Proposal to Optimize Liquidity & Capital in the MIN/ADA Pool

dojonilez · December 7, 2023, 9:39pm

Hi all,

I’m bringing forth to you my findings regarding the current MIN/ADA liquidity pool. I know most of you are familiar with the important rule of DeFi why having adequate liquidity is important. This is to fight high slippage and uncontrollable price movement. But very few seem to know that the same rule applies both ways, a pool can also be too big, and this (I believe is the case for MIN/ADA).

What happens in the opposite scenario, is exactly the opposite of having too little liquidity, the volume subjected to the pool will simply do nothing to it = drowning all price movement.

Current Situation: The MIN/ADA pool currently holds a substantial amount of liquidity, with a total value locked (TVL) of ~48 million ADA and a daily volume between 200k-500K ADA. While having a deep liquidity pool is advantageous, I believe the pool size might be disproportionate to the existing market and trading volume within Cardano. Under you can find a chart that compares some of the most known pools in Cardano. And as you can see Minswap has approximately a 8 to 10 times larger pool than even the largest projects in Cardano:

And here are the same projects compared by MCAP:

Now next I want to go over briefly the formula that runs most of DeFi

This formula is called the Constant Product Formula. In this formula, 𝑥 and y denote the total units in each asset, while k denotes their product. And k is always constant.

Using the example, it will look something like this –

Starting price for token X = 10

100 x 1000 = 100 000

The idea is that the product of the total units in each asset should always be the same regardless of their individual value. In other words, both assets should share a 50:50 ratio in total value.
So, if someone wants to buy 10 of token X, they must add roughly 111,11 of token Y to the liquidity pool to maintain the value of k.

Why?

90 * 1111,11 = 10 000
1000 / 90 = 1111,11

Price for 1 token X after purchase = 12,345 (1111,11/90)

As you can see, taking out ETH from the pool decreases its supply causing its value to go up, while adding more USDT increases its supply, further reducing its value to maintain the value of k.

A liquidity pool has a optimal size for it’s current market, usually CEX’s modify liquidity behind the scenes (obivously, because they are centralized), but this also means that it should also be done with decentralized projects. This is why LP provision is a service, and there are companies that do that for you (one example is JPG.store that used a 3rd party to handle their LP).

Now to the problem:

If we run a test through different Cardano pools (and I added Uniswap main pool for context), we can actually see what happens when a pool is too large for it’s own good.

In this test, we will test how a 100 000 $ single purchase will affect the pools price:

As we can see, we are in a situation where Min tokens price can not even be moved by 2 % with a 100 000 $ purchase, with almost a similar price movement to Uniswaps effect with a 3,5 Billion mcap.

Whereas a project x15 the mcap AGIX moves +8,65% with that same purchase and COPI with 3x the mcap, moves +19,53%.

Here we have one more comparison of a pool TVL compared to it’s MCAP:

This picture is to show, that normally a pools TVL should be in the single digits % range compared to it’s total mcap, but in Minswaps case we are at 82%. And this brings us to our next important point:

Capital Inefficiency: Maintaining excessively high liquidity ties up a significant amount of capital that could be used more efficiently elsewhere, in this case hindering growth.

Right at this moment the protocol owns almost 6 million $ in TVL in the current pool that represents (about) 25-30% of the pools TVL.

Proposal: I propose a gradual reduction POL in the MIN/ADA pool by 50%, with the reallocated capital directed towards strategic initiatives. These initiatives could include, but are not limited to, CEX listings, marketing efforts, and community development. The objective is to strike a balance that ensures sufficient liquidity for smooth trading while unlocking capital for the growth and expansion of the Minswap ecosystem.

These tokens would go to the DAO, and could pretty much fund all needed CEX listings going towards the BTC halving and the next retail bull market.

Conclusion: Balancing liquidity in the MIN/ADA pool is crucial for having a healthy trading environment. By optimizing the pool size and reallocating capital strategically, we can position Minswap and the MIN token for better and sustained growth in the evolving market.

I look forward to a constructive discussion on this proposal for the benefit of the Minswap community.

Best regards,
Nilez

PS: here is a screenshot of the calculations. If anyone from the community wants me to send them the Excel file, pls DM me. I’m more than happy to share

Discord: dojonilez

Ch_cken · December 7, 2023, 10:05pm

3 Objections & 1 Solution

This whale wallet (one of many) has sold 27M MIN. They harvest about $1m worth of min/ada and they only sell. They have profited 770k ADA just from selling min emissions. There are many wallets creating massive sell pressure like this. One can argue that it is this very same POL liquidity that is saving us from Gamestop level volatility.

When volumes pickup and staking aprs go well above 50%, by math and human incentive alone, I believe a lot of farmers will migrate to staking. This would mean that the POL is the last line of defense.
We are no where near all time volume highs. I think this is a good point, but we need to wait till volumes reach those levels or surpass and stay there for atleast a month or two before altering liquidity.
(Solution) Current all tokens from fee switch are sold to ada to reward min stakers EXCEPT MIN/ADA LPT. I propose we zap these to MIN and send them to a dead wallet.

