Hi all, 0xShitTrader from Ellipsis Labs here. I’d like to get community feedback for our proposal to add a Phoenix mSOL/SOL liquidity gauge to the existing liquidity mining program.
Phoenix is a crankless, on-chain order book live on Solana today. While AMMs rely on retail liquidity providers, the bulk of liquidity on limit order books comes from professional market makers. Professional market makers can provide better, more sustainable liquidity than AMMs, with a small fraction of the capital required.
Order books are ideal for pairs like mSOL/SOL where the price moves monotonically, so AMM LPs are guaranteed to get run over (commonly and misleadingly referred to as “impermanent” loss) and thus either lose money relative to just holding mSOL, or require high liquidity incentives to be compensated for this loss.
On-chain liquidity for mSOL is important for the Marinade DAO, because users are more likely to be willing to hold mSOL if they know there is tight liquidity available.
Today, mSOL/SOL primarily trades on two on-chain AMM venues. Orca has $800k 24h volume on $550k liquidity and Saber has $500k 24h volume on $1.5m liquidity.
Within the range of active liquidity, AMM LPs incur a loss of about 4%/year relative to just holding mSOL (start with 50% SOL and 50% mSOL, end the epoch with 100% SOL). This loss needs to be compensated by either LPs willingness to lose money or sufficient liquidity incentives. Both of these are unsustainable.
Phoenix has an mSOL/SOL market with one market maker today. With just $2000 of liquidity on the books, Phoenix is doing $50k 24h volume–and that is with no public-facing UI, meaning trades only occur on Phoenix when Phoenix markets have the best on-chain price. As more market makers begin quoting on Phoenix, we expect competition to further tighten spreads and provide better liquidity for mSOL/SOL traders.
Liquidity Incentive Program
Phoenix liquidity is unincentivized today. We propose an incentive gauge for the Phoenix mSOL/SOL pair.
- Of the weekly MNDE incentives allocated to the Phoenix mSOL/SOL gauge, 100% will be allocated to market makers, distributed pro-rata by maker volume
- This will lower the profitability threshold and encourage competition on the mSOL/SOL pair, increasing useful liquidity for the mSOL/SOL pair
Initially, Ellipsis Labs (core contributor to Phoenix) will handle the distribution of MNDE rewards to the market makers. Ellipsis Labs will also publish data for the mSOL/SOL pair to show how liquidity and trading volume responds to the incentives.
By allocating incentives to professional order book market makers rather than to AMMs, the Marinade DAO will receive more net new mSOL liquidity per unit of incentive.
Looking forward to hearing feedback from the community.