Cryptex Liquidity Strategy: TCAP (2/2)

[m0xt]

Intro
Cryptex aims to move both liquidity pools onto Uniswap V3 due to lower slippage and more capital efficiency. There is a discussion about CTX/WETH pool strategy here: Cryptex Liquidity Strategy: CTX (1/2)

Today let’s talk about TCAP/WETH pool, but I would like to highlight a few differences first.

Table 1: Token specifics

Cryptex does not have any TCAP reserves atm. Moreover TCAP mcap growth is dependent on supply * price. But we can influence supply only. So what is the motivation for users to mint new TCAP today?
(the answer could be applied for price peg problem too)

I think we can learn from stablecoin protocols and their price peg mechanism. However, Cryptex is in a different situation. The most common use cases for users to deposit any asset and mint stablecoins against are either leverage or arbitrage opportunities:
Leverage - users are not willing to sell and rather take loans to cover their financial needs - buy more assets, pay the bill, other investments…
Arbitrage - you can pay x% for your debt and generate y% out of it, where x% < y%

Users still have price exposure to collateral - debt (denominated in stables + interest) → long collateral. Ideally those people are financially educated and understand the risks. If the conditions change (i.e. borrow rate), they adapt. That is the key for holding the peg imo. Generally we could say that the main motivation is capital efficiency.

What is the most common use case for users to deposit ETH (majority atm) and mint highly correlated TCAP?

Because once we fully understand the behaviour and the use cases, we can better design the price peg mechanism imo. Have that in mind but lets focus on liquidity pool.

Problem

TCAP/WETH pool stats:
Pool pair: TCAP/WETH
Pair correlation: >0.95
LPs: 24
Pool APY: 3% (trading fees)
Current TVL: $2.2m
Protocol: Uniswap v3
Incentives: 26.038 CTX → $110k (0,26% of total supply)
Duration: 90 days
Daily inflation: 289 CTX → $1.21k
Pool APR rewards: 132% (CTX rewards)

The current TCAP/WETH Uniswap incentives will expire on October 15th 2022. I hope there is no need for explaining why this is not sustainable. Moreover there are only 24 users who provide liquidity for this pair. TOP 5 LPs have 84,8% of this pool.

Very high concentration is not good at all!

The protocol liquidity strategy should have 2 main objectives:

• Deep Liquidity - enough liquidity for users to buy/sell with minimum slippage (with much better distribution)

• Sustainability - sustainable model for having enough liquidity

• Shock resistant

Suggestion
Various liquidity strategies were mentioned in CLS part 1 here: Cryptex Liquidity Strategy: CTX (1/2)
Updates and new information are added in the comments too.

Team is currently working on better price peg mechanism for TCAP due to constant premium (market price > oracle price). IF we assume majority of minters are liquidity providers (which I was not able to confirm on-chain), we dont know how would new price peg mechanism affect them in any way.

I will not add any specific suggestion to this problem today for the reasons above. But let’s use this text as a resource for further discussion and a problem to solve for the future.

Please feel free to provide your feedback or suggest your solution.

[m0xt]

I have put together all avaiable alternatives for CLS to consider.

We already have:

1. Identified and defined the problem
   CLS part 1: Cryptex Liquidity Strategy: TCAP (2/2)
   CLS part 2: Cryptex Liquidity Strategy: TCAP (2/2)
2. Generated alternative solutions
   See the picture below. Here is the shared doc: CLS - Google Sheets

We have to:

3. Evaluate and select solution (current stage)
4. Implement
5. Follow up

Any kind of feedback is appreciated. Feel free to use your own evaluation in the google sheet. Please be aware of different token specifics for TCAP and CTX.

[m0xt]

I want to share my take on CLS with the community. I agree that protocol owned liquidity POL is the preffered option, but not sure we can do it with TCAP…

1. CTX liquidity - lets start with the easier one!

To create a deep liquidity, someone needs to provide necessary inventory of two assets: lets call it Project Token (e.g. CTX) & Base Asset (e.g. WETH).

Cryptex own a lot of PT, but none BA.
Which BA should Cryptex use? The current pool use WETH.
Why do we use WETH?
What are the requirements for BA?

Those are fair questions. I am personally open to 2 options at this point.

• Option 1: Arrakis Finance v2
  We could use Arrakis finance to acquire any desired BA. There is a reason why I prefer Arrakis over Olympus Bonding.

Olympus Bonding: PT are sold OTC to acquire PT + BA. Because OTC trades are infrequent, there is not enough liquidity and therefore no efficient price discovery. See the picture below what value would protocol acquire while various scenarious.

Arrakis v2: PT are sold for BA using limit orders on DEXs.

Pros:

• any BA
• less sell pressure
• market price
• POL

Cons:

• Arrakis fees

In general I like their approach and I think it is way more effective than using simple bonding.

• Option 2: Olympus Flex Bonds
  We could use Olympus Flex Bonds (if approved by Olympus) to do a treasury swap CTX <-> gOHM. Cryptex could use gOHM as collateral to take 100% LTV interest free loan in OHM to pair with CTX. Olympus would be obliged to hold CTX at least 1 year. For those unfamiliar with Olympus Finance, they aim to provide decentralized, censorship resistant reserve currency.
  They have built $315m treasury and own $65m of liquidity. Have a look here: OlympusDAO…#/dashboard?treasuryAssets=marketValue&days=30
  Generally about Olympus, read here: Basics - Olympus

Pros:

• none sell pressure
• max efficiency
• Olympus partnership
• 0 costs
• POL

Cons:

• OHM as BA
• none OHM liquidity control
• uncertain Olympus future
• need to be approved

I am a fan of Olympus (I do not hold any tokens). We should consider the benefits (partnership, tokens swap etc) with the risks involved here.

2. TCAP liquidity
   We know from on-chain analysis that high percentage of minters are TCAP/WETH LP providers. HIgh correlated assets have lower IL risk plus providers are incentivized by $CTX rewards at this moment. But do not forget they have debt denominated in TCAP! They are now expose to IL risk only, while no taking any significant directional risk.(once they sell their TCAP, they speculate on TCAP price going down)

If we try to acquire this liquidity, we will force them into bearish scenario. So I think we should find other solution. I suggest this one:

• Option 1: veTokens
  We would use a bonding solution to acquire some veTokens, which would be used for voting to direct the protocol new emissions as incentives into our LP pool - TCAP/WETH.

Pros:

• treasury diversification
• voting power to ensure ongoing incentives

Cons:

• 0 POL
• uncertain protocol future
• veToken price impact
• LP TVL volatility

(I would love to see a solution where only LP which also minted would be eligible for those emissions or allowed to deposit into the pool! That could attract new minters if there are juicy incentives.)

PS: I ll update till the thursday CLS call!