Increasing DXD's on-chain liquidity

[Powers]

tldr: This post is meant to discuss solutions to increasing DXD liquidity on-chain. While always welcome, the opinion of DXD holders is especially sought after. Please fill out the polls at the bottom

The Problem

DXD liquidity has stagnated over the last few months. Average trading daily volume on-chain has trended down since a September peak, which coincided with the Swapr launch on Aribitrum One:

The daily average on-chain volume for the last 3 months has been $97k. What’s more, DXD-ETH liquidity is split across three networks, Ethereum main net ($260k), Gnosis Chain ($740k) and Arbitrum One ($2m). Currently, a $25k trade from ETH to DXD incurs 2.8% slippage on Arbitrum One, 6.85% on Gnosis Chain and a whopping 9.4% on Ethereum mainnet (through 1inch).

There needs to be DXD liquidity if DXdao hopes to onboard new DXD holders, and the lack of liquidity is preventing larger investors from taking a position. What’s more, some classification systems (like token index creators or lending pools) look at mainnet liquidity, where DXD is weakest, as a barometer for overall liquidity.

And while Arbitrum is a strategic place for Swapr and DXdao governance, in my opinion, it is third behind mainnet and Gnosis chain in terms of priority. Even though, right now, it’s twice as big as mainnet and GC pools combined.

Goals:

Targeting liquidity pool size is a good first step. There could be different sources or methods that add up to reach the goal. Here’s a start:

• Mainnet DXD/ETH - $2.5m (~2% slippage on $25k)
• Gnosis Chain DXD/WETH - $1.5m
• Arbitrum One - $1m

Currently, DXD liquidity is at $3m across the three chains on Swapr, so this would be a $2m increase and a realignment of where that liquidity lives.

Potential solutions:

There are long-term options for increasing liquidity, even something like Double, a DXventures investment, but given the current state of DXD liquidity, it’s important to focus on what actions can be taken now.

I see four immediate options, which are not exclusive:

1. Increase the Swap Fee - On Swapr, the swap fee can be raised for each pool. A higher fee limits risk to impermanent loss for LPs. A 0.5% fee would be in line with the Haus/WETH pool on Gnosis Chain.
   • Suggestion: raise the DXD/ETH swap fee to 0.5% vs. the current 0.25%.
2. Rearrange SWPR awards - right now the majority of SWPR rewards for DXD-ETH pair is directed towards Arbitrum One, with the rest split evenly between main net and Gnosis Chain.
   • Suggestion: DXdao could adjust these amounts away from Arbitrum One towards mainnet and GC.
3. Locked Carrot Token Campaign - Launch a campaign that locks LP tokens for an IL insurance Carrot. DXD could be used as collateral, but only pay out if there was impermanent loss. This is an appealing option for GC but we could even create the token there and distribute on mainnet/arbitrum (and redeem back on GC).
   • Suggestion: $1m target campaign on mainnet, $500k on GC and $250k on Arbitrum one (paired with SWPR ). Cost ~100 DXD for 6 months to compensate for IL on the way to 0.30. Check out this spreadsheet to calculate the amount of IL needed to compensate. I think we could do a scalar token
4. DXdao Liquidity - this is the most direct action. When Swapr launched, there was pushback on DXdao providing DXD/ETH liquidity because it competed with the bonding curve. This is no longer a major concern, given that the bonding curve has been shut down and that DXdao has purchased close to 9,000 DXD through the DXD buyback program, so LPing would not take from the pre-mint. Given all of the DXD DXdao has, the risk of impermanent loss is low; the biggest cost is the ETH used to pair the deposit with.
   • Suggestion: Deposit $1.5m in DXD/ETH on mainnet, $1m on Gnosis Chain and $750k on Arbitrum One. This would be approximately 2,871 DXD and 515 ETH in total.

Taken together, these moves could yield more liquidity than the $5m target, because DXdao’s $3.25m would build on the $3m DXD/ETH already on Swapr. There may be some “crowding out” of LPs if DXdao enters, and it depends on whether Arbitrum liquidity moves to mainnet or Gnosis Chain

Moving forward

This is an important topic and keen to get the community’s input. The solutions are not mutually exclusive, and I favor doing them all. Below are some polls to gauge community interest. Please let your voice be heard! Additional ideas, comments or suggestions welcome below.

Poll questions

Should active measures be taken to increase DXD liquidity?

• Yes, we should mix things up
• No, liquidity can develop organically without interventions from governance

What networks should be prioritized (select up to 2)?

• Ethereum main net
• Gnosis Chain
• Arbitrum One

Which chain should have the largest DXD/ETH pool?

• Ethereum main net
• Gnosis Chain
• Arbitrum One

Of the solutions listed above, which are you in favor of pursuing? Not the specific suggestion, just the ideas. (select as many as you want)

• Increase the Swap Fee rate on all DXD/ETH pools
• Re-allocate SWPR awards to DXD/ETH pools on mainnet and Gnosis Chain
• Launch locked Carrot campaign to insure against impermanent loss
• Deposit DXdao liquidity into DXD/ETH pools on Swapr
• Do nothing

Of these, which is the most important one to pursue?

• Increase the Swap Fee rate
• Re-allocate SWPR awards
• Launch locked Carrot campaign against IL
• Use DXdao treasury on Swapr
• I said, “Do nothing!”

[thethriller]

I’m fairly new to DeFi, especially understanding the dynamics of the LPs etc, but I’ll do my best to chime in here.

It seems to me that total “liquidity” measured by amount of the token traded is not the primary issue. That number will be determined more by whether people have reasons to enter or exit the DXdao ecosystem via DXD.

It seems the real issue is the slippage, which causes anyone who wants to get in or out of DXD to pay a high cost to do so. If I’m understanding correctly (please tell me if I’m not), depositing more to both sides of any liquidity pool will reduce slippage for anyone trading in the pair while also earning some return for the DXdao treasury.

That does seem like the most direct way to impact the issue. The other methods proposed sound more like incentives for others to pitch in to help solve the problem, something we have less control over and I’m guessing would result in less net impact to the size of the liquidity pools and thus the slippage.

On the other hand, do we have reason to believe that the incentives would have even more impact than the amount we spend on them? Maybe there’s some research on the topic. If not, and if we go the incentive routes, at least we’d generate some interesting data to share back to the crypto community.