PIP-7: Protocol-Owned Liquidity

#1

Author:
Core contributor of PathDAO

Summary:
As the rewards for LP pool are ending on May 17, 2022, we propose to add
- 500K USDC from realized gain in the past months to the lower-bound liquidity (from $PATH price of 0 USD to market price of $PATH), and
- 125K USD worth of $PATH tokens per 0.01 USD liquidity band to the upper-bound liquidity (from $PATH price of 0.13 USD to 0.7 USD)

We believe this strikes the right balance between liquidity depth and $PATH token sustainability management

Abstract:
Based on PathDAO tokenomics (Token distribution - PathDAO), 150M $PATH tokens (15% of total supply) are allocated to the long-term holding compensation pool (i.e. staking and LP yield farming pool).

Rewards have been committed by the DAO for
- Single-sided Staking Pool at 3Mn $PATH per month until Jan 11 2023, 5AM EST
- LP Pool at 7Mn $PATH per month until May 17 2022, 5AM EST

This proposal is triggered due to the upcoming expiry of LP Pool rewards on May 17 2022. We recognize the importance of liquidity, and have been exploring multiple ways to build deep liquidity in a sustainable manner. Below are the key options and our evaluation:

  1. Continue LP pool reward farming at current emission rate. We will exhaust all 150Mn $PATH tokens (15% of total supply) that are allocated to the long-term holding compensation pool by January 2023. This is unsustainable and not ideal for the longevity of PathDAO. See breakdown below

    • 26Mn $PATH in the first month (Dec 2021 - Jan 2022)
    • 120Mn $PATH tokens from Jan 2022 - Jan 2023
      • 10Mn $PATH emission per month, for 12 months in total
      • On a monthly basis, 7Mn $PATH for LP yield and 3Mn $PATH for single-sided staking

  2. Purchase liquidity via liquidity marketplace such as Olympus Pro, by selling $PATH tokens at a slight discount. Despite getting Protocol-Owned Liquidity (POL) which ensures sustainability, this is unfavourable as the $PATH tokens (from treasury) sold will be instantly unlocked and create sell pressure

  3. Engage Venture Capital and raise funds for POL by selling $PATH tokens (from treasury) via OTC deals (i.e. selling $PATH tokens at a discount, on a vesting schedule). This is more favourable as the sell pressure is mitigated by the vesting. On top of that, PathDAO will be able to build a stronger support system among the Tier 1 VCs. That said, we think $PATH is currently trading at too low a price to engage on an OTC deal.

  4. Provide 500K USDC of realized gain from our operation in the past months as POL between 0 USD to the market price of $PATH. We believe this option strikes the best balance between liquidity depth and $PATH token sustainability management.

As of 11 April 2022, the total liquidity on UNISWAP V2, mostly incentivized by LP rewards, stands at 1.4Mn USD. This translates into ~700K USD worth of liquidity below the market price of $PATH.

The abovementioned 500K USDC, coupled with limit orders from realized gains of future operation (see PIP-6B) and our existing liquidity, will bring the total liquidity below market price of $PATH to around 850K USDC. We believe this is sufficient to stabilize the price of $PATH token in the event of massive sell events.

Please find the exact breakdown of liquidity below market price of $PATH as below:

  • UNISWAP V3 Pool 2: 30K USDC
  • UNISWAP V3 Pool 3: 200K USDC
  • Estimated Limit Order from monthly realized gain: 120K USDC per month (60% of 200K estimated realized gain) with potential month-on-month compound in the event of non-triggered limit order
  • Current proposal (PIP-7): 500K USDC

On top of managing potential sell pressure with deep lower-bound liquidity (liquidity below market price of $PATH), we also recognise the importance of upper-bound liquidity (liquidity above market price of $PATH), given that high price slippage will likely deter most big buyers. With current treasury value of 18.2Mn USD, the price per circulating $PATH supply of $PATH is 0.13 USD. Therefore, we are also proposing to add 125K USD worth of $PATH tokens per 0.01 USD liquidity band, from 0.13USD to 0.7 USD. This would stabilize the price and enable price discovery above the fair value of $PATH.

