Emissions Analysis & Committee Tool Enhancement
Minswap Improvement Proposal
Please note all calculations were done on 11/24/2024 with an ADA price of $1.02.
Background
The Emissions Committee was originally established to manage the MIN token emissions, aiming to strike a fine balance between attracting and retaining liquidity while minimizing dilution. This objective is outlined in the mandate section of this proposal.
The committee has determined that lowering the emissions bound has been the most effective course of action thus far. However, we now face a critical juncture where further measures are required. Additionally, it has become evident that MIN token emissions are deeply interconnected with the ADA-MIN Protocol-Owned Liquidity (POL). Emitted MIN tokens that enter the open market are highly likely to pass through this liquidity pool at some point.
A longstanding concern is that the MIN-ADA POL operates inefficiently. While this proposal does not address all underlying issues, it represents a step toward optimizing the system. This initiative will be the first of several proposals aimed at creating a comprehensive strategy for managing the MIN token and its POL more effectively.
Scope of Change
If this proposal proceeds to a vote, the primary changes will include the following:
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Reduce the lower emissions bounds by 50%.
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Empower the Emissions Committee to adjust the MIN-ADA DAO owned POL pool depth by up to 10% of the current depth on a biweekly basis, ensuring healthier slippage and minimized price impact.
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Authorize the Emissions Committee to allocate withdrawn liquidity to the MIN-ADA liquidity operations wallet, the treasury, or an idle wallet (as outlined in an upcoming utility integration proposal) for storage or reassignment of the assets.
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Approve additional compensation for the committee’s increased responsibilities associated with monitoring liquidity pools and emissions adjustments.
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Approve compensation for the work involved in drafting and implementing this proposal.
Emissions Thesis & Rationale
Analysis of Current Emissions/ Staking Inefficiency
The following points illustrate the persistent inefficiencies in the current emissions structure:
Revenue Distribution Inefficiency
The primary objective of emitting a DEX token is to attract organic liquidity providers by incentivizing participation through monetary rewards. However, as most global participants benchmark their returns against fiat currency values (e.g., USD), it is critical to evaluate not just the APY of these rewards but also their fiat value.
In the charts below, the MIN/ADA pair has appreciated by a commendable 15.80%, driven by investor interest. Even more impressive, ADA/USD has surged 247.89% over the same period. Consequently, the dollar value of MIN has increased by 287.06%, reflecting a significant price boost.
Before the most recent emissions cut, the protocol was distributing approximately $3,300/day or $99,000 over 30 days in emissions. Following a 10% reduction, emissions have now reached the lower bound of approximately $9,254/day or $277,620 over 30 days when adjusted for the price increase.
- Staking rewards currently amount to approximately $5,790/day or $173,700 over 30 days (excluding MIN), with an additional $192/day or $5,760 over 30 days when MIN rewards are included.
A sell of $99,000 MIN tokens has a price impact of 1.66%. The liquidity pool depth is the only thing protecting the token currently. It has been recognized that an emission incentive realignment along with proper pool management (covered later) will allow us to steer the ship back in the right direction.
Misconception of Revenue-Emissions Parity
If the emissions were not already excessive, a common misconception persists that protocol revenue distribution must fully offset emissions. This assumption is flawed. Currently, Minswap operates as a “blue-chip stock,” distributing 100% of its revenue without retaining any for reinvestment within the ecosystem.
While it could be argued that this is not entirely accurate—considering a significant amount of ADA has been accruing from batcher fees—these funds remain idle in the treasury. Consequently, they perpetuate the inefficiency model instead of being utilized to address it.
Strategically deploying these resources offers an opportunity to rectify these inefficiencies. Until then, from an investment perspective, the MIN token remains a poor value proposition.
This issue will be addressed in a future Utility Integration Proposal aimed at benefiting both stakers and the MIN token.
Unbalanced Financial Model
While the protocol generates substantial revenue, its financial model—combined with MIN token emissions—creates an unsustainable outflow.
- Minswap currently distributes $173,700 in ADA that could otherwise be converted into buying pressure for the MIN token.
- Additionally, it releases $283,380 worth of MIN tokens onto the open market.
The utility of the MIN token is limited to extracting additional value from the protocol or selling it outright. This structural imbalance fosters an ecosystem where long-term token performance is undermined by the lack of reinvestment or intrinsic value growth.
This will be addressed in the Utility Integration Proposal to benefit stakers & the MIN token at a later date.
Natural Entropy and Long-Term Decline
The current model creates a system of natural entropy that inevitably leads to the long-term underperformance of the MIN token. This outcome occurs without requiring investors to explicitly calculate or deliberate over the inefficiencies—it is an inherent feature of the system. It is inevitable barring momentary hype cycles and fomo investments. It is not prudent management of a long term business.
