Allow LP to restrict liquidity to subset of chains

Allow LP to restrict liquidity to subset of chains

Summary

Give a user who supplies liquidity control over which chains those funds may move to.

Abstract

When supplying liquidity, the user (LP) selects a set of chains that are eligible to draw on that liquidity for bridge transactions. If the LP does not select chain X, then the LP’s funds will not be used in bridge transactions from chain X.

Motivation

Just as a bad stablecoin can contaminate a DEX pool with multiple stablecoins, a low-security chain can contaminate a bridge pool that supports that chain. The risk to LP funds is determined by the weakest chain(s) in the pool. An LP’s funds are safe only if all chains remain secure; if just one chain is exploited then all funds in the pool are lost.

For example, if the native bridge contract for chain X is exploited, then non-native assets on X become worthless. They will be bridged out using cBridge until all cBridge liquidity on other chains is exhausted, leaving cBridge LPs holding 100% worthless assets on chain X.

Currently, USDC is supported on 11 chains, including some rather obscure ones with much lower security than the others. An exploit on any one chain puts the entire USDC pool at risk.

Proposal

When an LP supplies or manages liquidity, allow them to enable/disable each supported chain. If a chain is disabled, the LP’s asset claims will not move to that chain (and thus will not be used to execute user bridge transactions outbound from that chain).

Poll

LPs should be able to restrict where their assets may go

  • Yes, let’s do it
  • Good point but there is a better way to handle it
  • No, this is not the way

0 voters

2 Likes

Hi Pyggie,

Thanks for your proposal! I believe this was mentioned already in the past in an AMA we have had. I’m not sure whether this proposal was continued though.

I think it’s an interesting topic that could use a bit more thought. What would happen if most people only choose to provide liquidity for the following chains: ETH, BNB, and Polygon. There would be very little liquidity for other chains and perhaps not as many incentives.

Besides that, I do think this is rather difficult as you would need to store funds per wallet. While currently, the funds are in a single pool where you don’t need to worry about where the liquidity will end up. If this changes you would need a pool per wallet or a pool for every combination or perhaps just the token, just out the top of my head.

I personally do not have the knowledge on whether tokens on certain chains would be less secure, as I would expect the contracts to be somewhat the same.

I believe there are some challenges here. Would love to hear what others think!

2 Likes

I would expect obscure chains to receive less liquidity, and incentives for those chains would need to be higher to attract it. This would be a true market-based risk assessment. As it stands now, there is no way for a market signal of risk to get into the system other than simply choosing not to be an LP at all.

1 Like

An alternate approach would be to have multiple USDC pools. For example, a “safe” pool with just the most trusted chains and a “degen” pool with all chains. LPs would choose a pool based on risk preference and bridge users would ideally be unaware thanks to pool routing under the hood.

2 Likes

I think this sounds like a good suggestion - to have a main pool (blue chip) and a degen pool (lesser known, lower network adoption chain), not sure what that would do to the balance of the pools

Also there is that the debate of how and what to classify blue-chip v degen? E.g., IF Terra was integrated a couple of months ago, many would probably want to classify it in the blue-chip category? And that would open up a lot of issues (and potentially ‘accountability’) given what happened recently.

Or should the differentiation of pool be based on volume over a period of time?

As I’m writing this, it sounds more complicated than I thought – maybe the original option is more straight forward, to allow LP specify a list of chains that their liquidity should cover.
Still the question of how then this will do to the overall system is unknown.

I think i’ve just wasted everyone’s time :sweat_smile: - back to square one.

1 Like

Fucking right! Especially at the moment that Harmony chain just been hacked, my LP been swapped to that only has about 25% value🤬