Pre-Proposal for a liquidity management SPE

Hey Livepeer community, Alec here from the Tenderize team.
Our team, with founder Nico Vergauwen (ex-livepeer protocol engineer), has been building an on-chain economy around LPT the asset. This is being done in collaboration with the Livepeer foundation and 15 orchestrators who partnered on Tenderize v2.

The Tenderize team along with Doug and Sarah from Livepeer have been discussing ways to improve the liquidity profile of LPT. After initial discussion, the we drafted this SPE pre-proposal which suggests activating treasury LPT to improve liquidity. We are excited to gather feedback to ensure this liquidity SPE solves real community needs, please let us know what you think!

The SPE’s Mission
Through this SPE, the Livepeer community can lean on community members with a proven liquidity management track record with operational oversight from core Livepeer community members to ensure proper access to LPT. The SPE will ensure appropriate on and off chain liquidity for the various activities such as swaps (both centralized and decentralized), bridging chain to chain or from CEX, liquid staking, collateralization and more defi use cases.

The SPE’s approach and strategy
To satisfy liquidity needs for all relevant stakeholders, three key venues will be needing active liquidity management:

  1. On-chain Bridges (Appendix A)
  2. Decentralized Exchanges (Appendix B & C)
  3. Centralized exchange liquidity (future proposal)

Liquidity must be sustainable and capital efficient. This proposal suggests providing initial liquidity directly from the treasury, but working toward a future where delegated treasury LPT can produce yield which in turn is used as liquidity incentives. This approach eliminates risk of reducing treasury LPT balance while offering a new, lucrative yield opportunity for Livepeer community members beyond delegating.

The goal of this approach is to make liquidity provision attractive, by compensating for the dilution and opportunity cost of not delegating LPT. It potentially gives way for new types of ecosystem participants and a larger token economy in general.

Comparing Community vs Treasury Liquidity Provision
Let’s assume our goal is seed $1,000,000 worth of liquidity for LPT/ETH on Arbitrum Uniswap.

  • Option 1 Treasury sells $500k LPT for ETH then provide $1,000,000 worth of LPT/ETH as liquidity.

  • Option 2 Treasury delegates $1,000,000 worth of LPT then uses the inflation rewards to incentivize community liquidity providers.

Both options would result in $1,000,000 worth of liquidity on Uniswap. Option 1 does this by providing the $1M directly, option 2 does it by offering a comparable yield as inflation from delegating LPT. If yield for liquidity provision is greater than delegating, people can provide liquidity instead of delegating to capture this spread. Additionally, since the treasury doesn’t provide liquidity itself, it is not exposed to impermanent loss nor required to sell any LPT to fund the ETH side of the pool.

Extra Incentive From partner projects
DEXs such as Camelot and Bridges such as HOP offer additional incentives to bring liquidity to their venues. The typical structure is a 1:1 match on incentives + comarketing, attracting even more liquidity. The SPE will negotiate a deal and present an offer to the Livpeeer community for discussion and approval.

Reward Mechanism


Delegated LPT: This is the LPT delegated from the SPE multi-sig to fund liquidity incentives for the LPT / ETH yield farm rewarder contract.

Custom Yield Farm: Demeter protocol, built by Sperax, allows for custom yield farms on top of Uniswap. The LPT inflation will be sent to the reward contract by the liquidity SPE every 30 days. Once LPT is sent to the reward contract, it will be distributed linearly to LPT/ETH LPs for 30 days.

LPT / ETH Uniswap Pool: Incentives will be added to the existing LPT / ETH Uniswap pool on Arbitrum. Rewards are distributed linearly and can be claimed by LPs according to their respective weight of the LPT / ETH pool.

If the comunity selects a DEX besides Uniswap, we can use their preferred

Selecting Which Orchestrator to Delegate to
To ensure fair distribution of stake, the LPT should be rotated amongst good citizen orchestrators on a predefined cadence. During the last month of each quarter, rotation of stake will happen. Each week during the rotation month, 25% of stake will move to a new orchestrator, completing a 100% rotation after 4 weeks. Orchestrators with a rating of >= 9 are eligible to receive delegations. In addition to a rating of >=9, stake will also be geographically distributed across regions (e.g. LA, NY, FRA, LON, SIG, SPA, etc).

