Another step for Omen and DXdao: Empowering a DXdao “Omen Squad” with capital to create interesting markets and provide liquidity

Another step for Omen and DXdao:
Empowering a DXdao “Omen Squad” with capital to create interesting markets and provide liquidity

DXdao is continually iterating on improvements and experiments with Omen.

Omen product is to the point where a user can have a successful experience browsing, choosing and betting on a market. Gas fees aren’t great, but we believe there is a market of people that will still participate. Larger size trades make the economics better.

There is a trend that markets with higher liquidity tend to be some of the higher volume traded markets.

Here, six markets sit in both groups: “Highest Liquidity” and “Total Volume” which makes sense.

We have an idea for DXdao to form an “Omen Squad” eventually to be governed by a squadDAO.
Initially, it would be protected with a multisig.

The goal would be to have a pot of funds provided by DXdao to create a set of markets that the Omen Squad with the help of the community has determined to be timely, relevant and useful to the Ethereum/DeFi community.

With some active monitoring and a bit of extra effort, we believe that DXdao could create and fund some interesting markets to capture attention and users.

We’ve had this idea from before the launch of Omen, but decided to take a “wait and see” approach. We’ve waited…now it’s time to do.

To experiment and learn and iterate, we think DXdao needs to be more aggressive.

Details of Initiative:

  1. Form an Omen Squad

    1. Target 8-10 people
    2. Bring in people from the different communities (DXdao, Omen telegram, Gnosis, Authereum, others)
  2. Set-up an Omen Squad multisig

    1. Fund the multisig with an initial ~$25k of Dai
  3. Create an active “Potential Markets List”

    1. Anyone from community can propose markets
    2. Vote on top 3-5 markets (Target $5k liquidity per market)
  4. Create and Fund markets

    1. Multisig to execute
  5. Monitor markets

  6. Learn, Analyze, recycle funds

Initial Capital for Initiative:

  1. $25k

One goal is to choose markets that will not need weekly active management, as consensus and the multisig will be on the slower side.

Would be great to hear any ideas or input around this type of initiative.

If you are interested in being a part of the Omen Squad, please make it known in the #omen keybase channel.

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After some light discussion around this idea in keybase, it feels as if DXdao generally supports this plan of action.

To provide some more details:
The ideal GOAL is for DXdao to make money from this use of capital. But have the understanding that DXdao could lose money during this initiative, as providing Liquidity on Omen is risky. The hope is that the faster Omen Squad multisig will be nimble enough to act fast when needed.

This is in line with one community member’s suggestion:
“We have only begun to explore where Omen might get traction. It would be good I think to have the “Omen Squad” find ways to sustainably fund markets. Cus I think only when LPs can have a path to profitability will markets really catch on. As in, it would be totally fine to experiment and lose some of the funds in the process, but the goal should be to find profitable markets.”

If other’s have any input, please share here. Otherwise, we will move forward with a proposal to start this initiative.

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I fully support this plan and would even vote for higher capital allocation. We have to keep in mind that the money in those markets wouldn’t be spent but provided as liquidity. I also think the dxDAO would learn a lot what Omen LP feel like doing so.

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Thanks @clesaege . Some follow-up questions for you given your experience with Omen so far:

  • Do you have an opinion on what the minimum amount of Liquidity a market needs to start with to make it reasonable for people to trade? Would $5k of liquidity for a market be sufficient? This would likely allow a user to trade $100-500 as reasonable slippage.
    At $5k, this would only be 5 markets.

  • How much capital do you think DXdao should experiment with providing liquidity to Omen? $50k? $100k?

  • As this would be DXdao providing liquidity into an AMM-based system, are there certain currencies that you would limit it to? ETH vs DAI vs DXD?

  • Did you learn any good lessons during the PNK LP incentive program?

Thanks

On mainnet, with current gasprices, this isn’t enough. A 100$ trade with 2% spread/liquidity fee and 8$ of gas cost is 10% lost just by doing the trade.

I would aim at a few markets at 50k$ liquidity (as the top one we’ve seen), so for 5 a 250k$ portfolio allocation.

ETH and DAI are the main ones. I would avoid exotic currencies as it’s quite a bad use experience to have to convert and take the risk of exotic currencies.

Yeah, the issue we got were:

  • One large liquidity provider got most of the rewards.
  • During that time, there was a lot of crazy yieldfarming projects and even a 100% APR was too low to attract a lot of attention.

I still think rewards are a good idea, now the yieldfarming craze seems to have calmed down and 20% APR are even accepted.

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great points, i tried out Omen while ago and some markets had decent liquidity, but some other markets were extremely tiny.

I think we need more liquidity on these markets, being able to bet 1000$ on most of these topics without pushing the slippage too much would be a good start maybe ?

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I think you also have to replicate what is realistic for potential market creators to actually provide in liquidity and I doubt anyone is going to put in much more than $5k anytime soon with the notable exception of Gnosis.

I would also say the greater need is experimentation in market type to see what people are interested in betting on which also pushes towards more markets with smaller liquidity pools. That said for certain types of market - eg Sports before game starts - there shouldn’t be too much risk of a massive change in odds so should be able to provide more liquidity. Potentially the more interesting question is what the Dao does to offset risk if the sports betting was one-way - could it lay off risk onto Degens etc?

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In the crypto space 5k$ is very low (in last month we had 8 markets with more than 5k$ of average liquidity). You would have a lot of people who wouldn’t bother doing 5k$ deal in crypto. If the deals are attractive large sum of money can flow as we’ve seen with the yieldfarming craze.

Sports are quite safe for liquidity providers (as long as they remove liquidity before the event) and could be a way to allocate DAO ressources.

