- This proposal does not mess with tax rate, tax rate will remain at 0.2%
- No negotiation with CEXs will be needed as all changes proposed will be on-chain
Summary
This proposal aims to increase community pool income without increasing tax rate & relying on defi projects, but rather increase number of on-chain transactions by utilizing idle funds in community pool to generate additional tax revenue by existing dapps ( Liquidity pools ) on-chain.
There are many development proposals currently focus on requesting funding ( spending ) while not many talks about how to generate additional income, bringing in money from outside of LUNC ecosystem and earn the money that community pool can spend.
Idle funds in community pool can be used to provide liquidity to “LUNC - USTC” pool, utilizing existing dapps on-chain such as Terrawap or TFM , this can increase the Total Liquidity (TL) of “LUNC - USTC” pair in pool, and minimize slippage.
Why minimizing slippage is important? Lets take a look at criteria on how arbitrage opportunities will appear.
Arbitrage opportunities presented to Traders
By difference of prices for LUNC & USTC pair on CEX & liquidity pools, there will be arbitrage opportunities ( financial incentives ).
In CEX, LUNC / USTC prices moved by market trades executed by buyers & sellers
In liquidity pools on chain, price calculation in liquidity pools are by AMMs,
LUNC / USTC price will NOT follow CEX to move unless someone trades with the pool.
Take Base 100 as pricing for LUNC & USTC for illustration, price on CEX in different scenario
| Scenario | change in price LUNC | change in price USTC | LUNC / USTC on CEX | Calculation |
|---|---|---|---|---|
| A | 0 | +10% | 90.9 | 100 / 110 |
| B | +10% | +5% | 104.8 | 110 / 105 |
| C | -5% | +5% | 90.5 | 95 / 105 |
While LUNC / USTC stays at 100 / 100 for liquidity pools, assuming no trades on Liquidity pools
In Scenario A: ( USTC appreciates more than LUNC on CEX )
Traders can buy cheaper USTC on chain in liquidity pools ( 100 LUNC for 100 USTC ), simultaneously sell USTC on CEX for profits ( 100 USTC for 110 LUNC ).
In Scenario B: ( LUNC appreciates more than USTC on CEX )
Traders can buy cheaper LUNC on chain in liquidity pools ( 100 LUNC for 100 USTC ), simultaneously sell LUNC on CEX for profits ( 100 LUNC for 104.8 USTC ).
In Scenario C: ( LUNC & USTC moves in different directions on CEX )
Traders can buy cheaper USTC on chain in liquidity pools ( 100 LUNC for 100 USTC ), simultaneously sell USTC on CEX for profits ( 100 USTC for 110.5 LUNC).
These are all done by utilizing traders to take arbitrage trades on CEX vs liquidity pools on-chain for LUNC / USTC without actively manipulating / fixing the price OR adding fees to buyer / seller that increases their expenses on trading LUNC / USTC.
Breakdown formula for arbitrage opportunities
Δ in % changes of LUNC & USTC prices at any given time >
CEX’s trading fees ( 0.1% taking Binance Spot ) +
0.2% burn tax + On chain transaction fees ( neglectable ) +
Swapping fees in liquidity pools on-chain ( around 0.3% ) +
Slippage in liquidity pool ( varies based on total liquidity in pool )
which gives us
Δ in % changes of LUNC & USTC prices at any given time > 0.6% + slippage
Increasing total liquidity in liquidity pool on chain by idle funds in community pool will minimize slippage in liquidity pools.
How large is the arbitrage market?
Liquidity over period of 01-Jan-2023 to 31-Jan-2023
***Price used for calculations: LUNC $ 0.00017 & USTC $ 0.023***
| LUNC / USTC pool | TL | Average Daily Transaction volume ( USD$ ) | % of TL in pool | Fees ( USD$ ) earned by liquidity provider / day | Approx. APR% |
|---|---|---|---|---|---|
| Terraswap | 56,800 | 8,700 | 15.32 | 26.1 | 16.7 |
| TFM | 330,000 | 40,200 | 12.18 | 302.3 | 33.4 |
Higher volatility in price of LUNC & USTC can generate even more fees as more arbitrage opportunities will be presented to traders.
Swap fees will be earned by liquidity provider ( Community pool ) if community is willing to put idle funds in community pool to liquidity pools
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 over time.
In the same period,
Average daily trading volume for LUNC ( 391.047B LUNC ) and USTC ( 379.581M USTC ) on Binance.
This equates to USD$ 66.48M & USD$ 8.73M of daily trading volume for LUNC & USTC respectively.
When compared with liquidity pools in above dapps, we are talking about thousands in liquidity pools for average Daily Transaction Volume for “LUNC - USTC” while millions on Binance’s LUNC & USTC spot market.