Delegating LPT via Tenderize v2
To ensure stake can be distributed across multiple orchestrators while still being transparent, we suggest delegating to the operators through Tenderize v2 via one SPE multisig. This also allows the SPE to rotate stake without having to wait the 7 day unbonding period.

Tenderize v2 is on-chain liquid staking infrastructure for LPT. Through Tenderize holders of LPT can liquid delegate to the orchestrator of their choice, by doing so they will mint the tLPT token which will accrue rewards according to the selected orchestrator. This token can be swapped back to LPT through TenderSwap.

Tenderize v2 has of TVL of ~$15,000,000, all contracts have been audited by Halborn Security.

Expected impact

  1. A thriving liquidity ecosystem for LPT
  2. Embedding LPT more widely in web3 and DeFi
  3. Capital efficient strategies for creating liquid markets
  4. A sustainable approach to liquidity
  5. A community driven approach to liquidity

SPE Members & Background
The genesis members of the liquidity SPE will be as follows:

  • Nico Vergauwen: An ex-Livepeer Protocol engineer, now serving as the CTO for Tenderize Labs who is building a protocol for Liquid Staking LPT, among other assets. No compensation from the proposal.

  • Alec Shaw: DeFi native and Ex-growth lead and liquidity guy at Sperax, an Arbitrum based stablecoin protocol. Currently serving as CEO of Tenderize Labs. No compensation from the proposal.

  • Trusted Community Member: Up for community discussion / nomination

The genesis members care deeply about liquidity for Livepeer in all facets. Combined, the genesis team has a strong understanding of the Livepeer network and tokenomics as well as creating liquid markets and managing relationships with projects, exchanges and market makers.

SPE governance (or non-governance)
On Chain Liquidity Allocations

  • Staked LPT owned by the treasury or will accrue rewards from LPT inflation. These rewards will be held in a smart contract which will allocate to various LPT liquidity pools based on community approval.
  • Liquidity provided directly by the Treasury will not be moved without community discussion and approval.

Future funding needs

  • Increased LPT allocation in Tenderize v2 to fund additional DEX or bridge pairs
  • LPT loan for CEX market making (In May for CEX MM deal, current contract ends June 1)

Transparency commitments (or non-commitments)
The SPE will present quarterly reporting on various metrics to evaluate the liquidity of each project. These metrics will include but are not limited to:

⁃ Community liquidity acquisition cost (LPT and USD denomination)
⁃ Liquidity
⁃ Volume
⁃ Fees Generated
⁃ APR from swap fees vs incentives

After assessment from the community, Livepeer governance can debate and vote to amend to liquidity strategy or keep the strategy constant i.e. adding LPT liquidity to a new DEX. All projects done by the SPE are subject to Livepeer community vote.

Appendix A
Bridge liquidity - Funding ask of 40,000 LPT

Milestones

  1. Stake 20,000 LPT with Tenderize v2 (immediate)
  • Begin accruing community liquidity incentive budget
  1. SPE to present bridge partner proposals to the Livepeer community (within 30 days)
  • Public input from livepeer community to decide which bridge to partner with
  • Partnership considerations: TVL held, duration of TVL held, security audits, incentives offered by the team / DAO
  1. Agree on bridge liquidity venue, Livepeer treasury provide 20,000 LPT as liquidity

  2. Begin bridge liquidity incentivization (30 days after delegating)

  • After inflation rewards have accrued for 30 days, tLPT will be sent to the reward contract of bridge chosen by the Livepeer community
  1. Winding down of liquidity provided by the treasury
  • The objective is to reduce treasury liquidity provision to 0 within 6 months. At this point, liquidity is exclusively via yield generated from LPT delegations. This can be done as the price of LPT (and it’s corresponding inflation rewards) increase in value
  1. Result: Instant bridging between Ethereum L1 and Arbitrum, liquidity pools for CEX’s to enable direct to Arbitrum withdraws, >= $300,000 of bridge LPT liquidity provided by community members and >=$300,000 LPT liquidity provided by the treasury

