Authored by Milamber and Defi Ted on 5 Apr-23 with review from the Treasury Council
We propose to reduce our current Uniswap LP size from 22% of total FDV to c.10-11% of total FDV ($1.6m), and redeploy the remaining liquidity with a 1% fee instead of a 0.3% fee in order to capture additional revenues. We propose to redeploy c.$1.2m of this (c.70%) as a PDT/ETH pair as per the previous LP, and to deploy the remaining c.$0.5m (c.30%) as new PDT/PRIME and PRIME/ETH pairs to capture additional volume and fees, and provide liquidity for the Parallel and ParagonsDAO community.
Our current Uniswap PDT/ETH LP is owned by the Treasury Council multisig and is valued at 22% of our current FDV and 29% of our current circulating market capitalisation.
This is a significantly higher proportion of our TVL to support the LP position than the majority of projects of our size and in our sector of the industry, which typically have LP sizes of under 10% of FDV (N.B. Many of these projects also have liquidity on centralised exchanges not captured in this figure).
Not only does this represent an increased risk to our TVL relative to our peers in the case of an exploit, but we are not capitalising on additional revenue earning opportunities through the lack of a PRIME LP pair and a low fee % in comparison to similarly sized LP positions.
We therefore feel that redeploying our LP with 1) increased fees; 2) reduced size; and 3) an additional PRIME pair would benefit ParagonsDAO by 1) increasing fee revenue; 2) reducing risk to our TVL; 3) providing increased liquidity to our holders; and 4) generating goodwill and increased exposure with the Parallel team and within the wider Parallel community while liquidity is low.
We have c.$120k of unclaimed fees (c.521k PDT and c.41 ETH) which should be claimed as a first step.
Remove the majority of the current LP, leaving the amount we intend to retain as PDT/ETH liquidity. PDT and ETH received from this will remain in the treasury for future use.
Create a new PDT/ETH LP which will replace the existing LP, with a new fee capture of 1% of trades relative to the 0.3% fee on the existing pool. This will be deployed in the full range as per the old LP.
Remove the remainder of the original LP, having set up the new 1% fee PDT/ETH LP. We propose this two-stepped approach so as to ensure there is always sufficient PDT/ETH liquidity.
Create a new full range PDT/PRIME LP in addition to the PDT/ETH LP, with a fee capture of 1%. We can optionally do this in multiple tranches or in one transaction depending on the current pair prices.
Create a new PRIME/ETH position to add to the existing PRIME/ETH LP, with a fee capture of 1%. c.$100k of this will be deployed as PRIME and ETH in a 50/50 ratio in the full range, and the remainder will be deployed as single-sided ETH liquidity down to $0.50c. All LP positions should be monitored on an ongoing basis and liquidity re-added in line with growth/scale.
The workings below show our LP size as a proportion of total market capitalisation and FDV relative to a selection of our peers, highlighting that DEX liquidity is significantly higher than comparative projects.
Projects selected include our largest investments Parallel, a selection of other gaming projects (Illuvium, Raini) and a selection of other DAOs which invest in gaming projects (Merit Circle, Temple DAO, GuildFi).
While LP % of MC/FDV between projects varies due to 1) age/released supply (most of our tokens are distributed); and 2) liquidity on CEX (we only provide DEX liquidity), it is clear our LP size should be reduced. Based on our peers, an LP of 10% FDV is prudent without drastically reducing liquidity.
At 10% of our current market capitalisation and FDV, our LP size would be c.$1.2m and c.$1.5m respectively. Using $1.5m as a basis, allocating c.70% of this to our primary pair (PDT/ETH) and c.30% to the new secondary pairs results in pools of c.$1.1m and c.$0.5m respectively (suggested split shown)
The DAO recently purchased 100 ETH at no cost as a result of stablecoin arbitrage. If we consider deploying this in full in the PRIME/ETH LP as “additional” liquidity (relative to the amount of PDT liquidity we wish to maintain of c.10%), we would be providing $250k of PRIME/ETH liquidity at today’s prices (along with the $50k of PRIME we wish to deploy in the full range). This would be the equivalent of providing c.$400k of PRIME/ETH liquidity, and is a significant increase to the ETH currently held in the existing PRIME/ETH pool of c.125. We recommend our PRIME/ETH LP is capped at $250k of liquidity.
