Based on this super simple model, you could say that.
But in reality It’s a bit nuanced, so I wouldn’t claim one is more efficient than the other. Even in this example, assumptions about the discount rate (10%) and the relative strength of SHD bought vs SHD supply increase (90 vs 200 in the waffle model) will impact the models’ “efficiency”.
Wouldn’t this be more accurate if you also used the same $bond amount for the Bird model?
In the Waffle model you have a bond worth $200 and the Bird model a bond worth $100. So if the Bird bond was also worth $200 the amount of SHD put into the market would be +200 vs Waffle +110.
Am I thinking about this correctly or am I off?
Nevermind, I see that when it comes to how much SCRT the Treasury gains, they are equal.
I’ll take it as a joke, and act as I am not offended 
I believe it is better to use the true bond/mint process, that has already been battle proofed with other DeFi protocols, Instead of using the treasury and mint new SHD in the future to refill the it (which I would be against).
Waffle method does not slow down, it just adds an extra step already applied by other protocols, and add the same amount of SHD in circulation as the bird one.
yes but you get only half the liquidity depth for the same bond amount, besides the bond issuance policy states that if treasury value > SHD market value we perform a SHD buy back, refilling our treasury. So yes, in terms of liquidity acquisition it DOES slow down the protocol.
Anyway I apologize for the name calling. Just testing the waters of shade culture.
Never mind my 2nd challenge, I don’t think it’s correct.
The problem with the discussion of renting vs owning is that they’re not equal outcomes, or equal cost. The more I think about protocol owned liquidity (POL), the less it makes sense. I actually used to be a big proponent but the whole concept falls apart under scrutiny. It really is the directly opposite thing to basic economic fundamentals. Excuse my wall of text but I think this is really important and I think we’re making an absolutely enormous mistake by pursuing POL - a severe enough mistake that it will kill the protocol in the medium term if pursued.
Trading is just willing buyers and sellers exchanging at prices set by the market. Liquidity is a by product of the market determining that it is profitable to take a no-drift position (ty for pointing this out @mnm) to capitalize on trading volume. If liquidity is not there, the market is telling you that it’s not a good idea. When you try to force it by spending money on creating liquidity, sure, you’ll create the liquidity, and you will lose money. And sure, markets aren’t perfect, and people make money capitalizing on things the market misses all the time, but that’s called trading, or investing, or active management of a fund, and none of the above is what we do, and none of the above is what POL is.
Just to make it pretty clear what an exchange like ShadeSwap is, it’s like the NYSE, it’s not like an investment bank. Stock exchanges do not own liquidity, market makers do, hence the name. In the real world, exchanges cannot own liquidity. They would become insolvent in seconds. The daily volume of the US stock market is like $100b-$200b, and in order to support that kind of volume with an AMM we would need tens of trillions to hundreds of trillions to POL. Even with a perfectly efficient CLOB with a perfect market maker who is never wrong you would still need trillions of dollars to enable trading of sufficient depth to create that amount of volume. It’s not only completely unreasonable, it’s impossible. You cannot run an exchange that owns its own liquidity. The way you create liquidity on an exchange is to attract market makers, buyers, and sellers, to use the exchange. It’s in the name of the product. Exchange. It’s not “the protocol providing everyone exit liquidity.” It’s an exchange between willing buyers and sellers. The answer to liquidity on an exchange is attracting willing buyers and sellers.
But okay, maybe crypto is different, so let’s think about it some more.
What we’re talking about here is spending protocol funds to purchase LP tokens that we will that sit on. We’re not talking about active management of a fund, we’re talking about just buying LP. What this means is the protocol is going to take money, and say “i will buy any amount of these tokens in this pool at whatever the spot price is”. Let me extend that to your personal funds.
I want to be able to trade my SHD, but there isn’t enough liquidity to offload a position of my size. I would like all the proponents of protocol owned liquidity to take money from their checking accounts, their retirement accounts, their brokerages, college funds, whatever, and buy all of my SHD at current spot price, at any time I choose to sell. Whatever the spot price is. And not just a little bit, I’m talking like 50% of your net worth. How many of you would do it?
Why do we expect the protocol to do the same thing? To dip into its pool of funds that could be spent on any number of other things, such as:
When you choose to spend money on POL, that means you are looking at that list (non-exhaustive, of course!) and saying “all of those things are less important than allowing me to sell more of my token at a better price”.
I’ve said this a few times but I want to make it super, super clear, and i’ll bold the whole thing since this post is so long and I’m sure there’s a lot of skimming, so hopefully people stop and read and internalize this point:
One million dollars of liquidity only creates an additional $2000 of 1% depth.
We have a lot less money than you guys think. Let me make it concrete.
As of writing this post, if I sold 10,000 SHD, I would get just around $50k.