This will be addressed in the Utility Integration Proposal to benefit stakers & the MIN token at a later date.
When considering all these factors, it becomes evident that distributing such significant value must be justified by measurable outcomes. To evaluate this, we can examine how the Total Value Locked (TVL) on the Minswap protocol has evolved over the past.
Liquidity Retention Analysis
Historical Observations
Over the past 7.5 months of the Emissions Committee’s operations, it has been observed that Minswap’s liquidity remains highly resilient. Liquidity providers appear to prioritize factors beyond just APR when deciding to provide liquidity. These factors likely include the platform’s reputation, security, and overall user experience. While the exact reasons can only be speculated, the reduction in APRs and emissions has had a surprisingly limited impact on liquidity, highlighting the strong appeal and trust in the platform.
USDM Exodus Anomaly
Below, we present the TVL of the top four DEXs on Cardano (ADA) to provide a fair comparison that excludes the impact of price gains.
A noticeable drop in TVL can be observed across all DEXs, largely due to whales who withdrew their USDM and ADA liquidity. This anomaly highlights the potential opportunity costs for stablecoin liquidity providers during a rally in ADA’s price. Specifically, as ADA appreciates, stablecoin liquidity providers face a trade-off: continuing to provide liquidity or reallocating assets to capture greater upside. In this case, the whale opted for the latter, withdrawing their liquidity amid the rally and the added uncertainty surrounding upcoming elections.
This situation underscores a broader issue within the ecosystem: the absence of a market-agnostic stablecoin provider, which makes the ecosystem vulnerable to such disruptions.
The exodus began on October 29 and concluded on November 8, as evidenced by data from the liquidity pool tracking tool developed by Chicken. During this period, ADA’s price increased from approximately $0.35 to $0.43. The total withdrawal amounted to 2,540,000 USDM and 7,100,000 ADA in liquidity from Minswap. This equates to a total of approximately 13.6 million ADA, calculated using an average price of $0.39 during the period. Notably, this figure may be even higher, as the initial tranches were likely exited at a lower price.
Impermanent Loss & Bullish Sentiment Shift
It is evident that DEXs across the board have experienced a significant decline in liquidity. While liquidity has historically been resilient and sticky, the current situation appears to have shifted. Importantly, there is no indication that this liquidity is being redirected to another DEX, alleviating concerns about a competitor gaining a disproportionate advantage. Instead, this decline seems to stem from two key factors: the USDM anomaly and the rally in asset prices.
While the reduction in emissions is not solely responsible for this trend, emissions undeniably play a critical role in shaping liquidity dynamics.
This raises a profound and challenging question for the DAO: Should our focus be on protecting the MIN token and the protocol, or the broader ecosystem? What does “protocol health” truly mean in this context? These questions are difficult to answer within the framework of the current financial entropy model.
A more effective approach may be to prioritize metrics such as volume and volatility, which will be explored further in the section below on enhanced committee tools.
Emissions Bound Revision
Based on the analysis above, the Emissions Committee is tasked with processing extensive data and insights every two weeks to make informed decisions on adjusting emissions. At present, we believe that emissions have minimal direct impact on Minswap’s liquidity. Increasing emissions further risks introducing unnecessary sell pressure on the MIN token.
However, given the evolving market conditions, it is crucial for the committee to retain the flexibility to act decisively during biweekly meetings without progress being hindered by the need for future governance proposals to adjust the lower emissions bound.
To address this, we propose the following simple change:
Reduce the lower emissions bound from 200,000 MIN per day to 100,000 MIN per day.
Please note that this adjustment is not a guarantee that the lower bound will be reached, as the biweekly adjustment delta remains capped at 10%.
MIN/ADA POL
Background
It has long been recognized that the MIN-ADA Protocol-Owned Liquidity (POL) is inefficiently deep as illustrated by this study. However, as highlighted in the analysis above, it serves as a crucial safeguard against significant value loss for the token. As the identified issues are addressed—or even while they are in the process of being resolved—it is essential to monitor the depth of this pool closely.
We believe there is a strong correlation between emissions, pool depth, and liquidity operations. Therefore, it would be prudent for the Emissions Committee to oversee this pool as part of its mandate, utilizing carefully defined tools within clear limitations to ensure effective management.
Balancing Act
The choice between deep and shallow liquidity pools presents unique advantages and disadvantages. These can be analyzed by examining how each pool type influences key performance metrics:
- Slippage: The difference between the expected price of a trade and the actual executed price.
