Use Portion of Fees Collected to Increase Liquidity of Pools

Summary

The heart of Celer Network is the CELR token. And the heart of the CELR token is the fees reward. The goal is to increase the volume on the Celer Network to increase the fees pay to it’s stakers. Although stakers also get paid in CELR, this will be capped once the max supply is reached. Increasing the amount of fees paid to stakers will directly increase the utility of the CELR token.

Currently, it is more beneficial to provide liquidity than it is to buy CELR.

Stuff like this should be unacceptable.

We should not be dependent on liquidity providers.

I propose using a portion of fees collected to add liquidity to the pools. I also propose that fees collected should not be paid to liquidity providers (since they are already paid in CELR).

This will continually provide deeper liquidity to the network as the user base grows. It will also eventually phase out liquidity providing dependence. Also more fees will be paid to stakers and less CELR will be paid out to liquidity providers (reducing sell pressure & inflation).

This would of course, happen gradually, as to not discourage liquidity providers to immediately sell. It would also motivate them to buy CELR if they wanted to collect yield.

Motivation

Increasing CELR Utility & adding long term stability

Proposal

5% (or more) of fees collected should be added to the liquidity pool (distributed between pools based on weight).
Providing liquidity should not pay any fees and should be phased out over time.

Poll

What do you think?

  • Allocate a portion of fees collected to add liquidity in the pools
  • Don’t change anything

0 voters

1 Like

Hey ||seven||,

Thanks for your proposal. I find it an interesting concept, using fees to fill up liquidity so there is no need for liquidity providers. But I would also like to challenge your thoughts.

For example:
If a new chain/token were added, it would have 0 liquidity on all chains. This would mean that no one is actually able to bridge funds anywhere as there is no liquidity to be used. This would mean that someone (be it cBridge, token owners, or the chain) would have to provide the first liquidity. While this is of course an option but far from ideal. Or perhaps having liquidity providers at the beginning but then closing it off? Not sure whether that’s ideal.

Furthermore, I foresee some problems as well if you bridge a lot from chain A to chain B and not the other way around. This means that all liquidity ends up on let’s say chain B while no liquidity is left on chain A while it’s a popular bridge and can now not be bridged until the liquidity is either moved back or a 3rd party adds more.

Why do I think having liquidity from users works?
This way you can have cBridge decentralized - It can run without needing chains, token owners, or celer to step in. However, for people to want to add liquidity, they need incentives and thus be rewarded. This would be done through cBridge fees and currently CELR farming rewards (for some tokens… not all). This farming campaign however will probably not last forever. Meaning that with your proposal the liquidity providers would not get any rewards and pull out the liquidity. I would also like to add that currently the fees are higher for certain chains/tokens because of the market volatility and they’re calculated using active volume.

I’m not saying it’s impossible, it’s an interesting idea. But it’s not as easy as just removing the fees and adding them to the liquidity pools (even if it’s over a period of time).

Again, thanks for the proposal, and looking forward to your response and other people their opinion! If you vote, feel free to share why you agree or disagree!

1 Like

The idea does need to be flushed out more to account for all the details but I think the concept is valid.

Regarding new chains/tokens:
There should always be an option to add liquidity. New chains/tokens will definitely want to do this to support their bridge and ecosystem. That alone would be incentive enough for them without needing to get compensation.

Regarding having liquidity from users:
I don’t think having the cBridge be self-sufficient makes it anymore less decentralized. I merely see it as removing an unnecessary risk (see screenshot above), of having liquidity removed during a high volume incident. This could also protect the project from whales that might control (or potentially manipulate) a large portion of the liquidity.

Other reasons why I like the idea:

  1. Project strength & security:
    Having the TVL consistently grow with the userbase ensures that there will always be sufficient liquidity available no matter how many new users come onboard. Relying on incentives is basically hoping that users will fill the demand. Also from my own experience, the current fees paid to liquidity providers is next to nothing. This will obviously increase as the project grows, but what if it isn’t enough to pay everyone? As the project grows there will be lots more stakers, validators and team members that also need to be compensated. Having the LP taken care of is one less risk on the project.

  2. Pressure on the Token:
    The best marketing a token can do is go up in price. I know this isn’t the team’s main priority but it’s important for the project nonetheless. If I was a big investor, believed in Celer and wanted to get exposure, why would I buy the token when I could be making up to 50% APY (at the time of writing this) (which is much more than regular staking) in CELR on my large sum of money? My money would be in stables so I’d have no downside risk and be getting paid in CELR which isn’t locked up and could be dumped at any time.

3 Likes

Another note:

Current liquidity provided is over $157 million (from the pools).

At 10% APY in CELR, that’s 3.2 million unlocked CELR paid to LPs daily!
That’s a lot of potential selling pressure. I really don’t want CELR to end up like most dexes/rewards tokens where the token is just farmed to death.

2 Likes

Thanks for your in-depth reply, it’s an interesting idea!

1 Like

Well I understand that liquidity is necessary in ecosystems because it Promotes good network activity and trading volume traffic which attract new users and other potential project partnerships…

I guess I’m just baffled on how high the LP Apy% can be at times…

It would be nice to reward the stakers a little more who are actually willing to lock their tokens for the long term…

I’m in favor of this proposal and agree it can be fined tuned to keep everyone involved happy and overall good sentiment as we grow

2 Likes

The primary outcome of what this proposal aims to achieve is great. The only debate is how to get to this ultimate outcome.

A self-sustaining liquidity pools from collection of fees is an ideal long term target if/when cBridge gets to a necessary critical volume. Just need to be mindful of the caveats and the potential negative impact to achieve this in the short-medium term. In an ideal world, majority of cBridge volume would be from mint&burn.

At this point in time, the pool-based bridge model part of cBridge is still very much relying on LPs to bootstrap liquidity and the necessary incentives to keep them there.

I believe the liquidity farming mechanism is not intended to be a permanent measure - there’s usually a campaign period and capped amount for dispensing CELR as farming reward. The extremely high APY shown in the screenshot was due to unusual event in the market.

Taking away the fees earning for LPs could trigger a mass exodus at this point.
An alternative option would be to start with diverting small portion of the fees earned from both LPs and stakers to the pool. This takes time (potentially a very long time) depending on utilisation of cBridge.

Good point. I’d be happy with starting by only adding to the pools and not removing any incentives. My main concern has always been with security (large LPs randomly deciding to leave).

Once the pools are sufficiently saturated, then we could start reducing incentives.

Farming the incentive token to death is a common problem in many protocols.

I really like the approach GMX protocol followed in this regard:

  • Instead of receiving CELR, liquidity providers receive escrowed CELR. Escrowed CELR can not be sold or transferred. Escrowed CELR can only converted to full CELR tokens through vesting during a linear period of 1 year.

  • Additionally, when vesting is initiated, the average amount of liquidity tokens that was used to earn the escrowed rewards is reserved. If you reduce your liquidity position the amount of escrowed tokens that you can vest is reduced proportionally.

I believe this can have a positive effect in the CELR token price and prevent opportunistic farmers that are not interested in the long term project success.

1 Like