Protocol Owned Liquidity and the way forward.
Here is some backstory with numbers:
It’s been 12 days since we launched Beta on Arbitrum mainnet for public use, and the trading activity on the platform has increased multiple folds.
In the first 7 days, 1603 total trades were placed, and the trade volume (sum of all trade sizes) stood at 150K, of which 15% was generated as revenue.
Post the 7-day mark, the BLP exchange rate was at 1.11, it started to fall and went to 0.91 because of a few big trades winning and caused panic among liquidity providers, and again over the next 24 hours, the exchange fell further but not sharply to 0.85.
Although the BLP exchange rate was volatile, the cumulative trading volume went to $600K, and the protocol generated close to $90K in total revenue. We increased the USDC emissions but it was not enough to contain panic. Eventually, we decided to discontinue BLP and distribute the revenue generated to BLP holders with esBFR rewards to cover up the drawdown faced by LPs.
Why BLP (Buffer Liquidity Pool) was discontinued POL (protocol-owned liquidity) and what’s new in POL?
Even though the trading volume was increasing rapidly, the high max trade size and pool utilization limit resulted in BLP reserve fluctuating quite a lot. This caused panic and we were not able to manage the LP expectations.
The volatility is expected, especially during the Mainnet beta phase and our goal is to tweak different parameters to an optimum value to create parity for traders and Liquidity providers. Hence, we decided the ideal long-term solution was to discontinue BLP and switch to protocol-owned liquidity (POL).
We seeded POL with 75.5K USDC and restarted trading, with 40% of the fee generated being sent to $BFR stakers (increased from 30%) and 60% going back to the protocol.
Max trade size is now 0.3% of available liquidity, and max utilization is capped at 10% of total available liquidity; we expect this to reduce the POL volatility significantly.
Key benefits of shifting to Protocol Owned Liquidity (POL)?
- Permanent liquidity source; and shakes out short-term liquidity
- Allows quick testing and implementation of new risk management modules in a minimal period of time.
- Speeds up deployments of new products over the POL
- Eliminates conflict of interest and establishes parity between traders and liquidity providers.
- Allows us to employ off-chain mechanisms to hedge high-risk scenarios until an on-chain equivalent is developed.
- Increase capital efficiency, by deploying unused capital in other protocols.
One of the most likely questions we expect to be asked is — Can the trading be scaled with protocol-owned liquidity?
Yes, the platform can be scaled significantly. Because of the short-term nature of trades on the platform, Buffer can churn the same liquidity multiple times a day to generate high volumes.
For instance, 5 min trades at 10% max utilization can generate daily volumes of $2.8M and revenue of $432K with just $100K of POL. To that end, scalability is not an issue for Buffer with protocol-owned liquidity.
How liquidity for POL can be grown?
We propose an OTC sale of esBFR at a discount to the current price to further increase POL in order to support bigger trade sizes. esBFR can be directly delivered as a bonus token to all the OTC sale participants, which then can be staked to earn protocol revenue in USDC (Just like $BFR token) or be vested linearly over 365 days to receive BFR tokens. esBFR received via a bonus mechanism doesn’t require BFR tokens to be reserved for vesting.
There are other ways to grow POL as well, like BFR collateralized bonds, adding some % of fee generated back to POL, adding NFT sales proceeds, relaunching BLP but with a liquidity lock, and many others.
We encourage you to share your thoughts and ideas on this subject matter as it directly affects the future of the platform and the community.
You can join us on Discord to share your thoughts.
