As I pointed out in the Shade Bond Issuance thread (Shade Bond Issuance - #11 by ChristianA), LPing is a very specific portfolio construction that takes a no-volatility position on the assets in the pool, so the act of selling SHD for LP, regardless of the waffle or bird model, means that we are taking a bearish position on SHD and a neutral but high volume position on whatever pair we sell the SHD for. It’s important to think about LPing with bonds in this way because if we don’t, we will run into a situation that effectively reduces down to “we are giving away $1 in exchange for $0.70” and that’s just bad management of money.
With that said, I don’t see any situation where the waffle model makes sense. Because of the fact that it is not always the correct answer to spend protocol funds on LPing, having the treasury full of assets that could be deployed however we want, including into LP, is a better decision. I would extend this to say that if we are selling SHD bonds to raise money in the treasury, we should only sell bonds for highly liquid, non-Silk stablecoins, otherwise we are playing hedgefund.
In the case of bootstrapping dex liquidity - as I also mentioned in that thread above, the constant product AMM is one of the most capital inefficient swap mechanisms (arguably, the most inefficient swap mechanism in common use right now). This means that to “bootstrap dex liquidity” in a meaningful way we would need to attract literally hundreds of millions of LP across all supported pairs - and in the process, the protocol would be taking a no-volatility position on all supported pairs using hundreds of millions of protocol funds. If you’re okay with this, I have a question for you: would you be okay if we decided to spend hundreds of millions of dollars on a bespoke coin portfolio of SCRT, BTC, ETH, USDC, and ATOM because “we feel the price will go up”? I believe most people would say no, but that statement is roughly equivalent to the protocol selling SHD for SCRT/SHD, BTC/SHD, ETH/SHD, USDC/SILK, and ATOM/SHD LP.
The conclusion this leads me to is that I believe it makes sense to:
- Use the bird model, so we don’t trap ourselves into losing positions.
- Make very informed decisions about what LPs we choose to bootstrap, because with current market conditions on secret, it likely only makes sense to bootstrap a single stablecoin pool. For reference, Trader Joe on Avalanche struggled to acquire a significant amount of protocol owned liquidity just for their own JOE-AVAX pair, and at the time they had almost 2 billion in liquidity, and were doing 500m-1b in daily volume, and had a revenue generating lending product that had around $500m in TVL.
To think about it another way: if we manage to sell $500k worth of bonds, we can make any number of decisions with that money, but consider these three decisions:
- Turn $500k into $1m of SHD-sSCRT LP, which has a 1% depth of only $2000, meaning a trade of $2000 will incur a slippage of 1%
- Turn $500k into $1m of sUSDC- SILK LP, which will have much better depth and also is a no-volatility pair
- Put the $500k into extending the runway of the team for 6 months (best guess number, i don’t know what the actual monthly spend is)
Personally the ROIC of #3 is probably far and away the best right now, but in the absence of runway problems, #2 (and other no-volatility positions like it) are the only things that make any financial sense for the protocol to LP in.