The purpose of this post is to encourage discussion amongst the SPS DAO to explore how or if it would like to expand its DeFi presence in ways that should ultimately encourage the community to lock up SPS into long-term positions that could create their own value without needing permanent incentives from the SPS DAO to justify their existence.
The main concept that this post aims to explore is called triangular arbitrage, which leverages pools and positions in ways that can benefit both the liquidity providers and the SPS DAO as a whole by aiming to create an overall healthier SPS token that is better integrated into the wider DeFi ecosystem.
What Could Encouraging Triangular Arbitrage do for SPS?
A triangular arbitrage strategy can be used by leveraging key trading pairs and positions in ways that encourage volume to be routed through the SPS token, even if the end user doesn't know it. The way smart routers work with AMMs (automated market makers) is that they're constantly looking for the most efficient way to get from point A to point B, even if there are a couple of stops to make along the way.
For example, let's say that you want to trade WETH for USDC on PancakeSwap. You would go to PancakeSwap, pick the two tokens you want to trade and on the back end, the smart router is looking through every pair that includes these two tokens to find the most profitable route to get your desired outcome. This could be a direct swap or an indirect swap based on whatever is most efficient. You only need to know the input and output as the rest is ultimately irrelevant to the end user.
Where could SPS come into this equation? We could set up positions where SPS is paired with higher volume or more volatile tokens. When prices fluctuate, they create scenarios where routing through the SPS pools is the most efficient avenue for the smart router to choose, which can end up with more volume passing through the SPS token and more fees generated for the liquidity providers.
We can encourage our community to work together and build many smaller pools with higher volatility that ultimately create more volume on the SPS token or we could explore having the DAO create the pools itself. Either way, the intent is to capture some value from the greater DeFi ecosystem for our community while also making the SPS token more appealing to lenders and traders.
Risks
There are no guarantees and there is risk associated with doing anything in crypto or DeFi, so it's important to understand that first. Is there some potential for success? Sure and I wouldn't bother discussing this if there wasn't. If everything were to work out, we could end up with a healthier SPS token, higher trading volume and more fees generated for liquidity providers.
It's important to note that this strategy is usually used to launch a token. The strategy generally relies on high volatility and low liquidity to be most effective, which could be a bit of a problem with the $750,000 DAO position for SPS:BNB on BSC unless we start seeing volume ramp up considerably.
The concept relies heavily on capturing volume in volatile pools. The more volatile the pools and the lower the pool fees, the more likely tokens are to be routed through those pools. Higher volatility has its own risks and there is also counterparty risk tied to the paired tokens that are not under the influence of the liquidity providers or the DAO.
It's important to consider all of this.
Further Discussions and Examples of the Concept
I've had multiple people tell me the concept seems complicated or convoluted, so in an attempt to help offer different perspectives on this concept I've done multiple DAOn Halls with PJ, an X space with @leveluplifeph and I am attaching some Grok explanations here that may help:
ELI5:
More complex explanation in relation to DeFi:
Gathering Community Feedback
I will create a series of polls starting soon to gather feedback on how or even if the SPS DAO wants to proceed in regards to this information. Do we want to explore setting up smaller pools with higher volatility trading pairs to encourage triangular arbitrage through the SPS token? Do we want to offer LP incentives to encourage community members to create these positions? Do you know better strategies that you'd like to bring to the DAO's attention? Let's discuss!
Delegate Tokens and HP to Fallen Angels to earn weekly rewards!
Delegate | Join to the guild
What is the estimated magnitude of effect? IE what range of yield are these pools estimated to generate?
The concept sounds interesting, but it's challenging to gauge the value of the fees.
The immediate challenge that occurs to me is that if the pools turn out to generate substantially more yield than the rewarded pools currently displayed in the Splinterlands interface, wouldn't more liquidity naturally gravitate to those pools?
It still may be a good idea for some period of time.
What is the estimated cost to the DAO in terms of token, time, and effort to establish the pools?
Without trying it, it's really hard to say as there are many factors that come into play:
Long story short, we'd have to find out.
Thank you for taking the time to educate the community and write this article. Early on, Matt mentioned that he loves the idea of using incentives to drive behavior. I believe we’ve reached a point in Splinterlands where those still here are the strongest believers. Even if the liquidity pools aren't offering the highest yields compared to the broader crypto space, many of us would still be willing to support them.
That said, without incentives, SPS pool yields will likely hover in the single digits from fees alone unless someone takes on a risky concentration strategy. Personally, I plan to support smaller liquidity pools even without incentives, but I don't expect others to follow without at least a small "carrot."
Using DAO funds to incentivize pools is tricky. It introduces coins that would otherwise remain non-circulating back into circulation. I’m not particularly excited about the DAO indirectly selling DEC and SPS in the process.
A small incentive of around 1,000 SPS per day (roughly $10.14) per pool would likely be enough to attract at least $20,000 of liquidity into many of the smaller pools. I would also love to see this same strategy duplicated on HIVE, even without the more advanced AMM features.
One more point a lot of people view this as just another game mode within Splinterlands. Properly structured liquidity pools will directly impact the market cap and token price. Once the pool fees are strong enough to sustain liquidity on their own, the rewards could be phased out entirely. In the short term, the value is clear, and PJ himself pointed this out.
Great feedback! I'm planning on putting together a series of polls to help shape what proposal/s will ultimately go up for voting. However it goes, whether we're going to new chains, the DAO is exposing liquidity or we can work out some structure to do rotating incentivized pairs for the community, I'm very much hoping we get to finally put this theory to the test and hopefully we start getting more volume through the SPS token.
Is great opportunity to win 10 k sps easy
Thanks for sharing! - @azircon
This sounds as interesting as it does dangerous.
The potential benefits seem clear enough but could you expand on the risks?
What specifically? The risks at the highest level boil down to the DAO or the LPs could lose money.
How badly could it go wrong?
How much could we lose?
Could it wipe out the dao, for example?
I definitely don't think it could wipe out the DAO. Let's say the DAO put out 5 pools with 50k of third party tokens and 50k of SPS, we'd be exposing 100k which while extremely unlikely, could be lost. Realistically we're probably looking at mild variance and impermanent loss, but there's always counterparty risk when dealing with other tokens. We already technically have some of that now. Could USDC become worthless tomorrow? It's possible, not likely, but anything can happen. My goal is just to make sure everyone understands there are no guarantees (in life or crypto).
Seems like a risk worth taking then, thanks.