There has been a great deal of valuable insights around the Statemint DEX under Joe’s Statemint Roadmap post. The continuous discussions regarding the goals, functionalities, liquidities etc. which will eventually shape this DEX obviously warrant a dedicated thread, and hence I’m spinning it off from the original post and creating this one here.
I’d like to start this with where we left off:
This was touched upon during the Parachain Summit. Thanks for mentioning this; now we can have some detailed discussions around it.
My understanding of avenues where the DEX liquidity incentives could come from is as follows:
- Trading fees
- DEX/Protocol token emission as subsidies
- Rewards by listed projects (in their native tokens, or other assets)
- Rewards/interest from other products (within the same platform or composable with other platforms) that entitled to the LP tokens due to additional utility granted
The availability of #1 will be dependent on actual adoption of this DEX, which will demonstrate the DEX’ Product-Ecosystem-Fit or lack thereof.
#2 already puts this DEX in disadvantages, if anything, since Statemint does not have any token emissions to subsidize the liquidity provision. If this DEX wants to use DOT as liquidity incentives, then it has to go through the same governance process as all the liquidity proposals. There are some ideas such as re-purposing a portion of the regular Treasury burns as liquidity incentives (e.g. Kappa Sigma Mu Kusama Society), which are quite interesting and will obviously also needs community approval.
For #3, this really is a decision by the projects themselves rather than anything else. In most cases, these liquidity should go to Ecosystem DEXs because their offer better trading experiences and more value add. However, there might be instances where, for instance, a Parachain who is a wireless infrastructure provider may have a significant portion of their tokens held by large Telcos who might be taking their first step by putting these tokens to a liquidity pool governed by Polkadot, or doing nothing at all with these tokens. Then this Parachain might opt for using this DEX as a gateway DEX first (at least getting those tokens out from the cold wallet first) and dropping some incentives there. More generally from the pure tech perspective, LP tokens are just normal assets on Statemint and thus can be transferred over XCM to other Parachains, where they have flexibility for creating incentive programs if they want liquidity in certain pools on Statemint
Regarding #4, this is where it could strongly synergize with the ecosystem. For instance, can DOT/USDT LP token be used as collateral to mint aUSD on Acala?
Let me know what you think @danreecer . Also welcome ideas and feedbacks from everyone.
Statements could be more effective with some numbers backing them. For example, to evaluate a DEX, people are usually seeking:
- trading volume
- trading fee percentage
- expected LP rewards (calculated from above points)
We should be estimate trading amount requirement from Polkadot treasury and an acceptable slippage and calculate the liquidity requirement. We can estimate expected LP reward and trading fee and calculate incentives required to attract those liquidity and figure out how much incentives Polkadot treasury have to pay.
I will start to call it State-Swap (until another name is deemed better!)
Some ideas :
Its been an interesting discussion so far, mostly because of tensions it has revealed.
There has been pretty much zero conversation about who the primary users of this DEX might be or where future demand may come.
There have been many interesting points made, but we should maybe return to first principles and ask what unique role a statemint DEX might have in the ecosystem to enable genuinely novel financial primitives and to unlock value for projects that are razor focused on delivering against the original polkadot vision of application specific parachains…
We tend to see this everywhere across the ecosystem - basically people arguing far too high on the philosophical ladder, detached from the foundations that make this project so unique and so capable in ways that other ecosystems can’t. I guess this is natural, since people intepret threats or opportunities through the prism of their own experience and of course their vested interests.
For what its worth there is a user group that a statemint DEX could immediately serve - namely providing liquidity to funded teams receiving parachain tokens from on-chain governance, something I flagged here.
The aim would be to develop a Kusama ‘common good’ DEX narrowly focused on providing exchange and liquidity services for parachain contributors with funded proposals that removes the need for grass-roots parachain projects to list on CEXs and more speculatively minded DEXs.