This achieves 3 things:

We prevent more liquidity for min/ada as a result of volumes.
We implement a share buyback and burn at the same time.
Ties buyback of MIN to the volume on the dex.

P.S. - Like your points, but see if you can incorporate a poll in here with your voting ideas. Also an immediate 50% cut may be drastic. Perhaps we can have a community elected team monitor lp and allow them to adjust it every two weeks with a 10% cap.

Just a Chicken’s thoughts

Dennis · December 7, 2023, 10:24pm

Good analysis.

Shouldn’t we address the issue that’s causing price to continually bleed before we make the price move faster?

Dennis · December 8, 2023, 12:31am

Okay, so, say MinSwap withdraws some of their MIN/ADA LP tokens. What are the unintended consequences (good and bad)?

Anyone left in the LP starts making more interest, since they will have a higher % of the pool. (edit: I don’t remember if the DAO is farming with their tokens or not)

Does this eventually lead to a lowering of the MIN rewards in that pool?
Does this lead to people unstaking their MIN in order to move to the Farm? (I don’t consider that either good or bad, but just a possibility.)

The DAO’s income goes down. (They will no longer be farming MIN).
If price bleed continues, then price will go down even faster.
The DAO now has extra MIN that can be spent. You mentioned options of:

CEX Listings
Marketing
Community Development

I think those are good options. I would also add:

Deepening liquidity pools (to make sure we continue to have the best prices and thus the most volume)
Potentially purchasing some USDM may be a good option to make sure we have a deep pool when StableSwap launches.

What else am I missing?

PurritoGeneral · December 8, 2023, 6:18am

Thank you very much for the detailed Proposal and raising the issue. I know we were a bit rogue on Discord - but its important as a community owned project to always listen to the community and follow their ideas.

Its quite crazy to see in retrospect how big the Liquidity for $MIN really is. The fact a trade on chain for $UNI might have the similar impact as one for $MIN price-wise is insane to me. This is a result of 3 things:

The LBE which bootstrapped $MIN/$ADA Liquidity, and around 25mn $ADA was deposited, half of it going to Minswap DAO as POL.
Focus on POL with $ADA from the Fee Switch being used for around 1 year to buy back and LP $MIN/$ADA.
Attractive rates for farming $MIN/$ADA since the beginning.

Is there such a thing as “too much Liquidity”? - perhaps, if most of it is being unused and thats capital inefficient as you mentioned. The aim of Liquidity is to reduce slippage, volatilty and enable cheaper prices for a better UX. My question is then, what would be the target Liquidity/Slippage that we should aim for? How to determine that?

Regarding managing of the POL - I do not believe that is the best way to address this issue. Minswap Labs has a significant runway to fund development, the DAO has around 150k USD worth of ADA as well and that keeps growing. Giving a part of POL to a CEX is an interesting idea, and that will be brought up to the DAO once CEXs make their offers. Farmers are unpredictable, there are a series of very large LPs of MIN/ADA and the current Liquidity could shrink significantly any moment even without touching the POL. That is why the majority POL should always remain there as a cushion of Liquidity that will be there no matter what happens.

Instead, I believe there are other ways to solve this issue. Here they go:

Make LPing $MIN/$ADA less attractive through 2 ways: decrease overall $MIN emissions and distribute more $MIN emissions towards non-MIN/ADA Pairs such as ADA/iUSD or DJED.
Make staking more attractive: despite having slown down emissions significantly, the $MIN yield on LPing MIN/ADA is still quite attractive. The yield is higher than that of staking $MIN. But if $MIN staking incentives were added to bootstrap staking, by for example setting a Fixed $MIN APR (e.g. 2% for 1 month, 6% 3 months, 9% 6 months 12% 9 months), this would make staking $MIN more attractive.
Increasing the utility of Holding $MIN: for example currently you must hold MIN in your wallet to get a Discount on Trading Fees.

Let me know what you think of my ideas.

Purr

Ch_cken · December 8, 2023, 6:26am

Can you elaborate a tad more on the second solution? I think I don’t understand that one. Are you proposing a portion of emissions would be directed to stakers so that stakers accumulate MIN and ADA? If so, I think that would be something very very interesting to explore.

Rest of the points and solutions I think make sense.

PurritoGeneral · December 8, 2023, 7:24am

Yes, this would mean rewarding MIN stakers with MIN.

There are currently around 47mn MIN (close to 1% total supply) sitting in a wallet that were supposed to be used for MINt to MIN conversion but were never used. We could use this MIN for that as a part of a program (temporary) to incentivise/bootstrap MIN Staking.

The issue with APRs is they are volatile and often times unrealistic. That is what would aim to tackle with a fixed APR paid in MIN.

marco_112358 · December 8, 2023, 9:39am

I would like to see 2 things happen in the near future related to this.

Increase the fee percentage on MIN/ADA once v2 is live, or make ir dynamic. So that we can continue to reduce emissions without killing the yield.
Once a true stablecoin is live (usdm), move some of the POL to MIN/USDM. This will help alleviate some of these concerns as well.