- Price Impact: The change in an asset’s price caused by the size of a trade within a liquidity pool.
- Volatility: The frequency and magnitude of price fluctuations for an asset over time.
These metrics directly affect the trading volumes within a liquidity pool. Price discrepancies can create arbitrage opportunities, driving volume; however, excessive discrepancies may deter large trades due to unfavorable execution. Consequently, trading volumes impact Liquidity Provider (LP) revenue and, in the case of Minswap, protocol revenue, as stakers earn a share of the fees generated. In essence, trading volume is a fundamental component of Minswap’s overall success.
By adjusting pool depth, we can observe its impact on these critical metrics. The following analysis explores how deep, shallow, and optimal pools theoretically influence slippage, price impact, and volatility, and, by extension, trading volume.
Please note that this only highlights a few of many factors of each component.
| Pool Type | Slippage | Price Impact | Volatility | Volume Impact |
|---|---|---|---|---|
| Deep Pool | Low slippage, even for large trades. | Minimal price impact, large trades barely affect token prices. | Low volatility, stable prices but less attractive for speculators. | Encourages high-volume trading due to predictable pricing but reduces arbitrage opportunities. |
| Shallow Pool | High slippage, even for small trades. | High price impact, significant price changes from trades. | High volatility, encourages speculation but deters stability-focused investors. | Discourages high-volume trading due to unfavorable trade execution but creates arbitrage opportunities. |
| Optimal Pool | Balanced slippage, manageable for most trade sizes. | Moderate price impact, ensuring stability while allowing trade dynamics. | Controlled volatility, balancing stability and speculative interest. | Optimizes trading volume by balancing incentives, arbitrage, and trade execution to maximize LP and protocol revenue. |
Currently, the MIN/ADA Protocol-Owned Liquidity (POL) operates within a deep pool framework. While this allows for large trades and sustained volumes over time, it significantly reduces volatility. However, instead of consistent trading activity, we observe random and unpredictable volume spikes typically driven by major events, such as staking contract unlocks.
The following illustration highlights this phenomenon in relation to staking contract unlocks. It demonstrates the uneven distribution of volume, where higher volumes are concentrated around staking unlock events, with considerably lower trading activity during other periods.
Liquidity Monitoring Metric Examples
This section aims to provide insights into several potential approaches for analyzing and determining an optimal structure for liquidity. While these are illustrative examples and not guarantees of implementation, they demonstrate the types of analysis that can be employed:
- Modeling Sell Pressure - By analyzing the average MIN held per wallet that trades at varying frequencies, we can estimate the potential sell pressure on the market. This estimate can then inform adjustments to the pool, optimizing slippage and price impact to align with this level of sell pressure and achieve the desired outcomes outlined earlier.
- Tracking Large Liquidity Providers (LPs) - Combining the above metric with additional sources of expected sell pressure, such as MIN emissions, can enhance decision-making. For instance, by monitoring the behavior of the 5–10 largest LPs across all pools and tracking how they manage their MIN holdings, we can better understand whether pool depth, volatility, or a balance of both should be prioritized.
- Evaluating Net Volume Impact - By studying net trading volume over a specific time period and measuring its percentage impact on price, we can assess the pool depth-to-price impact ratio. This provides a foundation for decisions regarding pool depth adjustments.
- Analyzing Pool Extraction Values - Examining which participants—stakers, holders, traders, or LPs—benefit most from a deep or shallow pool can yield valuable insights. This helps identify how different groups are impacted, enabling a more balanced approach to liquidity management.
Regular Liquidity & Fee Sweeps
Liquidity sweeps are essential for maintaining pool efficiency by periodically removing accumulated fees. As fees deepen the pool, increased volumes and volatility can lead to greater arbitrage activity. While this may initially enhance liquidity, over time it can result in an excessively deep pool, creating inefficiencies.
It is generally a healthy practice to evaluate liquidity adjustments on a biweekly basis, ideally in alignment with emissions decisions. This approach enables dynamic management of liquidity:
- Deepening the Pool: When emissions are increased, deepening the pool can attract more liquidity while acting as a buffer against downside risks.
- Reducing Liquidity: When emissions are reduced, decreasing liquidity helps to offset the reduction in sell pressure, maintaining a balanced ecosystem.
It is important to recognize that liquidity management is a complex process, influenced by macroeconomic conditions, microeconomic factors, and revenue distribution. While this proposal introduces straightforward tools and actionable changes, it is just the beginning.
