate some discussions to see if I have missed anything.
Sincerely wish we as a community can have a constructive discussion with mutual respect and clashes of ideas will lead to a better end product.