There is a large arbitrage market to be captured and community pool can take advantage to build up capital for further uses before demand for LUNC & USTC can be rebuild through Repeg & utilities ( defi projects ) on-chain for the years to come.
Flowchart
***The 10% of burn tax proceed ( to be further decided by community ) described in previous proposal is relative to 0.1% ( 50% ) allocated to burn, simplified to 5% relative to 0.2% burn tax for easy reading
Continuous Contribution in flowchart is not an increased tax, but a split from current burn amount, taking 5% to invest in ourselves, which if community did agree to split part of the tax to invest in LUNC for the long term, will change the use of 0.2% tax
From:
The current 0.2% burn tax ( 50% ( 0.1% ) goes to burn, 50% ( 0.1% ) goes to community pool ]
To:
0.1% to community pool, 0.09% burn & 0.01% continuous contribution in the new community pool for increasing total liquidity in liquidity pools on chain.
Procedure
First, creating a separate community pool ( SCP ) ( identical to current community pool ) such that SCP acts to separate funds to be put into liquidity pool and community pool for transparency.
LUNC & USTC in SCP should be seen as Noncurrent assets. Although there is no lockup period in liquidity pool, frequent transactions in and out of 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.
5% ( to be further discussed acceptable % by community ) of 0.2% burn tax ( approx. $700 / day, assuming 4M LUNC and 1K USTC ) will be send to SCP as continuous contribution to maximize compounding effect and further increase liquidity.
SCP will automatically adds liquidity to liquidity pools periodically ( by time [ daily ] or triggered by accumulated amount of LUNC & USTC in SCP [ once reached certain amount of LUNC / USTC in SCP ] ) with a switch for community to vote if the switch should be turned off ( Pause / Stop contribution 10% tax proceed to SCP & liquidity pool ) AND conditional switch to switch off automatically if community pool has less than 500M LUNC ( or certain amount to be discussed ) to ensure community pool has enough liquid assets for operational expenses AND other conditionals deemed necessary for security reasons to protect SCP.
Parameters to be changed by governance
-
% of tax proceed to be contributed to SCP
-
Total Value Cap for SCP to stop 5% of 0.2% tax contribution to SCP
-
Switch for 5% of 0.2% tax contribution to SCP to redirect to community pool
-
Withdrawing liquidity from liquidity pools to SCP and SCP to community pool
As equivalent value of assets have to be put into liquidity pools ( e.g. USD$ 100 LUNC + USD$ 100 USTC ), some LUNC has to be turned into USTC to have equivalent value to be put into liquidity pool and increases the exposure to USTC. USD$ 31,000 worth of LUNC will need to be swapped to USTC initially and projected USD$ ~350 worth of LUNC to USTC per day.
Current ratio of LUNC : USTC in community pool is USD$ ~348,600 : ~70,900, 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 % of tax proceed for continuous contribution should ease the situation.
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 repeg LUNC / USTC, why not utilize what resources we have on hand in community pool?
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, 5% of tax proceed originally going into SCP ( liquidity pool ) will 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 ( CAP ) has been reached, stop continuous contribution and redirect the 5% 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.
Below table shows projected growth for SCP.
| Year | start principal | start balance by start of year | interest earned by end of year | end balance by end of year | Total LUNC & USTC put in SCP by end of year |
|---|---|---|---|---|---|
| 1 | $108,000.00 | $108,000.00 | $62,000.44 | $422,000.45 | $360,000.00 |
| 2 | $360,000.00 | $422,000.45 | $151,184.57 | $825,185.02 | $612,000.00 |
| 3 | $612,000.00 | $825,185.02 | $265,699.23 | $1,342,884.24 | $864,000.00 |
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 / 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
Pros
- Increase TL in liquidity pools will reduce slippage and price impact to pool
Arbitrage traders / algorithmic trading bots can trade in larger positions - more attractive for them to take the arbitrage trade
→ 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
-
Funds in liquidity pools are still owned by the community in the SCP
-
Different from staking community pool funds on LUNC, this will 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
-
Current liquidity provider’s pool share will be diluted
-
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
- Reducing risk of Bugged smart contracts in Liquidity pools
Smart contracts for selected dapps need to be audited by Trustworthy developers ( JL1TF? ) 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, 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 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 from scratch will require more work.
- 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 )
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 ( income for community pool ) 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.
This is a proposal consolidating below Topics:
1st version ( detailed ): Create and Fund LUNC <> USTC liquidity pools by community pool to provide arbitrage opportunities and incentivize on-chain transactions
Short: Bring Liquidity Back On-chain
Let’s get ourselves together: Let's get ourselves together, bring liquidity back on chain to increase tax income
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