Appendix B
DEX liquidity - Funding ask of 20,000 LPT

Milestones

  1. Stake 20,000 LPT with Tenderize v2 (immediate)
  • Begin accruing community liquidity budget
  1. Present DEX partner proposals to the Livepeer community (within 30 days)
  • Public input from Livepeer community to decide which DEX to partner with
  • Partnership considerations: TVL held, duration of TVL held, security audits, incentives offered by the team / DAO
  1. Treasury/Livepeer Inc to continue providing LPT/ETH liquidity equal to what’s currently provided (SPE can custody these assets if desired)

  2. Begin DEX liquidity incentivization (30 days after delegation)

  • After inflation rewards have accrued for 30 days, tLPT will be sent to the reward contract of the pair and DEX chosen by the livepeer community
  1. Winding down of direct liquidity provisioning by the treasury
  • The objective is to reduce it to 0 within 6 months. At this point, liquidity is exclusively provided by the community, funded with inflation generated from staked LPT inflation. This can be done as the price of LPT (and it’s corresponding inflation rewards) increase in value.
  1. Result: >= $300,000 of additional LPT/ETH DEX liquidity provided by community members. This amount will scale as the value of LPT increases

Appendix C
TenderSwap LPT - Funding ask of 30,000 LPT

Milestones

  1. Provide 30,000 LPT as liquidity on TenderSwap v2 (immediate)

  2. Result: $450,000+ liquidity for LPT delegated to any orchestrator via Tenderize v2

  • Instantly swap from staked LPT (tLPT) to LPT bypassing the 7 day unbonding period
  • $50,000 swaps with price impact =< 0.01%

Let’s discuss, cheers!

5 Likes

Hey Tenderize team! Great initiative.

Delegating LPT via Tenderize v2
To ensure stake can be distributed across multiple orchestrators while still being transparent, we suggest delegating to the operators through Tenderize v2 via one SPE multisig. This also allows the SPE to rotate stake without having to wait the 7 day unbonding period.

I think that is not possible without oracle at the moment?

2 Likes

Thanks for this proposal! It’s great to see that the DEX-liqudity/bridging issue finally gets some more attention and a concrete proposal!

Some feedback:

IMO we don’t need to fund bridges if we can establish enough DEX liquidity. Once LPT can be swapped to ETH with minimal slippage, that ETH can easily be bridged to mainnet (or directly deposited to CEXs) through all the various bridges - without having to decide on a bridging partner that could become obsolete in the future.
So spending LPT and time on bridging related issues is a bit wasteful in my opinion.

I like this idea! It’s an elegant solution without having to sell a bunch of LPT as a start.

But it’s important to note that by adding LPT as a farming incentive, most of that LPT will likely be sold. And should the incentivisation stop, the liquidity will also be gone.

Since the Uniswap Position NFTs need to be staked to get the rewards, it’s important to note the additional protocol risk here (basically: If there’s a bug in Demeter, your staked Uniswap liquidity position is gone). I’d consider myself a DeFi native as well, but I’ve never heard of Sperax/Demeter until now. While that’s totally subjective, it also has less than $1M TVL - so I’d personally classify it as a high risk protocol.

This looks quite complex already, but you forgot a very important additional factor: The reward cut needs to be considered as well. What limit do you set? Do you check each round that the Orch doesn’t increase the reward cut? And is it even fair/desired that the SPE pays the higher reward cut Orchs more than the lower ones?

Similar argument as above: While having a respectable TVL, I’d still consider Tenderize v2 a high risk protocol due to is newness. I also don’t get the “wait 7 day” argument: You can bond to a different Orch without having to unbond first and wait 7 days through the Livepeer protocol.