Contra · December 8, 2023, 2:07pm

Awesome, thanks so much for this. However, regarding your proposal in particular - would it not be more prudent to disincentivize ongoing yield farming from ex min-ada POL actors altogether by eliminating the yield farm incentives on that pool, and letting the POL for min-ada effectively service supply and demand - so that cost of emissions and fee switch revenue(and other sources?) can approach an equilibrium no longer skewed by the inordinate min emission allocation to min-ada YF that effectively steal from the future revenue of the protocol. I agree that there is too much liquidity tied up in min-ada, and would do better seeking yield where it is desperately needed (as indicated by double digit trading fee APRs).

Instead of halving POL on min-ada, which is 27% of the pool, why not disincentivize the ex POL liquidity from continuing to borrow from the future of the protocol by farming an inordinate percentage of the emissions supply?

Contra · December 8, 2023, 2:15pm

I agree that POL should be defended and even leveraged to incentivize liquidity elsewhere within the dex. I would rather let POL service the demands of market takers, rather than sacrifice POL to service the demands of market makers (mercenary capital?). I would also like to see some revenue return to continuously increase POL based on dex usage (batcher fee %)?

marco_112358 · December 8, 2023, 2:22pm

I tend to agree with Contra i would much rather see emissions decrease at the expense of 3rd party (more price sensitive) liquidity and let POL bear the brunt of trading MIN/ADA

Ch_cken · December 8, 2023, 2:58pm

I did not even know we had this and I think this would definitely fix the problem by making the staking apr more juicy during its early stages while volume is low and let the community decide how they want to use their MIN (farming vs staking). This would not only incentivize staking, it would also allow the POL to remain as is, and subject the lp naturally to market dynamics as a result of this bootstrapping iniative.

I think this may be the best option narrative-wise, free market dynamic-wise, and also a good use of resources that are leftover.

Ch_cken · December 8, 2023, 3:24pm

Agree with you. But perhaps I think for now adding more incentive to min/ada pol may not be wise. We have to see how an ath volume month has on terms of the staking vs farming dynamics and we also have to see the demand for a min/stablecoin pool once mehen arrives. I think the POL we have now is good and should not be reduced or increased (unless it happens naturally by people pulling or adding lp).

Contra · December 8, 2023, 3:44pm

Im not sure what made you say “adding more incentive to min/ada pol may not be wise”. That seems a very confused remark, respectfully. Min-ada >POL< is not “incentivized”. POL is independent of exPOL LPers adding or subtracting to min-ada LP.

Ch_cken · December 8, 2023, 3:48pm

Sorry, I butcher my words sometimes here and there.

Corrected sentence:

I do not think providing further incentives to MIN holders to provide liquidity to the min/ada pool and farm it is wise. Existing incentives are fine, but I think we shouldn’t focus any more of our POL towards it.

dojonilez · December 10, 2023, 12:19pm

Agreed that the staking is definitely a tool that will help us get some of the LP from individual farmers to migrate their MIN there.
Altering liquidity can be done when ever, thus my though of altering it every now and then, the total POL in MIN/ADA pair doesn’t need to be a constant amount.
Just so that I understood your point correctly, you are recomending a burn mechanism here?

Point on P.S - I might have mentioned it too lightly so it must have gotten over looked, I meant that the removal of the 50% POL would be gradually done. So like 2,5% every week over a 20 week time period (just an example)

dojonilez · December 10, 2023, 12:26pm

That sounds like a reasonable aproach as well. Find ways to diminish the individual farmers liquidity on MIN/ADA or try to move a large portion of the POL to other pairs to deepend their liquidity (like purrito suggested). This way the protocol could still earn fees from the LP, but not drown MIN with the deep liquidity.

dojonilez · December 10, 2023, 1:15pm

Hi Purrito,

Thanks for taking the time to respond in detail. I must say you had some really good points here and I think the right dirrection is in them. Obviously removing POL is not the only solution to the issue, a large part of the LP is from individual lp providers, so maybe we have to that way to find a solutions. Removin POL though, could be used as a immediate solution and maybe find other places where that LP could be more usefull, if we suddenly see a large drop in total LP, that removed POL could always be deposited back.

I like the last point about giving MIN more utility, maybe combine that with the idea of making staking more attractive and give the discounted trading fees utility tied to staking MIN. Meaning that you would only attain this utility IF you have MIN staked.

Question reagarding the CEX comments, has MIN actually approached any CEXs yet to start negotiating about listings? Do we have any data on what different exchanges charge and about their specific demands for getting listed?

dojonilez · December 13, 2023, 6:29am

Honestly one of the main reason for the bleeding is the fact that no one has the liquidity to make the price move up. So investors just prefer leaving to other projects and farmers prefer to sell their rewards.

dchagastelles · December 13, 2023, 3:24pm

I do agree that making staking more attractive by giving an additional $MIN rewards is a great idea, if is acceptable for stakers to get ADA rewards locked, get MIN rewards locked makes even more sense. Remove a little bit of MIN-ADA rewards and give to stakers!