In the proposal to Approve New DXD Token Model that passed earlier this month, one of the implementation provisions was to use DXdao treasury assets to increase DXD liquidity. It committed up to $1m of DXD/ETH. The proposal authorizes liquidity to be provisioned once the DXD Treasury NAV ratio surpasses 60%. The latest calculation is 68%.
DXD liquidity has remained low. With DXdao serving as an LP, there is also a possibility that DXdao earns fees from LPing. LPing on DXD/ETH has been profitable, likely given the higher fees on mainnet (0.5%) and Gnosis Chain (0.6%), despite pretty significant movements in the DXD/ETH price over the last few months. Given the commitment to 70% floor price from DXdao, impermanent loss should be less of a concern.
To provision liquidity on Swapr, DXdao must use the Swapr Liquidity Relayer. Funds must first be sent to the liquidity relayer from the treasury and then a proposal through the multicall2 scheme must pass that actually facilitates the liquidity deposit by checking the on-chain oracle. Oracle manipulation remains a concern, so the liquidity facilitation proposal through multicall2 could be broken into smaller amounts.
One funding proposal would:
- Send 130 ETH and 300 DXD to the Swapr liquidity relayer, identified as
Liquidity facilitation proposals through multicall2
- 25 ETH & 61 DXD with a 5% slippage tolerance
- 40 ETH & 91 DXD with a 5% slippage tolerance
- 65 ETH & 148 DXD with a 5% slippage tolerance
Note on Treasury NAV: This liquidity provision was approved as part of the new DXD Token Model, but there was not specifics on how it affects Treasury NAV. Many projects do not include protocol-owned liquidity as part of treasury calculation, but for clarification, the ETH in the DXD/ETH LP position counts toward Treasury NAV, but the DXD in it does not count towards circulating supply
Risks and considerations
Impermanent loss is a risk for all 50/50 constant-product automated market makers. That should be limited here because of the higher fee as well as the price range that DXD/ETH should trade in. Using the Swapr Liquidity Relayer comes with its own set of risks as it relates to oracle manipulation. Breaking the deposit amounts down into smaller increments makes it more expensive to manipulate.
Lastly, there is a risk that there will be some DXD issuance should the price of DXD/ETH go above what the pool was deposited at. This issuance would be offset by more ETH and thus shouldn’t have a large effect, but DXdao should be mindful whenever it considers a DXD issuance.