Liquidity for Life: Decentralized Market Making for DAOs
Liquidity for Life: Decentralized Market Making for DAOs
A key feature of any mature financial market is deep and sustainable liquidity. For a project to provide confidence to both new and existing investors, it must make it as cheap as possible for a user to access its token. Not only does this make it easy to onboard new token holders, but it also bootstraps a token’s ability to be listed on lending markets, derivative markets, centralized exchanges, and other venues.
It is crucial that DeFi protocols get their liquidity needs satisfied as early as possible, since a healthy token in crypto is the essence of developing a scalable and robust network. These days, it is far too common to see protocols waste their liquidity on mercenary incentives or ephemeral market cycles that attract yield farmers instead of lasting users. On the other hand, working with a traditional (centralized) market maker can be highly expensive, limited to the duration of the contract, and contradictory to the principles of on-chain liquidity. Since DAOs exist in a DeFi-native environment, it is important they work with an apt decentralized market maker.
We believe the best way to bootstrap liquidity for a DAO is to provide liquidity directly through the DAO’s treasury. While this was not possible on Uni V2-style AMMs, the advent of concentrated liquidity markets allow users to deposit single-sided liquidity. For DAOs, this means that it can provide liquidity solely to buyers of the token, while choosing the amount of sell pressure it would like to support. It does so by solely providing liquidity at ranges above the current price, and rebalancing to ensure that a majority of liquidity remains above the updated price. The flexibility of V3 positions also enables a DAO to mint multiple positions at once, all at different target price ranges that the community would like to support.
Not only does LPing enable the DAO to bootstrap its own liquidity, but it also serves as a sustainable way to earn yield and diversify the treasury. As users swap on the pool, the DAO is effectively trading their DAO token for a blue chip or stable coin. For instance, when a user swaps from USDC to UNI token on the UNI-USDC pool, if the Uniswap DAO provided UNI tokens, then a swapper is trading the DAO treasury USDC for UNI. Fees from these trades are also accumulated as passive yield for the DAO, which means that the DAO is being paid to provide liquidity, rather than the typical approach of paying for liquidity through incentives! Currently, even the biggest protocols like Uniswap hold a vast vast majority of their treasury value in terms of their own token, which can be disastrous during volatile markets — when markets trend downwards, not only does the product become less valuable, but the treasury takes a hit as well. It is vital that DAOs diversify into stables and delta-neutral positions to sustain itself across market cycles.
While Uniswap V3 certainly provides flexibility to LPs, such as through single-sided deposits, it also introduces complexity and active management. Coming up with price levels and tick ranges can be a task that requires complex market making technology, usually outsourced to an advanced — but centralized — trading firm.
About OpenBlock Labs
OpenBlock is a platform that empowers Web3 organizations with the data intelligence needed to take action and drive growth. From managing grants to optimizing incentive spend, leading DAOs and blockchain networks utilize this technology to maintain billions of dollars in value within their ecosystems.
If you are interested in working with OpenBlock Labs, please visit us at openblocklabs.com or reach out via Twitter at @openblocklabs.
A key feature of any mature financial market is deep and sustainable liquidity. For a project to provide confidence to both new and existing investors, it must make it as cheap as possible for a user to access its token. Not only does this make it easy to onboard new token holders, but it also bootstraps a token’s ability to be listed on lending markets, derivative markets, centralized exchanges, and other venues.
It is crucial that DeFi protocols get their liquidity needs satisfied as early as possible, since a healthy token in crypto is the essence of developing a scalable and robust network. These days, it is far too common to see protocols waste their liquidity on mercenary incentives or ephemeral market cycles that attract yield farmers instead of lasting users. On the other hand, working with a traditional (centralized) market maker can be highly expensive, limited to the duration of the contract, and contradictory to the principles of on-chain liquidity. Since DAOs exist in a DeFi-native environment, it is important they work with an apt decentralized market maker.
We believe the best way to bootstrap liquidity for a DAO is to provide liquidity directly through the DAO’s treasury. While this was not possible on Uni V2-style AMMs, the advent of concentrated liquidity markets allow users to deposit single-sided liquidity. For DAOs, this means that it can provide liquidity solely to buyers of the token, while choosing the amount of sell pressure it would like to support. It does so by solely providing liquidity at ranges above the current price, and rebalancing to ensure that a majority of liquidity remains above the updated price. The flexibility of V3 positions also enables a DAO to mint multiple positions at once, all at different target price ranges that the community would like to support.
Not only does LPing enable the DAO to bootstrap its own liquidity, but it also serves as a sustainable way to earn yield and diversify the treasury. As users swap on the pool, the DAO is effectively trading their DAO token for a blue chip or stable coin. For instance, when a user swaps from USDC to UNI token on the UNI-USDC pool, if the Uniswap DAO provided UNI tokens, then a swapper is trading the DAO treasury USDC for UNI. Fees from these trades are also accumulated as passive yield for the DAO, which means that the DAO is being paid to provide liquidity, rather than the typical approach of paying for liquidity through incentives! Currently, even the biggest protocols like Uniswap hold a vast vast majority of their treasury value in terms of their own token, which can be disastrous during volatile markets — when markets trend downwards, not only does the product become less valuable, but the treasury takes a hit as well. It is vital that DAOs diversify into stables and delta-neutral positions to sustain itself across market cycles.
While Uniswap V3 certainly provides flexibility to LPs, such as through single-sided deposits, it also introduces complexity and active management. Coming up with price levels and tick ranges can be a task that requires complex market making technology, usually outsourced to an advanced — but centralized — trading firm.
About OpenBlock Labs
OpenBlock is a platform that empowers Web3 organizations with the data intelligence needed to take action and drive growth. From managing grants to optimizing incentive spend, leading DAOs and blockchain networks utilize this technology to maintain billions of dollars in value within their ecosystems.
If you are interested in working with OpenBlock Labs, please visit us at openblocklabs.com or reach out via Twitter at @openblocklabs.
