Increasing DEX Liquidity with Community Pool Tokens
Contributing Authors: Luke, Minch
Date: 23/10/2023
Last Edited: 27/10/2023 (see Edit Log)
Introduction
Token networks are dynamic, constantly evolving entities, influenced by various factors that cause them to ebb and flow. Liquidity serves to buffer volatility, and support the expansion of network use. Regarding the cheqd Network, the flow of tokens underpins important functions, such as paying for identity transactions, supporting governance votes, and upholding the proof of stake network.
The current state of liquidity depth and available listing options for $CHEQ has been the subject of ongoing and extensive discussions across the cheqd community. Today, we put forth a community-driven initiative aimed at enhancing liquidity provision.
Proposal
We propose a Community Pool spend of 1,000,000 $CHEQ (One Million) or 27k USD (18/10/2023) to support a mixed approach of direct liquidity provision, and an incentive scheme to lure independent contributions to the target liquidity pool. Here are elements of the proposal:
Token custody: The cCDAO will be the custodian of these funds and manage the incentive scheme (multi-sig wallet with cheqd Team involvement).
Target liquidity pools: A New Osmosis Pool $CHEQ / $USDCa (0.2% swap fees, 0.0% exit fees); The existing Uniswap Pool $CHEQ / $USDT ! Please show allocation preferences in the poll !b
Initial Liquidity swap: To maximise capital efficiency the cCDAO will facilitate bids for OTC swaps starting at the market price of the deposit date of the community pool funds
Compounding rewards: 50% of LP revenue/fees will be reinvested in the LP
Incentive scheme: 50% of LP revenue/fees will be distributed as rewards to LP providers
Adaptability: The details of the LP and incentive scheme are subject to change by way of Governance vote within the cCDAO. Therefore, the initial liquidity positions and DEX options are not permanent and at the discretion of the cCDAO may be shifted or changed (i.e., liquidity may be reallocated to new exchange options)c.
Benefits
The benefits of greater liquidity within a Crypto ecosystem include:
Efficient Trading: High liquidity means that assets can be bought and sold quickly and at minimal cost. Traders can execute orders without experiencing slippage (a significant difference between the expected and actual trade price), which is particularly important for micro-payments and order flows that originate from utility across the network.
Market Depth: Liquidity provides depth to the order book, meaning there are ample buyers and sellers at various price levels. This depth makes it easier for users to enter or exit the market at their desired prices. Greater sources of liquidity also enable arbitrage bots to efficiently close market inefficiencies, benefiting the order books as a collective.
Wider Adoption: Projects with liquid tokens are more attractive to investors, exchanges, and businesses. They are more likely to be listed on major cryptocurrency exchanges, which in turn exposes them to a broader audience.
Community Engagement: A liquid ecosystem attracts a more engaged and active community. Token holders are more likely to participate in discussions, governance, and other activities if they can easily enter and exit positions.
Utility and Use Cases: Greater participation in the network, by way of improved access, will in turn attract developers to build on the network, making the ecosystem more versatile and valuable.
Access to Capital: Projects with liquid tokens can raise funds more easily through token sales - both in secondary markets and direct. Investors are more willing to participate in fundraising events for tokens that can be readily traded and have a proven market.
Snapshot of current liquidity
To get a view of the potential impact of providing liquidity, we have looked at the current status of Liquidity Pools on existing Decentralised Exchange listings (Table 1.)
Table 1: Snapshot of liquidity provided on key Decentralised Exchanges; taken 18/10/2023
Liquidity Breakdown | Total Liquidity Value (USD) |
Depth +/- 2% (USD)** | |
---|---|---|---|
Osmosis (CHEQ-OSMO) | 1,100,000 $CHEQ 121,400 $OSMO |
$60,000 | $1215 |
Osmosis (CHEQ-ATOM) | 345,000 $CHEQ 1,400 $ATOM |
$18,421 | $367 |
- Brendan
- USDC is utilised as per @Fraser | CEO @ cheqd comments
- The liquidity is split 50/50 between Osmosis and Uniswap
- Stop providing liquidity in ATOM and OSMO pairings and migrate to USDC/USDT
- Concentrating all liquidity in USD pairings will benefit overall trading experience and price action to be much more stable.
- Improved depth of liquidity.
- Increase agency of the ccDAO.
- I would want the CHEQ:stable to be USDC over USDT for a few reasons:
- USDC is now integrated into Kado and Circle will be releasing CCTP for easy (and I believe low cost) bridging in the future which should provide good on-ramping and bridging.
- There will be future USDC / Circle / integration announcements which will be useful for piggybacking for publicity purposes.
- I would leave it up to the ccDAO as to whether the liquidity is allocated to either Osmosis or Uniswap pairs:
- Uniswap is much more capital efficient than Osmosis since uniswap v3 uses concentrated liquidity
- Osmosis has supercharged liqudity but I haven't had a chance to check how easy this is to configure / apply.
- My only requirement would be that the decision is transparent and verifiable (which public blockchain should cover)
Thanks Fraser,
The guidance on which stablecoin to choose is appreciated–ultimately, the proposal is here to support the best option. USDT was just the highest reported preference between USDC and USDT in a Telegram poll across the cheqd and relative channels. I hear from Ultra some interesting innovations on USDC front.
I’m not sure you can argue that Uniswap is more capitally efficient, especially if you factor in gas fees. However, I am open to the benefits of exposure to a larger market. The supercharged liquidity gives you much the same ability to set a range of prices for the LP. Considering the volatility of $cheq, it would be something that needs to be closely managed.