Thank you for taking the initiative to start and keep pushing the discussion on POL and building deeper liquidity for stLINK (and soon stMETIS). This is a crucial issue, and as someone who has been considering the challenges involved, I want to offer some insights that might help guide this conversation for the wider community.
Key Considerations for LPs in AMMs
LPs are exposed to 50/50 value allocation in AMMs. Consequently, LPs may earn slightly more (via volume x 0.02% trading fees) than half the rewards they would have received by simply holding stLINK. If you think about stLINK as if it was wstLINK, we can consider this as impermanent loss (IL), as wstLINK appreciates over time.
The graph provides a clear illustration of this concept, showing how stLINK, LPs, and pure LINK holders fare over time.
Impermanent Loss (IL) Intuition for LPs
We can model the IL for LPs versus simply holding stLINK, where negative IL could even benefit LPs. This graph captures the impact of utilization rates, showing how higher trading volumes or lower rewards help mitigate impermanent loss.
While we should always aim for the maximum reward rate for stLINK, it’s true that decreasing the rewards will help mitigate IL for LPs, particularly if those rewards flow to LPs.
Building Deeper Liquidity for stLINK
Increasing trading volume and liquidity utilization should trigger additional incentives over time. Also, the amplification coefficient (A) is very likely crucial in shaping liquidity depth. For instance, I beleive the stETH pool’s liquidity has reached an astonishing depth because:
- Rewards have reduced
- Trading volume increased
- The amplification coefficient (A) was substantially increased, boosting the pool’s liquidity depth
The image below gives some insights of how analogous protocols are adjusting A (amplification) and the Offpeg Fee Multiplier
A ranging from 1 to 5,000:Ais an amplification coefficient, which defines the pool’s liquidity depth. The higher the value ofA, the deeper the liquidity.Offpeg Fee Multiplier from 0 to 12.5: A multiplier that adjusts the Swap Fee based on the pool’s state.
The stLINK/LINK price chart shows increased stability over time, indicating that stLINK is performing as expected. As withdrawals become available, raising A (if not already adjusted) would likely improve liquidity even further. Adding the Offpeg Fee Multiplier (if possible) could also promote greater price stability by discouraging trades in the “wrong” direction when the pool is off-peg.
Final Thoughts
Developing a POL mechanism, combined with the Insurance Pool feature from SLURP-15, offers a more sustainable approach to managing liquidity. This approach should help the protocol efficiently adjust liquidity as needed without relying heavily on the DAO Treasury to continuously fund SDL rewards for liquidity mining over an uncertain period.
Instead, LPs would receive a more stable and uniform type of reward that isn’t dependent on SDL’s price volatility. By reducing the protocol’s reliance on SDL incentives, this strategy ensures that liquidity provision becomes more self-sustaining and less subject to market fluctuations, providing long-term stability for the pool and the broader ecosystem.
Thank you again for bringing this up, and I look forward to continued discussions as we refine the liquidity strategy for stLINK. I’ll be working on modeling the system to gain deeper insights into the proposed 3% fee for both the Operator and Community Pool strategies, although they look pretty good at first glance.