In order to make the reduction in PDT/ETH liquidity less drastic and increase the proportion of PDT/ETH liquidity relative to all our positions, we may consider increasing the size of the PDT/ETH position to 10% of our market capitalisation (which would be 33% of the previous PDT/ETH position). Marginally increasing this (Option 1E) would mean we have reduced our overall liquidity by 50% exactly.
The original version of this proposal allocated $1.1m to PDT/ETH and $0.4m to PDT/PRIME. We may wish to retain 10% of our FDV as PDT liquidity (on either pair) and consider the PRIME/ETH LP as additional liquidity. Option 1D and Option 1E are also broadly in line with these figures. Echelon suggested each LP be allocated ⅓ of our total liquidity, however this would reduce PDT/ETH too drastically and therefore we do not recommend considering this proposal.
We recommend the Treasury Council consider Option 1D, which retains the target % of PDT liquidity from v1 of this proposal, while also providing a sufficient amount of PRIME/ETH liquidity relative to our goals and risk tolerance. This position should also be monitored more closely than the others.
As noted above, our current Uniswap PDT/ETH LP represents 22% of our current FDV and 29% of our current circulating market capitalisation, which is significantly higher than the majority of projects of our size and in our sector of the industry, which typically have LP sizes of under 10% of FDV (excluding CEX).
As such, any potential issue with our LP represents a significantly higher risk to our TVL than most of our peers. Conversely, the additional liquidity in our LP relative to our peers could be better used elsewhere through other methods of liquidity provision and/or lending, diversifying that risk.
If we were to reduce this position to c.10-11% of our FDV, we would bring our LP size in line with our peers and reduce the impact of any hypothetical exploit of our LP position on our TVL.
Our Uniswap LP fees on the PDT/ETH pair are 0.3%, which is low relative to peers of our size and TVL. As such, we are missing out on potential additional fee revenue on trading through our LP, which is particularly important at our pre-revenue stage in order to support operations.
By redeploying our LP position with a 1% fee (the typical amount among peers of our size), we would again bring our LP in line with those peers and increase the fees collected from traders using our LP, delivering additional revenue to the treasury.
PRIME has recently unlocked and has now settled in price, with low levels of general liquidity across the market. PDT is currently a highly-correlated token as we have a significant amount of idle PRIME in our treasury, as well as token holders earning PRIME through staking. There is an opportunity to benefit from PRIME trading volume, while also providing additional liquidity to our token holders and the wider Parallel community, some of whom may be unaware of ParagonsDAO.
By dividing our LP position between PDT/ETH, PDT/PRIME and PRIME/ETH pairs, our PDT stakers and holders benefit from being better able to liquidate PRIME returns through the provision of additional liquidity to the market. As PDT and PRIME should broadly move together as a pair, we stand to benefit by earning fees from PRIME trading volume while remaining at a relatively low risk of impermanent loss.
There are currently c.1,400 PDT holders and c.6,300 PRIME holders (with many more wallets holding unclaimed PRIME). We will benefit from making it easier for PRIME holders to diversify their holdings into our token, and increase goodwill and exposure among the Parallel community by providing liquidity, some of whom may not be aware of ParagonsDAO. As such we may increase the number of PDT holders and active members of our community.
The PRIME price has decreased substantially from the first day of trading, as has PRIME liquidity. We have an opportunity to generate significant goodwill with the Parallel and Echelon teams by providing liquidity to the market and backstopping the token price. A stronger working relationship with both teams will benefit the DAO significantly, potentially allowing the DAO and its tools/platform to be more closely integrated with Parallel’s technical rollout along with being endorsed by them to the community.
Within one week of this proposal, subject to Treasury Council approval at its next meeting.
Minimal. Costs should only relate to the gas fees for redeployment of the LP liquidity.