Summary
This is a joint proposal prepared by representatives of the Neutron Foundation and Shade Protocol, following the initial forum post of Carter Woezel (Shade Protocol Lead Researcher) to execute joint liquidity provisioning for the SHD and NTRN tokens as per the table below.
| Source | Tokens Provided | Pool / Platform | Value |
|---|---|---|---|
| Shade Protocol Treasury | SHD | SHD / NTRN LP on Astroport (on Neutron) | $100,000 |
| Neutron Main DAO Treasury | NTRN | NTRN / SHD LP on Astroport (on Neutron) | $100,000 |
| Total | $200,000 |
Shade Protocol will provide tokens to the value of $100k to be matched with NTRN to the value of $100k for total liquidity of $200k. These tokens will then be paired and deployed equally as Liquidity Pool (LP) positions IN the NTRN / SHD LP on Astroport (on Neutron). The LP position on Astroport will be managed by Timewave’s Covenant system.
Shade Protocol will own 100% of the SHD tokens within the LP position; Neutron will own 100% of the NTRN tokens within the LP position.
Justification
Liquidity is essential for the smooth functioning of decentralized applications, such as decentralized exchanges (DEXs), lending protocols, NFT marketplaces and other projects. Users typically provide liquidity by depositing their assets into smart contracts, and they are incentivized with trading fees and token incentives for doing so.
Protocol Owned Liquidity (POL) refers to a scenario where the Chain/DeFi protocol itself supplies a portion of the liquidity required for its operations. In such a case, the protocol uses its own reserve funds (community pool/treasury) to ensure there is enough liquidity available for users to trade, lend, or participate in various DeFi activities. The protocol itself holds and manages token reserves instead of relying solely on external market participants to provide liquidity.
By establishing POL for NTRN and SHD on Astroport, the goal is to:
- Diversify and sustainably deepen liquidity for NTRN & SHD in Cosmos.
- Improve trade execution without the expense of incentivising liquidity.
- Open up additional cross-chain arbitrage routes, resulting in a net increase in trading volumes.
- Improve accessibility and usability of both tokens and platforms, for each community, and encourage wider community adoption of DeFi protocols in Cosmos.
Risks
- Platform Risk - by deploying its treasury on another chain, each party exposes itself to additional chain/smart contract risk.
- Impermanent Loss - As the token of each party is paired against that of the other, fluctuations in price will result in variations in token numbers of each token within the LP position as the stronger performer is sold for the weaker to maintain a 50/50 $ value ratio within the pool. The stronger performer of the two tokens will suffer ‘Impermanent Loss’ in the pool - a decrease in the number of tokens. If either party were to execute a withdrawal whilst in such a position, it would realise this loss.
Execution Process
Subject to community approval, this POL proposal will employ Timewave’s Covenant system. Covenants allow highly customisable and decentralised deal making; a major step forward from previous POL deals in the ecosystem that require intermediary multisigs.
Amounts
Exact amounts of SHD and NTRN will be determined by the 10-day TWAP according to prices on Coingecko on the day of the Covenant instantiation.
- Shade Protocol to provide SHD worth USD $200K
- Neutron to provide NTRN worth USD $200K
Price
Token exchange ratio will be determined by the 10-day TWAP according to prices on Coingecko on the day of the Covenant instantiation.
To protect both parties from unexpected slippage, Covenants function by stating a target LP ratio between the two tokens upfront and specifying an acceptable range within which the Covenant will deploy the liquidity. If the pool ratio is within the acceptable range by the time both parties contribute their tokens, the Covenant will two-sided LP the maximum amount of tokens and single-sided LP all remaining tokens. If the pool ratio is outside the acceptable range, the LP will not occur in order to protect the involved parties. The Covenant will regularly check for the next 30 days to see if the ratio returns to within range and LP if/when it returns to the acceptable range. If it does not return to range within 30 days, the Emergency Committee (EC) will refund the tokens to both parties. More on the EC below.
The acceptable range proposed is +/- 30%.
Timewave Covenants
Due to the Covenant System’s early stage of development, the Covenant System can support Astroport, but cannot yet support ShadeSwap.
Deposit Venue: Astroport
The Covenant contracts can receive the native tokens on any chain through Interchain Accounts or directly on Neutron.
For this proposal, Neutron will deposit tokens through a Neutron governance proposal directly into the Covenant address on Neutron (address provided after contract instantiation).
As the SHD token is a CW-20 token and not a native token, it will need to be deposited on Neutron (address provided after contract instantiation).
Once the Covenant receives the appropriate amount of funds from both parties, it will then route the funds to Astroport.
Lockup Duration
Covenants can include a mutually agreed upon lock duration. However, in this instance there will be no lockup period. Any of the parties can trigger a withdrawal whenever they want by passing a governance proposal to do so.
Withdrawal
On withdrawal, the Covenant will unwind the whole LP position and direct all resulting SHD to Shade Protocol and all NTRN to Neutron.
SHD tokens will be returned to Shade DAO Treasury:
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NTRN tokens will be returned to the Neutron Main DAO Treasury neutron1suhgf5svhu4usrurvxzlgn54ksxmn8gljarjtxqnapv8kjnp4nrstdxvff
Party Addresses on Neutron
Each party needs an address on Neutron with the authority to trigger a withdrawal.
- Neutron will use the Neutron DAO neutron1suhgf5svhu4usrurvxzlgn54ksxmn8gljarjtxqnapv8kjnp4nrstdxvff
- Shade DAO will use its governance multisig. This multisig may be swapped out with the Shade DAO address at a future date, once Shade DAO upgrades to on-chain governance
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Security
Covenants have been rigorously tested on testnets, tested on mainnet, and independently audited by Oak Security. However, since this is the first ever production use of Covenants, we recommend employing a few safety measures: 1) Emergency Actions and 2) Upgrades
- Emergency Actions
Covenants allow the parties to authorise an emergency committee (EC) to perform immediate emergency actions. The EC cannot withdraw the funds to themselves. The EC can only withdraw funds to the parties that contribute capital to the deal. This EC is important because issues may arise that require action faster than the governance of either/both parties could take given their voting periods.
For example, if the Astroport contracts have a bug and the respective SHD:NTRN pool is being drained faster than each of the parties can pass governance proposals, the EC could stop the issue by immediately triggering a withdrawal of the assets to Shade Protocol and Neutron.
Covalent DAO will serve as the EC for this Covenant.
- Upgrades
Admins of the contract have the authority to migrate the contracts or upgrade the configs. Since the Admin has powers beyond what the EC is granted, the Admin of this Covenant will be Covalent DAO, Shade Protocol via governance multisig, and Neutron DAO, with governance set to majority rule and voting power as follows:
- EC has majority voting power when the Covenant is first instantiated, while attempting to route the funds, and LPing the funds. If there are issues that come up, this is the time when they are likely to happen due to cross-chain complexity and the EC can act faster than Shade and Neutron.
- After the LP has occurred, EC grants Shade and Neutron majority voting power of the Admin DAO so that any upgrade will require approval by both Shade Protocol and Neutron governance in order to occur.
Timeline
Subject to community support, the proposed execution timeline is as follows:
- Day One - Draft Forum post submitted to both community forums for discussion.
- Day Five - Neutron and Shade Protocol to create formal proposals on chain (where applicable); amended according to community feedback on both sides.
- Neutron Voting Period 14 days
We appreciate and seek feedback from Shade Protocol community members regarding our collaboration with Neutron and this joint liquidity provision proposal for SHD <> NTRN liquidity on Astroport.