[mDAO proposal] Add Phoenix mSOL/SOL Liquidity Gauge

Governance
#1

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.

Background

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.

Data

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.

7 Likes
#2

typically gauges have wanted to more directly incentivize

  1. growth in msol tvl
  2. growth in msol liquidity for swapping

incentivizing maker by volume vs available liquidity seems more likely to be incentivizing wash trading wouldn’t it?

4 Likes
#3

Wash trading would only be feasible if the trading fees are smaller than the MNDE rewards. The MNDE rewards are likely not going to be large, so I doubt there would be wash trading. Basically just incentivizes tighter spreads, which is good.

3 Likes
#4

The wash trading point is a good one.

The intent is to incentivize “useful liquidity”–the best prices on-chain for mSOL/SOL trading. Currently Phoenix has no UI, so it only gets volume when it’s offering the best price and therefore Jupiter traders or arbitrageurs hit it. I agree that volume can get juiced by wash trading, which is not what the Marinade DAO should want to incentivize.

We have the infrastructure to measure time at top of the book. Perhaps we could do something there, where MMs get rewards based on how often they are at the top of the book, for reasonable size?

3 Likes
#5

not if you are the fee collector or if the net fees are low. Which i assume is the case since there is only 1 mm on Phoenix right now.

I think this would be preferable but then you do run into the MEV problem of JIT remove liquidity , but maybe that is thinking about it too much.

3 Likes
#6

We can use end-of-slot snapshots so JIT won’t be an issue. That being said, we’ll monitor the activity on the market and propose modifications if the incentives are leading to behavior that isn’t increasing useful liquidity.

2 Likes
#7

sound very engaging when reading “100% will be distributed to market makers”, so the biggest narrative that you are rewarding the most from providing liquidity is confirmed one more time. For sure, every new platform - is a new opportunity to attract new users to play a part in Marinade DAO. Great proposal

3 Likes
#8

I don’t seem to be able to edit the original post. Below is the modification, based on community feedback.

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
  • 50% will be distributed to market makers pro-rata by maker volume
  • 50% will be distributed to market makers by top-of-book-time
    • Snapshots taken at the end of each slot during the time period
    • Each slot will be weighted equally, and distribution for a slot will be 50% for bids and 50% for offers
    • For each side of the book, the distribution for a market maker M will be proportional to their size in the top 10 mSOL of the book (intent is to incentivize makers to provide tight liquidity)
  • 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, and may make updates to the program to ensure the rewards allocated are used optimally for incentivizing useful liquidity.

3 Likes
#9

I think those are reasonable terms for distribution, and I appreciate the effort to distribute incentives differently and in a way that benefits both protocols the most.

I tend to be favorable to adding a gauge for Phoenix mSOL/SOL trading and seeing what kind of traction it gets in the gauges :slight_smile:

3 Likes
#10

that doesn’t really solve jit because you can just pull liquidity start of slot and add at end of slot. but either way it’s probably fine just calling it out as something to think about in case you see abuse like that.

2 Likes
#11

I think it’s pretty much impossible to target your add liquidity transaction to the end of slot unless it’s the leader themselves doing it.

1 Like
#12

Hello @0xShitTrader and thanks again for the proposal
After reviewing it internally and looking at sentiment here, we decided it was worth a try to open a gauge for mSOL-SOL on Phoenix, with the distribution model you explained above.

We’ll open it ASAP and will ping here when the gauge is available to be voted on with Chefs NFTs! :slight_smile:

1 Like
#13

sounds great! Excited to work with the Marinade DAO.

1 Like
#14

Thanks again to everyone for their useful feedback.

The Phoenix mSOL/SOL liquidity gauge is up and ready for staking! To vote for the Phoenix liquidity gauge, please go to the Marinade governance site.

1 Like