The KSMDEX, would be selective about the pairs it lists - and require chains that do apply for listing to satisfy certain prior criteria, in the same way common good chains can access treasury funding, but for profit ones (supposedly) can’t,
Similar to a cooperative model, the DEX would only set prices within its own sovereign economic zone, and the compromise would be that community led parachains wishing to list on the KSMDEX would face is that they could not list on any other DEXs or CEXs.
In this model there would be no need for a new token as the Kusama treasury would provide liquidity, making use of the un-used funds and would retain all trading fees.
Further, I can see a path to StateSwap being the market for ParaNotes - something we will soon propose to Kusama governance. ParaNotes are a way to rethink the economic and political relatiohship between the relay, parachains and on-chain orgs and are a way to enable genuinely novel new defi primitives on dotsama.
Anyways, my original hope at introducing the notion of a Kusama ‘common good’ DEX still stands.
the hope is that this and following concepts can loosen a few of the shackles that are holding back a more open and experimental playground in Kusama.
There are an incredible amount of talented creative people in and around this ecosystem, and yet a paucity of out there ideas - we have been given a gift, a place to think up, experiment with and test new concepts. Let’s seize that opportunity to think a little laterally.
Eventually Teams could bid for a StateSwap listing as part of a parachain auction process, where a portion of DOT is held as liquidity provision in the DEX and team contributes portion of tokens to support listing.
None of the Dex’s on any existing Parachains are performing a function close to what is required for the entire ecosystem to flourish.
One discussion point from my side:
Do we want a fundamental redefinition of DOT?
@Rae mentions that current allocations like Treasury Burn & Society could get reallocated to Incentive Rewards.
At the moment, the fundamental value proposition of DOT is to secure the network.
Inflation is a redistribution of purchasing power from those that do not participate in the incentivized activity to those that do participate in it.
Polkadot incentivizes securing the relay chain and redistributes purchasing power via inflation.
Incentivizing liquidity provision would mean that DOT is redefined from a token that purely secures the network to a token that has the additional purpose of attracting capital.
In my opinion, this opens the Pandora’s box. Where previously the game was primarily about securing the relay chain to create a flourishing parachain environment, a new player type now enters that is more interested about extracting value from incentives. There now could be a fight between those two interests and parties with a lot of capital and DOT could shift the budget of how much incentives are allocated more and more towards directions that benefit themselves. Polkadot could become a value extractors game.
Personally, I strongly oppose this redefinition of DOT. I think this redefinition of DOT would lead us into a political field where debates about the good governance of the whole ecosystem would be cannibalized by discussions about how much DOT incentives should go into each pair and who could bribe the most to get their pair incentivized.
I suggest we instead focus discussing incentive options from @Rae’s point #3 - how actors/protocols can incentivize their favorite pair with their own tokens.
I consider that having a DEX on Statemint/e would be also useful for supporting stable coins for Treasury V2. As proposed here it would be useful to have stable coins inside the treasury. Having a ‘trusted’ DEX that can be used to swap the treasury’s funds into some specific asset would allow a lot of flexibility. For example, proposers could specify the asset they would like to receive and the treasury could go ahead and swap the dot/ksm for the equivalent amount of the specified asset. So the treasury would have reserved practically all of the assets that the proposer would receive upon successfully completing all of the phases.
Of course, the specified asset would need to be listed on StateSwap.
this won’t be practical w/o getting quite slippage until Statemint DEX will have lot of liquidity required due to its design. That means either suboptimal solution or fight for liquidity with dexes on parachains in the times, when liquidity got pretty scarced in whole crypto and especially in Polkadot.
Btw liquidity of Polkadot ecosystem ain’t limited by lack of dex projects but by many smaller / bigger missing primitives like easier to integrate token standard which lead to much more needed integrations to custodians, cexes, otc desks and hw wallet support which are currently very expensive and not priority for any of 3rd party providers of such services being busy with integrations of other ecosystem. Many of them they will find easier to integrate them as well. Another big reason are missing better and trustless bridges and their infrastructure.
