Automated Liquidity Management for Velodrome with an increasing dynamic Range that follows sDAI organic interests
Introduction
Velodrome is a relatively new decentralized exchange (DEX) that has gained popularity due to its innovative features and efficient design. One area that could be further improved is liquidity management, particularly for assets with interest-bearing features, such as sDAI.
Problem
sDAI is a synthetic stablecoin that aims to track the price of DAI. However, its price can experience periods of volatility due to factors such as market conditions, changes in the underlying collateral, demand for the asset, and its interest-bearing nature. This volatility can make it challenging for liquidity providers to maintain a healthy balance of USDC (or other stablecoins) and sDAI in their pools.
Solution
I propose an automated liquidity management (ALM) system for Velodrome that would use a dynamic range to adjust the ratio of USDC to sDAI in liquidity pools based on the interest rate of sDAI. The range would increase gradually as the price/interest rate of sDAI increases, helping to protect liquidity providers from impermanent loss and capturing the additional yield generated by sDAI.
Benefits
The proposed ALM system would offer several benefits, including:
Reduced impermanent loss: The dynamic range would help to reduce impermanent loss for liquidity providers, as it would adjust the pool’s composition to account for changes in the volatility, price, or interest rate of sDAI.
Increased capital efficiency: The system would allow liquidity providers to make better use of their capital by automatically adjusting the pool’s composition.
Improved liquidity: The system would help to improve liquidity for sDAI, making it easier for traders to buy and sell the asset.
Captured yield: The system would allow liquidity providers to capture the additional yield generated by sDAI, increasing their overall returns.
Implementation
The ALM system could be implemented using a smart contract that would monitor the price, volatility, and interest rate of sDAI and adjust the pool’s composition accordingly. The smart contract would need to be carefully designed and audited to ensure its security and reliability.
Conclusion
An automated liquidity management system with an increasing range would be a valuable addition to Velodrome. It would help to reduce impermanent loss for liquidity providers, increase capital efficiency, improve liquidity for sDAI, and allow liquidity providers to capture the additional yield generated by sDAI.
Additional Details
The following are some additional details about the proposed ALM system:
The range would be calculated using a formula that takes into account the price, volatility, interest rate, and other relevant factors of sDAI.
The range would be updated periodically, such as every hour or every day.
Liquidity providers would be able to choose whether or not to participate in the ALM system.
The ALM system would be open source and auditable.
Note:
This proposal is still under development, and I am open to feedback and suggestions. Please feel free to comment below.