Proposal to increase base_pool value
- Terra research
- September 2nd, 2020
TLDR
- Propose to change base_pool value of Terra <> Luna swaps from 250,000 SDR to 625,000 SDR
Intro
The main goal of Terra <> Luna swaps are to maintain Terra’s stability, Not to become an on-chain market to trade Luna and Terra. To avoid Terra<>Luna swaps to be used as the on-chain market for Luna, the on-chain market should not offer better or same liquidity compares to the off-chain markets(secondary market, exchanges). But, if we take too conservative approach on the base_pool’s size, it might be another problem as it creates a lot of slippage during the arbitrage. As we expect the Terra’s demand will increase a lot by next Columbus-4 update, current base_pool size can be a problem. So, key for determining the base_pool’s size is to select proper base_pool value that provides slightly less liquidity than the on-chain market. There are a lot of ways to define liquidity of certain market, but in this case, to define the liquidity, we use each market’s slippage. Also, we use mid price for a standard price to calculate slippage for off-chain market.
The on-chain market’s (Terra<>Luna swaps) liquidity determined by the base_pool’s size, if the base_pool’s size is bigger, the slippage of on-chain market gets smaller, and if the base_pool’s size gets smaller, the slippage of on-chain market gets bigger. In last update (col-3 harfork), as we only have coinone LUNA/KRW pair as the most liquid market, we use coinone LUNA/KRW market’s orderbook snapshots to calculate the slippage of off-chain market. We first took a snapshot of coinone Luna/KRW and calculate the slippage. After that, we took an average of slippage to calculate the off-chain liquidity. As the sell order’s slippage is larger than buy order’s slippage, so we only take bid orders to calculate the off-chain liquidity.
Above graph shows the market liquidity of each off-chain and on-chain market. The X axis represents the size of the one sell trade in Luna. The Y axis represents slippage % of that trade. For instance, if someone sells 50000 Luna in coinone, the slippage % is 2.73%. In this graph, the blue line graph shows off-chain liquidity. If on-chain line graph is above off-chain line graph, it means on-chain market has more liquidity than off-chain market. If on-chain line graph is under off-chain line graph, it means on-chain market has less liquidity than off-chain market. As the off-chain market always has to have better liquidity than on-chain market. We have to find base_pool’s size that offers less liquidity (means the line graph of off-chain market is always under the line graph of that on-chain market). In 2019/11/8 (for Col-3 hardfork) Result was 250,000 SDR.
As Luna gets more liquidity than last year, we plan to reflect the Luna’s current liquidity status to upcoming Columbus-4 hardfork.
Methodology
The methodology to determine new base_pool is same as before. But, as Luna listed to many big exchanges, we will use 7 different market pairs to calculate the base_pool. Also, as the sell order’s slippage is larger than the buy order’s slippage, we will only take bid orders to calculate the liquidity. The market pairs that we use to calculate the liquidity of off-chain markets are following:
Huobi global
- LUNA/BTC
- LUNA/USDT
Binance
- LUNA/BTC
- LUNA/USDT
KuCoin
- LUNA/BTC
Bithumb
- LUNA/KRW
Coinone
- LUNA/KRW
We first took several snapshots with a different timeline of each market to remove data bias. And calculate each snapshot’s slippage and took average of that slippage result to define each market pair’s liquidity.
Result
Above two graphs show each market pair’s liquidity in different scale. Unlike 11/05/2019, we can see the current liquidity of off-chain Luna markets are improving a lot by comparing the location of Black line (which represent liquidity of 11/05/2019 coinone Luna market ) with other lines. For new base_pool value, As the binance LUNA/BTC market has the lowest liquidity among major exchanges, we select binance LUNA/BTC market to select a new base_pool value. As you can see in the log scale graph, the base_pool with 650,000 SDR value meet that condition.
In conclusion, from the liquidity data, We suggest to use 625,000 SDR as new base_pool value.