It may be simpler for the DAO to take the risk, either it pays off for the DAO, either it pays off for users which also pay off for the DAO by bringing users.

“It may be simpler for the DAO to take the risk, either it pays off for the DAO, either it pays off for users which also pay off for the DAO by bringing users.”

The above is in my humble opinion a very simplified statement regarding potentially utilising hundreds of thousands of USD worth of treasury funds and putting them at direct risk. There are many potential scenarios where where we could simply loose funds and not achieve sustainable growth in user base, so presenting it as a simple win/win case is unsatisfactory.

I’d appreciate a more detailed plan/suggestion for capital allocation:
i) Sports might be awesome because there is lower risk, but at minimum we should know what we can do to mitigate risks and how big potential losses could be. What could one big whale do? Or a system of some kind? Increasing liquidity also increases the reward from anyone figuring out an attack vector.
ii) Let’s not risk 100s of thousands of USD because it is “simpler”… but because we hope to achieves x, y or z and measure against it. Is the goal simply to reduce spread and test if that drives more volume? For how long is this liquidity available to the squad? Can Omen not grow without a large amount of centralised funds to reduce spread? And under what conditions does it find its way back to the treasury? What are the likelihood of profits vs losses in that period?
ii) If this was in the region of $25k as a test, then fair enough, then we could iterate, evaluate and scale and achieve what I am asking for. But suddenly there is talk of a $250k capital allocation which I really don’t feel comfortable allocating to a small group of people with no clear analysis of goals/KPIs, risk/reward ratios and mitigation strategies.

It’s not a utilization, it’s a portfolio allocation in one of the dxDAO own product. A 250k$ allocation may lead to a monetary benefit/loss for the dxDAO of around 25-50k$ not the full allocation. Due to the way Omen automated market makers work, a lot of capital need to be deposited to avoid a high spread, this is due to the fact that the market maker should never run out of fund not matter how the market is moving. The only case where a lot of capital could be lost is if a result would be known before the liquidity is removed (and even then, that wouldn’t be the full 250k$ amount).

Omen is a 2 side marketplace. Liquidity providers and predictors. It suffers from the chicken and the egg problem:

  • If there aren’t liquidity providers, there won’t be predictors (not possible to buy/sell positions without a huge spread).
  • If there aren’t predictors, there won’t be liquidity providers (no liquidity fees, thus no reward to providing liquidity).

To bootstrap it, there need to be a huge amount of money in one side of the marketplace, it shouldn’t be required forever, but it’s definitely required for bootstrapping. It’s also required to give confidence to users. If the DAO owning the marketplace finds it too risky, why would anyone else take the risk?

The DAO could ask this capital to be sent back, or keep it as liquidity.
Moreover, by making Omen better, this:

I’d say the overall estimated return is close to 0 with a 25k$ standard deviation (rough estimate, we obviously cannot predict the trades and outcomes which would happen but spreading those in 5 markets should reduce the variance compared to 1).
This is only counting the direct monetary profit/loss of liquidity providing. Having a better Omen product comes in addition and is a significant reason to do so.

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Thanks @clesaege @CLCL @Dexter and @madmax for all the comments. It’s super great to hear this dialogue and see the different perspectives.

To clear things up, it definitely makes sense to start with a small amount of funds. This is why $25k was chosen - enough to try a handful of markets, but not big enough that if something goes wrong, it would be catastrophic. I personally don’t think $50k is needed in a market to be interesting to traders. But if things go well, this could be a possibility in the future.
@Dexter makes a good point that DXdao needs to learn if non whales can be LPs successfully.

Some markets would likely be shorter-term and some medium term. Shorter-term markets notional could then be recycled into additional markets.

Targeting different topics will be a big part of the experiment. What are the most popular verticals? Markets around DeFi? eSports? etc.

We want this to be a win-win scenario, but agree that it would be difficult to start this initiative with much bigger sums money.

We also need to learn how the technical mechanics of Omen Squad interacting with Omen works, and the speed at which it can happen.

Regarding some of @madmax 's detailed questions, here are some initial thoughts, but wide open for input:

but because we hope to achieves x, y or z and measure against it.

We want to learn if DXdao’s Omen interested community can collective source interesting Omen markets that attract trading activity and draw in users to Omen, can technically execute, and profitably provide Liquidity.

Is the goal simply to reduce spread and test if that drives more volume?

Target would be to have enough Liquidity that spread is not a deterrent to users. And, yes, attract users.

For how long is this liquidity available to the squad?

After a month or so, plan is to monitor how LP is doing and if appropriate recycle into more markets.

Can Omen not grow without a large amount of centralised funds to reduce spread?

Think of this as a kick starting to do one more thing to push Omen along and attract interested users

And under what conditions does it find its way back to the treasury?

The community can watch closely how the process is going, and at anytime, propose to change, stop, grow this program.

What are the likelihood of profits vs losses in that period?

Ideally, profits are made. If not profits, then maintain stability and earn fees. If losing money, then change the strategy.

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Valid points @clesaege. We need to test this process and structure with $25k first, then we can always ramp it up if the DAO chooses.

We should also attract other organizations to put in LP capital too. Market creators get to choose the trading fee too, so that could be attractive.

There is also a wider point in that there will effectively only be 3 questions left on Omen in about 10 days (admittedly spread across about 6 markets) - will EIP1559 occur before April, will Berlin hardfork occur this year, will phase 0 launch this year - that have greater than $1k liquidity so there is a pressing need for new markets.

Very true. Do you have any ideas for good markets? Or even topics that we can construct markets around?
We are making a list. Feel free to share here or in Omen channel on Keybase. Thanks