So instead of cannibalising or competing with parachain use cases, it would be more useful to have resolved issues which are holding back potential service providers within your own community.
Pretty much all of the above comments take as a starting point the requirement for liquidity incentives - and then the conversation / argument progresses/degrades from there.
There are alternative ways to creating a non-custodial atomic swap DEX that requires no liquidity incentives - such as Decred’s DEX.
I think there should be some DOT incentives on the StateSwap DEX.
@alice_und_bob made a great point, it disincentivizes security, which is the primary function of DOT, but we don’t spend DOT only towards that. There is a treasury that spends DOT on various activities from infra to marketing. The question is how big % of DOT is spent on those areas. If it’s some healthy amount, it can be good for the whole ecosystem while not endangering security.
Another point by @jakub, indeed missing infrastructure is a blocker for getting liquidity for parachains, and StateSwapDEX will have the same problem. Fortunately, W3F can back the DEX with its reputation, maybe even customize some infra and raise the confidence in providing liquidity. Something that parachain teams can’t do.
An argument why we need DOT incentives is that we have to look at this through outsider perspective. LPs are not Polkadot insiders - they don’t know parachain projects, they have less confidence in their tokens. Crypto works in a way, that first mover has big gravity, attention and confidence from token holders. Naturally, Polkadot outsiders will interact with DOT as their first point of contact in Polkadot, and they will have the highest confidence and opinion that that’s what’s important. You can see this everywhere, e.g. crypto ecosystem reports will mention DOT, but won’t mention some “minor in their eyes” parachain’s token.
Therefore, the first step and best incentive is the DOT reward. Maybe, there would be even better reward if we reward with BTC, ETH or some stable like USDT, but I’m not sure there’s a capability for that.
From a parachain team perspective, I’d love if we could list our native tokens against DOT easily, potentially even get the liquidity from treasury, since it will help with exposure to newcomers and thus help the overall ecosystem. Maybe treasury can help parachains by buying their tokens and then LP it in pairs on StateSwap. Everything paired with DOT.
Obviously the Polkadot has a liquidity problem, so we need to solve it on point of the least friction in building network effects. Parachain teams have to understand that their growth is capped by the growth of Polkadot. Parachains won’t grow if Polkadot (DOT) is not growing, so we need to do this.
Target user groups: On a practical note, which user groups on the LP/trader side the StateSwap wants to attract? Institutional ones have different views from retail. Different token holders (ETH, BTC) have different behaviors and risk profiles. The logical groups to tap into are ETH DeFi users, maybe Cosmos users (since they understand multichain), and BTC community. I’ve recently noticed a lot of Bitcoin folks liking or retweeting my tweets and from the past experience I know there is some mild approval of Polkadot by the Bitcoin community. I know that even some Bitcoin core devs are thinking about Polkadot and looking into it, so maybe the next focus in line would be serving the needs of those users.
Statemint DEX could also be used as a multifaucet.
Example, swap 5 DOT for couple different coins in the ecosystem to have for gas fees and be ready for exotic transactions.
If there would be coins from different ecosystem (ETH and others), it could attract people not primarily in DOT ecosystem, some people would use the DEX just for the multifaucet.
As someone heavily invested in DEX parachains, perhaps I am biased. This feels like a major affront.
I thought polkadot’s advantage and selling point was application specific parachains. Having a DEX on Statemint seems counter to that principle.
A DEX on Statemint will cause liquidity fragmentation for the ecosystem. Something with this impact does not classify as ‘common good’ unless it fully out-competes DEX focused parachains. But in that scenario, what is the point of polkadot? Why have application specific parachains if everything is done on Statemint? What efficiencies will be lost, and what is left, if polkadot abandons its core parachain philosophy?
It seems this is happening regardless, but I am here to voice my opposition.
@alice_und_bob brings some very valid concerns here.
