Temporary LP ADA Delegation Plan

Summary

The Minswap DAO is currently losing out on about 40k ADA every epoch by not delegating the ADA in Liquidity Pools in the Smart Contract. While we are working on a framework for a full-fledged strategy on how to delegate this ADA and how to implement it, the opportunity cost is too high to leave the ADA unstaked any longer. In this Proposal, we present 4 Options on how to temporarily delegate the ADA, until a more detailed framework is defined.

Background

The Minswap DAO currently has about 70 million ADA locked in its Smart Contract. As we work on a long term delegation strategy, this ADA currently remains unstaked. It is difficult to devise a coherent strategy on how to delegate this ADA, but rest assured the Minswap Team (with the help of Kitty Farmers) are on it. However, currently this ADA is unstaked, which at a 4.5% APR, means the Minswap DAO is missing out on about 40,000 ADA every epoch if it were staked. Until we devise a full-fledged strategy and the on-chain tools to vote on it, we think it makes sense to still delegate this ADA, and the Minswap Team and Kitty Farmers have designed 4 Options for the larger community to debate and discuss on.

But before presenting them, we need a bit of a foundation. Minswap is an AMM DEX that is based on Liquidity Pools. This means, under the eUTxO architecture, that each Liquidity Pool (e.g MIN/ADA, LQ/ADA…) is one separate eUTxO with one separate stake key. Thus, we can only delegate entire Liquidity Pools to SPOs, and sadly we cannot split our delegation in smaller amounts like IOHK does in their delegation program (for instance in chunks of 1-3 million ADA, in order to have the minimum a pool needs to mint blocks reliably).

In addition, the discussion around what to do with the ADA staking rewards received is a very difficult (but intriguing!) one. For now, the ADA rewards would go to the DAO treasury, but we are actively working on ideas (e.g. that could benefit LPs, or MIN holders somehow) and will kick start discussions on this topic soon!

Here are the the 4 Options:

Option 1)

Delegate all ADA in Minswap Liquidity Pools to a Minswap Private Stake Pool:

A Private Pool can be a great tool to kickstart a DAO Treasury. The formula that determines ADA staking rewards dictates that a0 has a small impact on rewards, but with a large pledge it can be significant. Private Stake Pools optimize ADA rewards by pledging the whole (or a very significant) stake cap of the pool. The bigger the pledge (what affects a0), the higher the potential rewards as you’ll mint potentially more blocks. In a Private Pool, by setting a big part of the wallet as the pledge (let’s say 50M ADA, for example), you could get roughly 1% more rewards than if it were staking with a pool that has 1k ADA in pledge, for example. So, you would get 5.1% APY instead of 4.2%, plus you collect the 340 ADA fixed fee every epoch. This is a very capital efficient option.

Option 2)

Stake to FISO Pools following the idea in this other Proposal by @madblocks:

This is an attempt at a Fair Approach, and it consists of delegating the ADA in our Liquidity Pools to FISO Pools. FISO Pools are community Pools with low stake (the majority under 1 million ADA) which gained the trust of the Minswap Community during our FISO. Many of them, however, have suffered after the FISO with the recent centralisation of the network, some even sadly closing down. For this strategy, it would make sense to choose FISO pools with low stake, and that are still operational.

A FISO Pool temporary delegation strategy would aim to also maximize staking rewards and minimize pool saturation, by staking the largest Liquidity Pools (like MIN/ADA, with currently 26mn ADA) to the smallest FISO Stake Pools available (like VAULT, with 100k ADA delegated), second largest Liquidity Pool to second smallest Stake Pool and so on (see an example of a spreadsheet here). This strategy could be implemented between all FISO Pools, or for instance only between those with less than 4 (or another number) million ADA live stake. This ensures that FISO stake pools receive the optimal benefit of this delegation distribution mechanism as well as providing a good return on the protocol’s capital allocation, and decentralizes the network.

The parameters would be taken from live data at the moment this is implemented within the protocol. The Minswap Team will need 1-2 weeks in order to optimize this process, divide pools into separate staking keys, and coordinate with DeFi Llama to ensure they are tracking our data correctly.

Option 3)

The third Option would be to mash up both previous options: Delegate as much ADA as capital efficient as possible to the Private Pool (currently the maximum stake before returns start diminishing is 67mn ADA) and follow the FISO Pool strategy for the rest of ADA.

Option 4)

The fourth Option is quite similar: Delegate the MIN/ADA pair ADA to the Private Pool (which is likely to be the biggest Liquidity Pool, with about 26mn ADA currently) and follow the FISO strategy for the rest of Liquidity Pools.

Moving Forward

Last Epoch, a Minswap Private Pool was created. This was done as it takes 5 epochs (now 4) for this ADA to start earning rewards, and we want to have a temporary strategy defined by then. Below, there is a non-binding poll. We ask you to vote on the poll, so we can gauge the sentiment, as well as perhaps leave comments with better versions/modifications of the proposed strategies if you deem necessary. The poll will close in 2 epochs.

If you had to choose between all 4 Options, which one would you choose?

  • Option 1
  • Option 2
  • Option 3
  • Option 4

0 voters

28 Likes

I love the idea of maximizing the ADA staking returns and then fairly delegating anything that is not capital efficient. These staking returns will eventually go back to Minswap users and MIN holders. Thus, I am happy to vote for option 3. Thanks for the detailed post Purrito!