Combining the above critics and proposing a simpler approach:

  • Instead of staking, the SPE should run an Orch that only does reward calls (so no transcoding jobs are taken away from Orchs).
    This removes the complexity of stake management and varying LPT rewards due to different reward cuts of Orchs. It does take up one spot in the Orch list, but it’s a simple approach without introducing additional risk by using additional protocols.

  • Instead of using the inflationary rewards as rewards for LPs, the SPE should create protocol owned liquidity.
    This means that the SPE sells half of the inflationary LPT for ETH and then adds the liquidity itself. IMO, this solution is more sustainable in the long term, since the liquidity doesn’t vanish once there’s no more inflationary LPT coming in. The downside is that it will take longer to build the liquidity. But again, in this scenario, no additional, risk introducing protocol like Demeter would need to be used.

Btw. I get that my feedback doesn’t go well together with this proposal. Nico and Alec won’t be taking any compensation, so their reward would be more usage/TVL of their protocols. If those would be eliminated, there’s no real incentive anymore for their work.

3 Likes

I guess maybe there is no time for this right now because there is so much fundamental stuff going on with Livepeer but I just wanted to say this particular issue is very important too. Participation rate is very important for any stake based network and I truely believe Ethereum mainnet to Arbitrum transition is the main reason why it’s not reached 50% for a very long time. Until exchanges start supporting Lpt on Arbitrum, the reverse bridge problem better be solved imo.

I’m technically in no place to give meaningful feedback to any of this but @TenderizeCoreTeam What do you think of Vires’ reply? You had a long discussion together as well on Discord about this before and it’s clear you 2 will be the ones that will mainly drive this and make this a reality, if ever.

How could rotate stake without having to wait the 7 day unbonding period by using tenderize?
The current unbonding fee structure in Tenderize v2, where unbonding 10,000 LPT incurs about 4,000 LPT fee, seems excessively high and limits operational flexibility for stakeholders. This fee severely impacts the liquidity and undermines the benefits of quick unbonding that the SPE aims to promote.

This fee is depended on total swap pool, if there is 11k LPT left in the pool and you want to swap 10kLPT there is no wonder the fee will be sky high, thats why SPE asks for more liquidity so the fees are low even with that high TLPT swap. Fee curve is well explained in the tenderize whitepaper and I encourage you to read it before you interact with the protocol.

lol. It couldn’t explain how could rotate stake without having to wait the 7 day unbonding period if fee curves like that. Even this can be done just on livepeer explorer right now without any fees.

@karolak @nhis I think there must have been some old versioning of the SPE proposal versus the one which was posted. The intention was not to rotate staked LPT Through tenderswap.

Rather we’ll evaluate orchestrator performance quarterly and move LPT on a rolling basis every quarter. Do it incrementally so not all LPT is unstaked at once every quarter.

If it’s smaller amounts for which the swap fee is negliglbe we could route it through TenderSwap but this is not the intention for larger amounts.


@vires-in-numeris

  1. Bridge liquidity was a request by Livepeer Inc. core team members

  2. You’re right that this type of liquidity is “mercenary”, we can improve mechanisms in the future to reduce impact of pure mercenary liquidity and improve network alignment.

Providing liquidity straight up is also a permanent limit order to sell or purchase LPT.

  1. I agree the yield farm adds unnecessary complexity, will look into alternatives.

  2. I’m not sure I agree that the SPE should run its own O. I think staking to highly performant Os instead is more synergistic with the network and is also an incentive for Orchestrators to attract this delegation.

4 Likes

Thank you for the feedback everyone, we will incorporate a few key points:

  1. Natively stake some of the LPT instead of through Tenderize
  2. Removal of Sperax contracts, replace with more battle tested contracts

We welcome any additional comments/feedback before progressing this proposal next week!

I agree with vires that Tenderize should run their own non-transcoding orch. It would be unfair for the treausry stake to skew job distribution. (every orch have different reward cuts so there will always be some biased preferation) The only equally affecting solution would be to run orch and exclude the power of this stake to influence job distribution. I also think tenderize should utilize their platform and stake through it. It provides excellent insta swap function. Raising TVL would benefit the network and help to build swap liquidity too.