If we multiplied on chain liquidity by 10x, which would be about $15m of additional liquidity, my trade would only improve from $50k to $80k. This, obviously, is impossible, because if we sold enough bonds to get $15m of additional liquidity at current prices, the price of SHD would probably be around $1, but let’s be conservative and say it would drop it to $3, so that $15m of liquidity is now actually only $4.5m, which means my $50k trade would instead be around $70k. Just to be clear if we sold enough bonds at current spot price to create $15m of liquidity (e.g., sell $7.5m of shd), that would be around 750k SHD, which would more than triple current circulating supply I believe. Again, obviously, nobody would buy bonds at that price, that kind of supply shock will obliterate the market, and all of the SHD we’re all currently holding. And the reality is even worse!! The bonds are sold at a discount! The protocol gets even less money than I’ve calculated here from selling bonds, so the nearly-zero value of POL is even smaller!
This is such a huge deal I’m gonna repeat myself.
When you are in favor of using bonds for POL, you are saying that you would rather the protocol spend quite literally all of its purchasing power on creating slightly better prices, instead of using the money to fund the next few years of development and marketing. That is the trade off. They’re mutually exclusive. Pick one: A baby whale gets another $20k or $30k when they dump, or the protocol can fund development and marketing for another couple years.
Hopefully that sufficiently establishes that us spending money on owning liquidity is a bad idea. If not, I would love to hear dissenting opinions, but I’d like them to be mathematical. I’d like someone to show me that the millions of dollars that it would require to own an amount of POL that actually matters has a greater ROIC than doing literally anything else.
So maybe we work around that assumption and say instead, we will just spend less money on protocol owned liquidity. We want to enable trading of our token, right? And renting liquidity is expensive, right? So maybe we bootstrap it with protocol funds using bonds. We don’t need to spend ludicrous amounts of money, right? Just a little bit, get the trading going. The thing is, as the math above shows, the amount of liquidity we can actually create is very small because diminishing returns set in really quickly. The truth is if you assume the price of SHD doesn’t tank when you sell discounted bonds (unreasonable, but makes for a more conservative estimate), and we increase on chain liquidity by around 20% (which would translate to around $300k of liquidity, which would increase circ supply by roughly 12%), that 10,000 SHD sale example I gave above? It improves from $50k to $54k. It’s basically inconsequential, and it cost us a ton of money.
The ROIC of POL is so abjectly terrible that spending that money on almost anything else you could imagine that isn’t outright burning it would be a better decision.
Last point, there are obviously a couple others aspects to POL.
These are easy to dismiss.
So again I go back to my original position. The only reason it would ever make sense to LP is when you think the ratio of the price of the tokens in the pool won’t change, and when you think volume will be high. The utilitarian goal of the protocol providing a public good is not real. It does not exist. So, since we are not a managed fund, we should not deploy capital like one, and therefore, we should not acquire POL.
In conclusion, the bird, waffle, and any other model of using bonds to POL are all equally bad because POL is bad. We absolutely should sell SHD bonds to raise capital, but only after we have identified a need that generates a positive return on our investment. We absolutely should talk about how we bootstrap dex liquidity, but we should not sell bonds to do so.
Delay again and deploy an order book non custodial exchange. 
(onomy protocol)
Correct me if i am wrong. But i do not believe POL is the only avenue we are going to use to bootstrap? I can see it being a diminished return and very small impact for high inflation if it was. But I believe the idea is starting a position of POL that adds to a more normal position of LP and grows over the course of years to be at a point it can sustain itself.
Am i wrong in that?
Wasn’t this debate only about owning the SHD liquidity on the dex ?
If the aim is to own all the liquidity of the DEX, of any asset, then I agree 100% with you Christian, waste of money and big risk.
If it’s just to own the SHD main liquidity (SHD-SCRT for exemple, or future SHD-SILK), then it might be worth it
We did talk about it in TG, but yes, my example is only talking about a single LP. Of course owning all liquidity is complete nonsense, but even owning a significant fraction of a single pool is unreasonable. In this case i define a significant fraction as “a significant fraction of an already deep pool” since right now we could own maybe 30-50% of current SHD-sSCRT LP (at great cost), but overall liquidity would still be low and therefore our addition is mostly inconsequential.
I believe the only LP it makes sense for us to hold is stablecoin LP (e.g. sUSDC-SILK-sDAI, maybe) because it is a low-drift position, but I think asset-based investments need to come after expenses and strategic investments, and it definitely shouldn’t come from capital raised by bond sales.
Thanks for taking the time to spin this up,
To your point, the most popular DEX pools in crypto are all tied to stablecoins or ETH/BTC (below is the top 10 largest pools on Uniswap). In addition, this is with Uniswap V3 so we are already talking a significantly more capital efficient paradigm than what ShadeSwap is going to market with. I’m in agreement with some of the issues discussed here, I think initally that bonds should only be issued to acquire stablecoin liquidity on ShadeSwap or staking derivatives as any other issuance for LP is ultimately taking both a speculative position while also absorbing the cost of volatility.