There is already multiple parachain teams building dexes here competing for liquidity. May the best of them win. This race has a technology but also an incentive component. A dex on Statemint sounds good from a usability standpoint. It makes it easy for someone to swap their Stables that are native on statemint instead of teleporting them to a dex parachain first and it in the end requires one less teleportation step to get to the right asset and then use it on Parachain X.
Overall though this fractures liquidity even more. An exchange is only as useful as it’s liquidity is deep. If polkadot wants to attract serious DeFi transactions then the dexes need to have very deep liquidity to accomadate for whale capital. Liquidity is where other Ecosystems are ahead and this needs to change. A Dex on Statemint that will be the default for most unsophisticated users is not a good solution as it diverts capital away from the more sophisticated and probably technically superior dexes that are currently in development/deployed.
This seems to be born out of bad usability and needs to be solved on a UI/XCM Level to make users not even notice that they are hoping chains.
When reading the news about StateSwap it sounds like there would be native BTC, ETH implemented, so not wrapped? How would that be possible on Polkadot relaychain?
It’s a bit tangential to the dex but:
Short answer: They’re wrapped.
If you’re not on your native chain then it’s always ‘wrapped’ or as we call it a ‘derivative token’. BTC, ETH etc would behave effectively like reserve asset transfers do - i.e. a derivative token that represents the asset (that represents locked tokens on the original chain) would be exchanged. Any derivative token is only as good as the bridge that it went over (or mechaism that the original tokens are locked by). Snowbridge for example should be able to use ETH 2.0’s new finality via the bridge hub and mint into statemine/t. Bitcoin doesn’t have finalisation so other mechanisms are needed (for example interlay parachain are one way of getting bitcoin derivative tokens).
We need to separate out the concerns. Fears that there will be n+1 dexes on parachains rather than n dexes seem not well founded - there’s going to be a lot of dexes and we can’t prevent more of them opening. We need to not oppose a dex on statemint simply because it is one more dex.
I’ve been wondering about the ‘unfair’ playing field of only having one governance model rather than two that effectively most parachains have. There’s nothing special about how statemint does its governance. It’s possible that another parachain could choose to give up its own governance and route everything through the relay chain’s governance. (This could be undone via a relay chain vote, and parathreads might make this approach more palatable).
Wallets are likely to integrate with dexes that give their users the best rate and enable them to take a slightly larger fee for that work of sourcing the best deal. StateSwap is not likely to provide the best route for most pairs (I’m disapointed that I have not seen dex aggregators yet - if you’re building one, let me know).
I conceed that traffic from exchanges might likely choose to go via statemint but again statemint isn’t doing anything that another parachain can’t do, so it’s possible (though admitadly a bit less likely) that another parachain could act as an onramp parachain to exchanges. (and again there’s room for dex aggregators to not use the statemint dex). I think this is essential simplification of onboarding (for now).
Unfair liquidity incentivisation seems to be the main bone of contention. In some ways StateSwap is at a disadvantage because it can’t incentivise with its own token. Personally I’d like to see it apply for liquidity incentives in the same way as other parachains do through Rae.
I hope that we will look back next year and look on this as a storm in a tea cup. The fears are understandable but they don’t have to materialise. Everything will change over time and what is the right thing now might not be the right thing later on. The worst outcome would be that we’re afraid to try things.
Great. That’s how I imagined it and it’s the classic method. Some tweets then presented the whole thing in a somewhat shortened form. Stateswap would then partly use the help of other parachains (interlay), which is good as a cooperative, but would also lead to a kind of dependency on projects that are basically limited in time (lease period). I am very excited about the project and can hardly wait to invest in external blockchains with stored values from the Dotsama ecosystem. In particular, I think the functionally simple integration of BTC is a great thing.
And please: Let’s make stateswap intuitive and foolproof. Polkadot’s design by nerds for nerds reliably prevents mass adoption.
I believe the following discussion is relevant. In particular, if you object to the Statemine/Statemint DEX proposal, I’d be interested in whether my governance “blue-sky” suggestion would be attractive to you: