Proposal to Allocate Batcher Fee Revenue to Strengthen Stablecoin Liquidity Pools

Proposals
1

Introduction:

Minswap’s ambition to be the preeminent DEX on the Cardano platform is contingent upon its ability to offer optimal liquidity in pivotal trading pairs. Historically, on other blockchain platforms, stablecoin pairs have been the most traded, driving significant volume and user engagement. However, our stablecoin liquidity pools, notably ADA-IUSD, ADA-DJED, ADA-USDT, and ADA-USDC, need enhanced support. We propose channeling the batcher fee revenue to bolster these liquidity pools and capitalize on the potential trading volume they can attract.

Benefits of the Proposal:

  1. Stabilizing Key Trading Pairs: Boosting liquidity in stablecoin pairs guarantees smoother transactions, reduced slippage, and a superior user experience. This is likely to entice a larger user base to Minswap for their stablecoin transactions.
  2. Optimizing DEX Operations: By increasing the liquidity of these pairs, Minswap can potentially capture a larger share of the trading volume in the Cardano ecosystem, leading to more fees and a healthier operational framework for the platform.

Foreseeable Difficulties:

  1. Ensuring Fair Distribution: Adequate distribution among the stablecoin pairs based on liquidity and projected demand will be a balancing act.
  2. Potential Exposure to Risk: There’s an inherent risk in placing a significant amount of POL in positions tied to the performance of these coins. Any potential failure or instability in one of these coins could have ramifications for the DEX.
    3.**Directing funds to this porposal would leave the MIN token price decline (which the author finds worrysome as adressed on another porposa https://forum.minswap.org/t/proposal-to-utilize-batcher-fees-for-min-buyback-and-burn-mechanism/4540l) to solve itself and could lead to Minswap losing its dominant position in the DEX space (see post for further details)

Proposal Implementation:

  1. Funding Source: Use the batcher fee revenue as a dedicated source of funds for the stablecoin liquidity pools.
  2. Allocation Strategy: Strategically distribute funds among ADA-IUSD, ADA-DJED, ADA-USDT, and ADA-USDC based on trading volume, not just within Minswap but also considering other DEXes. This strategy will require strategic updating to remain relevant.

Conclusion:

By redirecting the batcher fee revenue to boost our stablecoin liquidity pools, Minswap positions itself to capture a significant trading volume inherent to these pairs. This proposal serves as a strategic move to cement Minswap’s standing as a dominant DEX on the Cardano platform. We urge the community to support this initiative for the continued growth and resilience of Minswap.

5 Likes
2

In general, I like this idea. I have 2 concerns.

  1. I think we should wait to see what is coming in v2 before we make this change.
  2. With the current situation of stable coins on Cardano, we may be best to wait for more liquidity. It just seems like the real issue here is that there aren’t good stable coin options in the first place. (I do get the argument that we should be ready for that before, though)
3 Likes
3

Do you think its a bit like the chicken and the egg? I feel it may be the case, meaning, its difficult to have liquidity when there is no demand, and its hard to have demand, when pools are so shallow that in practice you cannot operate. I think stableswap will help, since in practice its like adding all liquidity of stablecoins into a single one (since you can always change between them at low costs), but I dunno, I feel its like the egg and the chicken…

4

There is definitely some chicken-and-egg going on. I hope USDM will help. That is supposed to be released in December. Who knows how long it will be before there is much liquidity there, though.

5

Overall, it is a very good and reasonable Proposal.

I would include a Background section:

Batcher Fees (2 ADA Fixed Fee per action) are currently distributed 50% to Minswap Labs and 50% to Minswap DAO. The DAO has accumulated since August 2023 a total of 251,728 ADA.

The community must decide what to do with this $ADA.

Pools such $ADA/$iUSD have the following APR as of 6th November 2023

  • MIN APR: 3.09%
  • ADA APR: 1.13%
  • INDY APR: 7.8%
  • Trading Fees APR (30D): 6.37%

$ADA/$DJED:

  • MIN APR: 9.25%
  • ADA APR: 3.38%
  • Trading Fees APR (30D): 16.53%

This shows that the Trading Fees profitability is quite high. There is demand for swapping and Volume, and the Liquidity is not sufficient. The DAO could acquire a share of these $ADA/$Stablecoin LPs and earn a profit through farming and fees while only being exposed to $ADA and Stablecoins price.

Purrito’s thoughts

In favour

Acquiring Stablecoins for the DAO Treasury makes perfect sense to me. Especially with Stableswap launching soon, some Minswap DAO $ADA could be used to buy Stablecoins and provide liquidity in the Minswap Stableswap. This would support liquidity while earning fees for the DAO.

On the other hand, USDM will be launching soon, as the first fiat-backed Stablecoin. This could change things for the Stablecoin situation on Cardano. In addition, iUSD is at 0.94$, if it is bought and it repegs, it could be a profitable trade for the DAO.

Against

However, the current Cardano Stablecoins are not as robust and reliable as the Ethereum counterparts. As was described in the Stableswap article: “DJED cannot be minted when collateralization is below 400%. This means that the effective peg is something like 0.99$ to infinity. Meanwhile iUSD has no real repeg mechanism (since iUSD redemptions are not possible).” For example, iUSD is currently deppeged at around 0.94$ and has been like that for around 1 month. It is not sure whether redemptions will fully fix this. It is also a question whether right now, at what seems to be close to the bottom of the bear market, is the right time to sell $ADA for Stablecoins.

Conclusion

Here is my conclusion: we should be rather conservative whenever it comes to DAO treasury management. Buying stablecoins makes sense, but perhaps in a DCA way in order to successfully manage risks. Perhaps, a Proposal could be made to buy Cardano Stablecoins with 50% of the ADA from Batcher Fees received by the DAO (meaning 25% of total Batcher Fees ADA generated).

