We need to decide if we should add protocol owned HDX liquidity even if it prevents the community from adding their own HDX LP. I believe we should increase the protocol owned fraction of the HDX pool even if that means raising the HDX value above the cap on LP adds. My preference would be to add the full $250k HDX outlined in referendum #18 at the soonest available opportunity.
Background reading: https://hydradx.subsquare.io/post/45
Background information:
We continue to add protocol owned liquidity (POL) to omnipool liquidity as outlined and agreed to in referendum #18 (https://hydradx.subsquare.io/democracy/referendum/18). Sometimes those additions drop HDX liquidity below it’s current cap of 5%, sometimes they do not.
Referendum #18 did not explicitly outline how these situations should be handled.
For example, when considering how POL liquidity additions should affect HDX – should they:
1. Keep the HDX fraction of total LP constant before and after the addition?
2. Never raise HDX fraction above the cap (5%)
3. Let HDX fraction become some other value (4%, 6%, etc).
For reference, the protocol owned fraction of each individual pool is shown below (POL %). This is found by adding the treasury LP position shares with Omnipool protocol shares, divided by the total number of shares.
+-------+------------+--------------+-------+
| Asset | POL Shares | Total Shares | POL % |
+-------+------------+--------------+-------+
| HDX | 1.157E+18 | 2.025E+19 | 5.7% |
+-------+------------+--------------+-------+
| DAI | 1.885E+24 | 1.956E+24 | 96.4% |
+-------+------------+--------------+-------+
| BTC | 4.867E+09 | 4.874E+09 | 99.8% |
+-------+------------+--------------+-------+
| ETH | 1.086E+21 | 1.092E+21 | 99.4% |
+-------+------------+--------------+-------+
| DOT | 2.639E+12 | 8.820E+14 | 0.3% |
+-------+------------+--------------+-------+
At the time of writing, here is each pool's value compared to the total, expressed as a percentage:
+-------+-------------+----------+
| Asset | Value | Fraction |
+-------+-------------+----------+
| HDX | $324,665 | 5.5% |
+-------+-------------+----------+
| DAI | $2,080,345 | 35.3% |
+-------+-------------+----------+
| BTC | $1,123,770 | 19.1% |
+-------+-------------+----------+
| ETH | $1,838,950 | 31.2% |
+-------+-------------+----------+
| DOT | $524,568 | 8.9% |
+-------+-------------+----------+
Negatives of adding POL HDX LP above the cap:
- The community may be prevented from adding additional HDX LP unless price drops or other asset LP is added
- If you are bullish on HDX (like me!), using treasury funds for HDX LP will likely result in loss of protocol owned value, especially because we will likely not sell the LRNA. It would likely be more profitable to hold and sell at a higher price than let the community acquire POL HDX at these prices.
- If HubAssetImbalance (HAI) continues to move further from zero after the POL HDX LP addition, the protocol will likely experience a loss of value as assets are drained from the pool.
- It reduces the faction of fees earned by community LP positions
Positives of adding POL HDX LP above the cap:
- It prevents uninformed members of the community from likely losing value due to IL or HAI increases.
- It reduces the amount of LRNA sold back to the Omnipool which has a number of interesting and complicated implications...
- It makes it more likely HAI will reach zero. When HAI = 0, LRNA generated from protocol fees (0.05%) is added to the HDX pool. This increases the value of HDX compared to other assets, benefiting all HDX holders in a fair way.
- Additionally, when HAI = 0, if LP positions are removed, and current price of their assets is less than the initial price, then the protocol gains a fraction of the shares. These are added as Omnipool "protocol shares", increasing POL.
- The protocol earns transaction fees
- It reduces the price impact on HDX trades making the Omnipool look more attractive to traders and potentially pulling volume from Kraken.
- Potential LP providers may be scared away from using the Omnipool if they see that they have fewer tokens than they initially put in. This happens when LRNA is sold to the Omnipool and HAI increases from the value it was when LP was added. We have seen several commenters in discord ask: "Why do I have fewer tokens than I put in even though price has dropped since I provided LP?". These situations are reduced if LRNA sellbacks are reduced.
My thoughts:
The main rationale for a cap on HDX LP is volatility could result in harmful LRNA dynamics. Increasing HDX LP using POL avoids this. POL HDX LP reduces volatility and reduces LRNA sold back to the Omnipool. This helps us remain competitive with Kraken and helps attract traders and thus LP.
Although it will likely take a long time for trading fees to make up for IL losses, I believe the IL losses are counterbalanced by the increased efficiency of the Omnipool, the reduced LRNA sellback, the greater potential for protocol fees to go toward the HDX pool, and the greater potential for POL increases on LP withdrawals. I also believe most community HDX LP providers are ignorant about the semi-complicated risks involved with providing LP at this stage. Most are simply looking for something to do with their HDX. We should endeavor to protect these individuals from harming themselves. Even if protocol owned assets take a minor hit from IL, this is the right thing to do for the community.
Additionally, letting fees and other rewards accumulate as protocol owned assets rewards all HDX holders in a fair way, avoiding the issue of some community members not being able to add HDX LP while others are able to get it in.
Edit: omg the banner is huge, my eyesss
This all sounds good and well thought out to me