Emissions Committee Alteration
MIN/ADA POL Tool
The Emissions Committee will be granted an additional tool to enhance their ability to manage the MIN/ADA Protocol-Owned Liquidity (POL) effectively. This tool will be subject to a biweekly vote, conducted alongside the emissions vote, and must align with the mandate outlined in the original proposal that established the committee.
Tool Overview:
- Functionality: The ability to adjust the depth of the MIN/ADA POL by up to 10% of the current TVL on a biweekly basis.
- Fund Allocation: The Committee will have discretion to allocate adjusted funds as follows:
- Retain funds in the POL Liquidity Wallet for future operations.
- Transfer funds to the Treasury for protocol-wide use.
- For the MIN portion, transfer to the Idle Reserve Wallet, if deemed necessary (to be detailed in Utility Integration Proposal in future).
Please note that this authority applies exclusively to the MIN-ADA DAO POL. The committee’s responsibilities will be limited to adjusting the pool depth in accordance with the outlined guidelines and deciding where to store the assets—whether to retain them for potential future increases in pool depth, send them to the treasury, or transfer them to the idle wallet. This defines the full scope of their capabilities.
Important Notes:
- This tool does not guarantee that the full 10% adjustment will be utilized in every instance.
- Depth adjustments will depend on the availability of funds to support the changes.
This addition empowers the Emissions Committee to dynamically manage the MIN/ADA POL, ensuring flexibility and adherence to the protocol’s long-term objectives.
We encourage the community to remain engaged and watch for future proposals focused on optimizing the management of Protocol-Owned Assets (POA), Protocol-Owned Liquidity (POL), and Utility Integration which aim to tie all these complex mechanisms together.
Committee Updated Responsibilities
If this proposal passes, the committee’s responsibilities will include the following:
- Biweekly Emissions Adjustment Vote:
Conduct a vote every two weeks to determine any necessary changes to emissions. - Biweekly MIN-ADA DAO POL Adjustment Vote:
Conduct a vote at the same time to decide on potential adjustments to the depth of the MIN-ADA DAO POL. - Release of Biweekly Statements:
Publish a statement following each vote that includes:
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Decisions made regarding emissions and POL adjustments, if any.
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The rationale behind the chosen adjustments.
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Details on any removed liquidity, including the destination of the MIN and ADA (or the current plan for their utilization).
These responsibilities ensure transparency and accountability in the committee’s operations while maintaining alignment with the protocol’s objectives.
Please note that the method of communication—whether through announcements, a dashboard, or another channel—has yet to be finalized. The chosen approach will be shared once the most feasible and efficient option has been determined and may evolve over time. DAO assets can currently be monitored via this dashboard.
Compensation
This section will deal with compensation structures related to the committee and research done for this proposal.
Committee Compensation Alignment
This section does not alter any of the existing rules governing the committee’s operations, as outlined in the prior proposal. Instead, it introduces additional compensation to acknowledge the significant effort and time required to manage these new responsibilities effectively.
Proposed Adjustments:
- Base Compensation Increase:
- Add an additional $70 per member (bringing the total to $170 per month) for monitoring the complex metrics involved, making informed decisions, and providing rationale when requested.
- Boosted Compensation Increase:
- Add an additional $100 to the boosted compensation (bringing the total to $300 per month) for the member who, as determined by a committee vote, provided the most value during the month.
These adjustments ensure that committee members are adequately compensated for the increased workload associated with these tasks, promoting fairness and accountability within the committee structure.
Proposal Specific Compensation
This proposal and the insights it provides were heavily informed by intellectual property (IP) and content developed and produced by Chicken. The proposal itself, along with the background research, was authored by Chicken and subsequently peer-reviewed by the Emissions Committee.
Below is the scope of work involved, detailing the contributions made by Chicken across multiple roles, the associated time commitment, and the calculated total compensation based on industry averages. The average hourly pay for each role was sourced from ZipRecruiter statistics, and the total compensation was calculated accordingly.
Scope of Work by Chicken
- As a Data Analyst:
- Theorizing and conducting background research (this paper). (4 hours)
- Average hourly pay: $40/hour (ZipRecruiter average for a Data Analyst)
- Total for this role: $160
- As a Content Writer:
- Drafting and refining the proposal. (6 hours)
- Average hourly pay: $40/hour (ZipRecruiter average for a Content Writer)
- Total for this role: $240
- As a Software Developer:
- Developing liquidity monitoring tools and authorizing the use of intellectual property by Minswap DAO & Committee for ongoing operations. (15 hours)
- Average hourly pay: $55/hour (ZipRecruiter average for a Software Developer)
- Total for this role: $825
Summary of Contributions:
- Total Hours Worked: 25 hours
- Calculated Compensation: $1,225