Alternative pivot is issuing a SHD bond for L1 assets to then stake and passively earn revenue. We could even convert the L1 asset into a staking derivative and take a largely delta neutral position on stkd-SCRT / sSCRT LP pair - increasing the adoption of the derivative, increasing protocol revenue, while also earning trading fees + SIENNA (in the interim while we wait for ShadeSwap).
I agree broadly with @ChristianA. In particular, I don’t see a need to even improve SHD liquidity, let alone improve SHD liquidity by a small amount using massive capital (their post covers more, worth multiple reads).
To try to answer @AnewbiZ, I’m missing the logic as to why POL will be self-sustaining/growing. I’ve LP’d on a number of protocols and pools, and it has never been self-sustaining to the point that I’ve been incentivized to use my LP “revenue” to buy more assets to re-LP over and over. In a stablecoin pool, maybe.
@Waffle I also don’t believe owning SHD main liquidity is important - but this has more to do with my disagreement with or misunderstanding of @CarterWoetzel 's post in the main Shade bond thread.
Can you explain the thought process behind issuing bonds for stablecoin liquidity? What need does that address?
Stablecoin liquidity is the most capital efficient: specifically stable-to-stable as there is minimal volatility in the pair. This service provided for traders by marketmakers (in this case the protocol) does not suffer the long term volatility of Asset A appreciating or depreciating in comparison to Asset B as they are both stable assets.
Stables retain their value, which means the treasury does not bleed when they hold them. The next step is finding a source of yield for these respective stablecoins
In the case of a pair that is stablecoin/SHD there is two outcomes: (1) SHD appreciates in value (treasury is happy) and stablecoin position shrinks. (2) SHD depreciates in value (treasury not as happy) but then the stablecoin position grows. Both of these are solid outcomes, and revenue is earned in the form of trading fees + protocol arb in either scenario.
We don’t need to earn yield on our treasury because we are positioned to earn on our suite of services. WE ARE THE TOOL MAKERS.
The protocol treasury is equivalent to a corporate treasury, and our bonds are literally corporate bonds from corporate treasuries, so I think it makes sense to think about how the treasury is deployed and how bonds are used from that perspective.
Growth stage companies don’t ever spend money on stock picking or equities management (unless they’re literally a financial services company or a fund), because the point of a growth company is to invest in the high growth of the company. Regardless of ethos (traditional capitalist ethos of a corporation is different from the “public good” ethos of Shade), this is fundamentally true.
So a growth stage tech company isn’t going to issue a bond to buy stocks with. They would issue a bond to build new factories, hire more staff, fund marketing, etc, because that’s the point of the company. Even if they did issue a bond for that, nobody would buy it, because nobody is investing in a tech company to gain exposure to a managed fund.
Our case is the same. We’re a growth stage fintech company, and people aren’t coming to us because we’re a managed fund, and being a managed fund is not what the protocol was built to be, so we should not be issuing bonds to essentially “pick stocks” by LPing. That’s what LPing is fundamentally, it’s a market position. The reason nobody does this is because the expected return on investing in “ourselves” is greater than the expected return on the investment (LPing). I think most arguments against boil down to:
My answers, in order, are:
I don’t believe the higher capital efficiency of a stablecoin pool changes any of the above. The high capital efficiency and low risk do make it a more attractive option, but it’s an option that should strictly be reserved as one of the places we deploy unused treasury until it is ready to be deployed elsewhere. The positive benefits (better liquidity and cash flow) are secondary but not the goal.
I think the same is true if we talk about buying L1 tokens and staking them. It’s stock picking on high beta assets for a yield that historically does not outpace its loss in value, so it’s an even further departure from the purpose of the treasury IMO and shouldn’t even be considered as a place to park unutilized treasury funds at all. At least at this stage of the protocol.
RE: @zenopie I think it would be a good idea to think about how to utilize undeployed protocol funds but just from a risk minimization perspective, not a yield generating perspective or a public good creating perspective. More than anything we want to protect the principle value of the treasury (which is why i emphasize not focusing on nominal token count)
Do any of your points address user needs?
I agree with the features of stablecoin LPs that you stated. They are compelling reasons for anyone to consider LP - but make no argument for why a protocol should LP it’s own funds.
Your third point is surprising to me. I read the point as attributing scenario outcomes as being positive symptoms of LPing. E.g. you said the protocol would be happy if it LP’d stablecoin/SHD and SHD increased in price. You could make the same argument and say the protocol would be even happier if it didn’t LP SHD/stablecoin and SHD increased in price.
I agree with everything.
what is it that you propose? no liquidity? the same Mercenary LP setup as uni swap and every other dex uses?
I would love some order book action eventually, but we need liquidity from somewhere.