What needs to be better defined? (assuming we used 50% of the ADA from Batcher Fees** received by the DAO for it)?

  • Which Stablecoins?
  • In what ratio?
  • To provide in the Stableswap (which pair) or to pair with ADA?
  • How often would these Stablecoins be bought?
7 Likes
6

I agree with purrito above. In principal i am fully in favor of using protocol owned assets (POA) to deepen liquidity across many different Minswap pools. And stablecoin pools are ripe for this POA.

But i am quite nervous for us to own the 2 major stablecoins in Cardano and 2 bridged assets. Both majors have flaws, somecmsy argue fatal flaws. With the hoprfully emminrnt lsunch of USDM, obviously seeing how it goes once its live, is my preferred stablecoin. Once indigo entertains v2 with a redemption mechansim i would be much more open to iUSD. DJED, i dont know. Feels like they r working on v2 potentislly on ergo? Rumors there.

Overall i would be okay with an extremely small amount in each but would prefer for enhancements to both existing stablecoins and much prefer a fiat backed stable with robust oversight.

So i wouldnt be opposed to a 50/50 split beteeen djed and iusd capping at say 50k total and slowly ramping up through forward looking batcher fees (i.e. take 50% of the dao treasury 50% until we hit 25k djed and 25k iusd). Something like thst would be okay. Still provide some POA as liquidity in those pools but limit downside thorugh appropriately sized asset allocation.

Would want to see a dao vote on this.

2 Likes
7

I understand the importance of providing liquidity to the stables. However, I would rather not do this right now. I think the DAO treasury would increase greatly in value by holding ADA for now. This would be a better trade and increase the treasury’s fiat value more than buying stables. I think providing a level playfield is our job rather than to bolster the liquidity of one or two tokens (even if they are stable coins) which are not our own token. As Minswap holders we are entitled to say how the funds should be used. I think they can better be used in other ways. Warren buffet says idiots diversify. He means that to get wealthy you do not diversify, but once you are wealthy then you do. The 250k ada will provide enough stablecoin liquidity for 1 or 2 whales. It is not worth it. I think at this stage the funds are better used for the following.

  1. Save up for an eventual cex listing or hire a legal team with them to give us all the knowledge and resources we need to improve our chances at a Coinbase listing in the future. It would be odd that the best defi app on Cardano 2 years in a row is unable to be the first to get listed on Coinbase.

  2. Moving forward we use a % of the batcher fees to buy $MIN and send it to a burn wallet that nobody owns. This will assauge the concerns about the circulating supply and max supply. When the number of users and unique trades rise, more $MIN will be burned. I understand people have many things against this. But I will be honest. Majority of Cardano holders do not recognize MIN for its “bad tokenomics”. The tokenomics aren’t bad. They are just bootstrapping the protocol for way longer than need be. To give an example after mid 2025 when team vesting ends, and the circulating supply is ~ 1.5B from emissions and vesting. Even if emissions remain at the upper bound of 1,000,000 MIN per day. It would take 9.72 years for us to reach full circulating supply. If you take the lower bound of emissions that would increase to 29.16 years. This is highly unnecessary as there is no guaranteeing if we will still be relevant that far into the future and hurts current min holders (more so sentimentally and financially to a lesser degree). We are essentially sacrificing early adoption in a flourishing ecosystem for the sake of longevity (which is not guaranteed without adoption). Just to bring perspective, even at the lower bound of emissions I would have to buy $9,000 of MIN a month to keep my % ownership of total circulating supply or it decreases steadily.

Using 50%-100% of the DAO fees to buy MIN and send it to a burn wallet will essentislly counteract all of this. During periods of high volume it will “burn” more min and during periods of low volume it will not. This will greatly aid the sentiment, value, and lower dilution of MIN tokens all while not affecting the protocol’s outlook by much. The 9.72-29.16 years of bootstrapping would be reduced slightly, but in return more people will partake in the Minswap token utility if they hear that we are addressing this major concern that has been brought up by 75% of people when asked about Minswap on Twitter and other platforms

I humbly choose option 2 and would vote to use 100% of DAO batchers fees during our growth phase for this. This % can be voted to be changed later, but for growth and adoption I think this is important right now and we would be trading a little bit of the bootstrapping time in return for adoption (and even then still have a lot of bootstrapping time leftover).

Humbly,

Your Very Own Ch!cken

2 Likes
8

Few things to consider:

  • DCA you want this to be a gradual process to eliminate ADA price fluctuation from the equation
  • the more stables you accumulate the more you grant them stability and support their adoption

I am in favour of using a portion of the fees towards stable accumulation, this is part of a virtuous circle towards more adoption and stability. Even better when it is owned by the Minswap DAO.

1 Like
9

I agree the stables carry risks, I however feel that a market based solutions should be the answer. Like if people trade som stables we don’t like it’s their choice and that is the one that should be backed. I think it’s only fair that the starting point is constant for all though, since if you only put liquidity in one of course it will capture most of the volume. So I would start equally and then direct according to volume

1 Like
10

I too agree in the burning, hence my other (and preferred) proposal. I knew this proposal would not manage to be a green on since people are very divided in which coins and so on. But I rather have this than the DAL hold the ADA. For me this is the biggest mistake that could be done here.

1 Like
11

Exactly, and at the same time you create more revenue from this steam since you have more trading

1 Like
12

Great points here, would add that INdY just recently voted to change the allocations on DEXs and staking so the %s may change a bit.

13

Indigo V2 is currently in the discussion phase on the forum, for a few more days, and then it will go to a vote. If it passes the protocol will make a major upgrade within 30 days.

1 Like