Introduction
Hey chefs!
This is Durden from Lifinity. I would like to propose a partnership between Lifinity and Marinade.
tl;dr
・Lifinity creates a custom oracle for mSOL, opens a mSOL-USDC pool, and provides the assets for market making
・Marinade compensates Lifinity with 0.05% of the total volume generated on mSOL-USDC with a cap of $100M per month
Let’s start with a brief overview of Lifinity.
What is Lifinity?
Lifinity is a proactive market maker designed to improve capital efficiency and reduce impermanent loss (IL). It is able to accomplish these goals by:
- Concentrating liquidity
- Proactively market making using an oracle
- Implementing a rebalancing mechanism
Notably, Lifinity provides a unique market making architecture that combines lazy liquidity provision, concentration, and IL reduction. This sets it apart from both constant product market makers (no concentration or IL reduction) as well as concentrated liquidity market makers (no lazy liquidity provision or IL reduction).
Since its launch in January, Lifinity has performed over $1B in trading volume with only $5M in available liquidity.
For a deeper dive on Lifinity, please check out our:
・Documentation: https://docs.lifinity.io/
・Litepaper: https://lifinity.io/litepaper
How Lifinity can Benefit Marinade
Lifinity is the most capital efficient DEX on Solana (as measured by volume / TVL). This will likely be the case for an mSOL-USDC pool as well. In other words, Lifinity’s liquidity will be able to provide Marinade with the greatest bang for its buck.
In order to effectively market make for mSOL, Lifinity must create a custom oracle. This involves using Pyth’s SOL price feed as a starting point and adding staking rewards to it at the end of each epoch. Other DEXs do not take staking rewards into account; their price of mSOL is purely determined by the current supply and demand for mSOL. As a result, the market price of mSOL is cheaper than the rate you get for staking SOL on Marinade’s website (i.e. you are better off using your SOL to buy mSOL rather than staking it) the vast majority of the time.
By adjusting prices according to Pyth’s SOL price and the staking rewards accrued, Lifinity’s custom oracle will bring mSOL’s market rate to be as close as possible to the staking rate (the amount of mSOL you get for staking SOL on Marinade’s website). This is ideal for Marinade for two reasons:
- mSOL holders can convert their mSOL to SOL at a better rate. The ability to immediately exit with minimal loss of the SOL contained in the mSOL means a greater willingness for users to acquire mSOL.
- The closer the market rate of mSOL is to the staking rate, the easier it becomes for the market rate to fall below the staking rate, which will be arbitraged by staking SOL for mSOL and then selling it on the market for SOL. This increases the total amount of SOL staked through Marinade and, consequently, Marinade’s revenue.
Let’s consider how this would work in practice through an example.
Suppose there is 1 hour left until the end of the current epoch, and the price of mSOL on Lifinity and other DEXs is the same. After 1 hour passes (assume no trading has taken place for simplicity), Lifinity will have adjusted its mSOL price higher, adding 1 epoch’s worth of staking rewards. Since other DEXs still have the same price from an hour ago, there is an arbitrage opportunity. Users can buy mSOL cheaply from other DEXs and sell it on Lifinity for a profit. The net effect is for the price of mSOL to increase on other DEXs (i.e. become closer to the rate you get from staking SOL for mSOL). In the absence of Lifinity, supply and demand would be the only forces influencing the price, these arbitrage trades would not take place, and the price of mSOL would adjust much more slowly. Thanks to Lifinity providing more accurate pricing, arbitrage becomes possible, the market price of mSOL is adjusted upwards, and this brings about the benefits mentioned above. Put differently, Lifinity will on average be a more willing buyer of mSOL compared to other DEXs.
In summary, in addition to the benefit of deepening liquidity, Lifinity’s custom oracle will help price mSOL more accurately, which benefits Marinade by improving mSOL’s conversion rate and increasing the amount of SOL staked through Marinade.