18 Likes

If we can direct enough ADA from a couple pools (currently ADA/MIN, perhaps in the future ADA/stablecoin) to a private pool with a high enough pledge to make a differrence, then we should do that. These ADA rewards are the future bill-payers of the DAO and Minswap labs team, and the rest will return to MIN holders over time, so it’s really critical to the long term success of Minswap that we take advantage of this.

That said, we should also look to support community pools with some portion of the ADA as well. And since, over time, I expect Minswap TVL to exceed the capacity of one pool, we should definitely spread delegation around. Decentralizing Cardano remains a critical component of Cardano’s long term success, and we want SPOs to be able to operate into the future. I recommend option 3.

9 Likes

I really think this is 4 very good options. It’s a bit like choosing your favorite child. I don’t think the amount of ada earned by Minswap will be much greater if we go with 3 over 4, but I do think choosing 4 could have a significant impact on these small FISO pools. That could come back to benefit Minswap in ways that are hard to predict. It is good to develop friendships and allegiances across the broader Cardano community.

I support #4

3 Likes

3 and 4 are similar enough that I am happy with either strategy. I do think that if we have a private pool (which we do), we should at least max it out, though.

3 Likes

I like the idea of continuing to support the stake pools. It continues to show Minswap’s commitment to promote decentralization of the cardano blockchain. I’m ok with option 3, but long term, you should look at creating even more SPO partnerships for this. In the long run, the SPOs will help evangelize Minswap, and they may be able to help when it needs to scale further.

2 Likes

I prefer only stake to single pool operators but this remained stalled a lot and the private pool is already created so i go with option 1 having in mind that those rewards will go to liquidity providers so MIN will gain more value

1 Like

Great options but like 3 and 4 out all. Although I like 3 the most because it distributes the stake, but do like the most capital efficient if end goal would be to distribute to holders and get some of those ADA’s back from IL :stuck_out_tongue: :pray:

Option 1 to create a large treasury is best in my opinion. Possibly use some of that new ADA to buy back some of the supply at a fixed rate to hedge against the massive inflation of MIN tokens.

I am SUPER excited for this to get going.

General question: What happens if the UTxO for one of the pools grows larger than 67M ADA? Can that be split? It would be hard to stake well at that point (whether staking in a private pool or in a FISO).

I love these options. I feel like Options 1 and 2 each have strengths and weaknesses, which then pour over into options 3 and 4.

Option 1)
good: I love being capitally efficient.
bad: (a) I’m not sure we can guarantee a 50M ADA pledge. ADA in pools is dropping. There is currently no locking period (though MINt may change that). (b) What if ADA in pools INCREASES? We would need a second or third Pool. That’s good news, but then the pledge on those pools couldn’t be guaranteed either. Obviously there are answers to these questions, but they aren’t in the write-up.

Option 2)
good: This is a huge support of the blockchain and of Single Pool Operators.
bad: How often are we going to re-evaluate our stake? Are we going to “pretend” what each SPO would look like without our stake each epoch, then redecide and redelegate each time? This could create quite a whirlwind effect on SPOs.

My personal choice is Option 3.

Setting the pledge at the pool will be a tricky number to do efficiently, no matter which of these options we choose, though.

1 Like

All options are good! What would the plan be to do with the ADA gained from staking long term in the DAO treasury? Feel like using it to buy back MIN off the market and lock that MIN to stabilize the price. This would directly benefit MIN holders and MIN/ADA LP providers. Also could be distributed back to MIN holders or MIN/ADA LP holders. Perhaps this is ‘step 2’ but it’s intriguing and worth a discussion.

1 Like

I like the idea of a mixed private pool and also supporting the FISO pools. I’m terms of the rewards earned each epoch from delegation I feel the team should receive a portion of those rewards for maintaining the private pool and also all the hard work that goes into maintaining the DEX.
However I also feel that because the stake is using users liquidity, that users providing liquidity and also yield farming should also get a portion of the the ADA rewards. Added to this that should the liquidity be used to stake into other project’s ISPOs, that these tokens from the ISPOs can also be air dropped to liquidity providers or MIN holders (thus bringing some profile utility to MIN).
I think there are a whole lot of options that could benefit both the team and DEX users.

I vote for option 3.

We should max out our own private pool to ensure the health and viability of the MIN protocol, as well as to reward MIN supporters. Then we can focus on the Cardano community. That will leave more than enough ADA to generously support the Cardano community through decentralization going forward, as the amount of staked ADA will grow.

Strongly agree with everyone above, supporting the cardano community is extremely important and will no doubt strengthen MIN more than money can alone.

i personally voted options#3.
Apart from having to grow the DAO treasury (more capital efficiency), we’re able to support small FISO pool who are struggling to mint block for every poch.

1 Like

I like the idea of option 2. The FISO model brought my to Minswap and to those small stake pools. Small stake pools/SPO´s are very important for the network and this could grow into a program of Minswap to reach out to new pools over time.

100% agree with this

Being a complete noob, I don’t completely understand the impact of these options hence would prefer something in between like option 3 or 4. After reading other comments on this post I feel that option 4 seems to be the best as it looks at future needs of creating new alliances and it can also impact small FISO.

So In light of that I choose option 4.

We have to be careful that MinSwap TVL is easily captured not just by DeFi but also any other smaller TVL tracking system. Let’s make tracking MinSwap TVL easier for everyone even if we stake to pools.

I think all ADA earned for the DAO treasury should be converted to MIN and stored as MIN. The DAO’s treasury shouldn’t hold any ADA. This will help increase the price of MIN and would therefore benefit all MIN holders and LPers.

2 Likes

I prefer option 3 and with the ADA rewards I would use them to lower the commissions for farming