To recap, we are proposing to add
- 500K USDC from our realized gains in the past months to the lower-bound liquidity (from $PATH price of 0 USD to the market price of $PATH), and
- 125K USD worth of $PATH tokens per 0.01 USD liquidity band to the upper-bound liquidity (from $PATH price of 0.13 USD to 0.7 USD)

Appendix - Current liquidity pools:
UNISWAP V3 Pool 1: Uniswap Interface
UNISWAP V3 Pool 2: Uniswap Interface
UNISWAP V3 Pool 3: Uniswap Interface
UNISWAP V2: Uniswap Info

Voting options:
• In favor (Yes)
or
• Against (No)

Budget:
500K USDC to be provided from PathDAO treasury as Protocol-Owned Liquidity

Process:
PIP-7 will proceed in the following manner:
1. This proposal will be open for discussion until 16 April 2022, 6AM EST
2. After the discussion concluded and any possible adjustments have been made, the proposal will be up for voting on Snapshot. This link will be provided in due course
3. The snapshot voting will last for 120 hours after it goes live
4. After the voting concludes and if the proposal is accepted by the token holders, the proposal will be executed

4 Likes
#3

100% aligned with this thinking but personally I would prefer we use path/eth as opposed to path/usdc. Eth is going to start becoming deflationary and I think this could be a good opportunity to make that ‘trade’ as well.

Question: what would happen to the $path and usdc earned from the pool? Would it be reinvested back into the LP, or added to the treasury/treated as revenue?

2 Likes
#4

PATH/ETH is a good one.
Also since people trade mostly in eth, we should have a deep eth/path pool too.

#5

On the fees earned from the pool, the $PATH portion will just be removed from circulation.

The $USDC/ ETH component will be treated as realised gains. Follow the PIP6B process.

#6

I would also favour an PATH/ETH pool over USDC, otherwise very much in favour.

1 Like
#7

Since this is quite a complicated topic, the team made some visuals on some of the scenarios in our previous Happy Hour session. Should help with the understanding of the liquidity projections.

Link here Happy Hour #9: PathDAO x Kingdom Raids - YouTube

55mins in, we touch on this topic.

  • Light blue bars indicate rented liquidity. The rest of the colours are protocol-owned.
1 Like
#8

The 4th option is a good one. As I said on Discord, I am in favour of it although I do think single staking incentives are way too low right now and are dilluting community. This will make it even lower as people transfer their path tokens to it.

So partially in favour.

1 Like
#9

The written explanation was hard to follow. But I will vote in favor of this proposal after watching the explanation and seeing the charts from the YouTube video linked in a comment above. The YouTube video is essential viewing to understand the proposal. Below are my take-aways on why I will vote for this proposal:

  1. PathDAO revenues will be used to provide liquidity for trading. This is useful way to deploy PathDAO revenues at this early stage of the project where DEX liquidity is important.

  2. PathDAO will own the liquidity because it is using its own revenues (amounts it owns) for liquidity. This is a longer-term more sustainable approach than renting liquidity via LP rewards.

  3. PathDAO will have flexibility to use $PATH tokens for other uses cases instead of merely rewarding LPs, who in some cases may be mercenary farmers rather than long-term aligned with our goals.

  4. This approach is also viable if liquidity needs to be provided when the $PATH token launches on Polygon.

I have concerns about the proposal, of course, but I don’t think these are significant enough to make me vote against the proposal. Below are two concerns for discussion.

First, the model for providing liquidity creates a “vacuum” between the current price of 0.024 and the “treasury value per circulating supply” which is currently at 0.1267. As I understand it, by creating the vacuum, the purpose is that the DAO’s buybacks of $PATH will move the price up higher due to the lack of liquidity in the price range. But when the price resides within the liquidity vacuum, that means (1) buyers and seller will encounter more significant slippage, (2) the token price will appear much more volatile in that price range, and (3) theoretically larger spot market buyers will be discouraged from buying $PATH if they are unfamiliar with the liquidity model and see unexpectedly high slippage because they are buying in the vacuum.

Second, while the web app is very clear that the current LP rewards end on May 17th, it still allows LPs to stake/lock their LP tokens well beyond May 17th. I am assuming some LPs will complain that they stake/locked LP tokens beyond May 17th, cannot unstake/unlock, and are earning 0% after May 17th. Given the LP rewards end on May 17th under this proposal, is it practically feasible to allow all LPs to unstake on May 17th and is it something the DAO would want to permit? Not sure.

2 Likes
#10

Wasn’t this supposed to be snapshotted already?

#11

Was speaking to a few community members and noticed that our proposal wasnt clear enough that we are actually removing the farming yield reward. Hence we are thinking of conducting a LIVE AMA session next week (this week core team is attending a conference in Europe) to make sure everyone is clear with what we proposed and make an informed decision

#12

ja. There’s still time for this one, so no rush imo. Looking forward to the live session and hope to join. Thanks!

1 Like
#13

I agree with xViking for the PATH/ETH pool

1 Like
#14

Great summary and input sir.

  1. The vacuum state indeed has the pros and cons you’ve mentioned.
  2. The 0% earnings have been made clear on the site and in our announcements. But let me check with my dev if the smart contract has a release function.

Let’s discuss live more on the Townhall this coming Saturday. :slight_smile:

1 Like