In the future, we may adjust our oracle to price mSOL as if staking rewards were distributed at a linear rate rather than all at once. In reality, rewards are distributed at the end of each epoch rather than continuously. However, mSOL at 2 days before an epoch’s rewards accrue is less valuable than mSOL at 2 seconds before an epoch’s rewards accrue; neither actually has the rewards at that moment, but the latter will receive them much sooner, and ideally this time component should be factored into their prices. Testing is needed to determine whether this market making strategy is feasible, but if it is it would cause additional upward pressure on the market price of mSOL, further enhancing the beneficial effects mentioned earlier.
Partnership Details
We recently published an article introducing two new services that we began offering to other protocols: Introducing Market Making & Liquidity as a Service | by LIFINITY Protocol | May, 2022 | Medium
Article tl;dr
・Market Making as a Service (MMaaS) – Marinade provides the assets for market making and retains the market making profit (MMP), while Lifinity keeps the trading fees
・Liquidity as a Service (LaaS) – Lifinity provides the assets for market making, and Marinade compensates Lifinity for the risk
We believe LaaS is currently the better option for Marinade as it more closely matches the model that Marinade is currently utilizing with other DEXs, where liquidity is incentivized through MNDE emissions.
We propose building a custom oracle for mSOL, opening a mSOL-USDC pool, and depositing $1M worth of Lifinity’s protocol-owned liquidity (POL) to market make for the pair. In exchange, Marinade would provide 0.05% of the total volume generated on mSOL-USDC with a cap of $100M per month (i.e. the maximum paid on any given month would be $50k). (Note: In the future, we can also consider adding a mSOL-USDT pool with similar terms.) The payment would be made in MNDE, using the USDC value of MNDE at the time of payment to calculate the amount. The MNDE will be distributed pro-rata to our thousands of veLFNTY holders, expanding the MNDE holder base. The 0.05% figure is comparable to Marinade’s subsidies for Raydium and Orca’s mSOL-USDC and mSOL-USDT pools (i.e. when calculated as if they were paying per unit of volume, although in reality they are not). The cap provides Marinade with a layer of protection in case our pool is “too successful”.
As explained in the article, we believe charging based on the volume generated makes the most sense as this properly aligns incentives and Marinade essentially only pays for whatever utility is realized from Lifinity’s liquidity provision. This is different from Marinade’s other liquidity mining programs in that, instead of specifying a fixed amount of MNDE from the start that will be shared among LPs, the amount of MNDE to be paid is variable and determined only after the period of liquidity provision has ended. An additional benefit of this model is that the liquidity provided is stable rather than fluctuating as it is when it is dependent on mercenary liquidity providers.
This proposed model is incompatible with the standard liquidity mining model employed by Quarry, which is utilized for the recently accepted proposal for Marinade’s liquidity mining gauges (https://forum.marinade.finance/t/mdao-governance-proposal-liquidity-mining-gauges/). And this is for good reason: unlike other DEXs, our pool requires the development of a custom oracle for mSOL and the rewards are not fixed but rather based on volume. Thankfully, Marinade also has the Quarry relayer for projects such as ours that are not integrated with Quarry, so our proposed model can be implemented through this mechanism.
Conclusion
This proposal will:
・Improve liquidity for mSOL
・Provide more accurate pricing for mSOL
・Increase the amount of SOL staked on Marinade
Overall, the proposal is consistent with Marinade’s current liquidity mining initiatives. While all DEXs increase liquidity for mSOL, Lifinity is able to offer the additional benefits mentioned above by integrating the time component through a custom oracle. Further, we are able to do this in the most capital efficient manner thanks to our use of Pyth’s oracle for SOL.
Looking forward to hearing what the Marinade community thinks!
That being said, I think having a tight spread and liquidity for mSOL-USDC is valuable for Marinade and MNDE holders. Let’s approach the proposal from the liquidity mining perspective and explore both solutions proposed here:
Although a mSOL-USDC pool does also marginally improve mSOL-SOL liquidity.