Alkimi Liquidity Pool (LP)
Introduction
High liquidity is a fundamental part of any financial-based system as it gives participants the security of transacting with minimal slippage.
Decentralised AMM liquidity pools have the added incentive of enabling transactions without counterparty risk.
The liquidity pool will help the ecosystem to grow while allowing early adopters to benefit the most from that growth.
Alkimi’s liquidity pools also enable more participants to enter the ecosystem, creating a more even distribution of $ADS tokens.
The Alkimi Liquidity Pool will further improve decentralisation and help provide longer-term liquidity for the entire network.
Liquidity Pool
We have decided to incentivise (revenue share with) an 80:20 Pool ($ADS:ETH) on Balancer.
Alkimi has chosen the 80/20 pool:
- Lower Impermanent Loss
- More accurately expresses a bullish conviction
- Better performance in volatile trading conditions.
Weighted Pools
Weighted pools are an adaptation of the classic 50/50 (x*y=K) primarily used by Uniswap and other DEXs.
Weighted Pools are suitable for general cases. However, a Balancer Weighted Pool will allow Alkimi to offer a Liquidity Pool with a ratio of 80:20 (ADS:ETH), reducing impermanent loss.
For an explanation of Impermanent loss, see the Balancer Documentation here.
Using a weighted pool from Balancer allows Alkimi LP providers to choose their preferred level of exposure. Giving them the ability to express sentiment towards $ADS tokens while gaining exposure to the volatility of the fees generated.
Liquidity Providers
Liquidity providers are $ADS token holders adding $ADS and ETH to a liquidity pool in the ratio 80:20. In return for adding liquidity, they will receive a token representing their pool share. The standard designation for this LP token is stADS.
Buy Backs
Initially, token buybacks will be split between the Treasury and the open market to minimise arbitrage opportunities and liquidity leaching from the $ADS ecosystem.
Some of the ETH raised from treasury sales will be used by Alkimi to deploy their $ADS to the liquidity pool. (see Alkimi self-sustainability section below).
Token buybacks will allow Alkimi to increase liquidity as we onboard new network participants. Rewards are generated from actual revenue, so yields will not be inflationary and will provide consistent network growth while avoiding hyperinflation.
Due to payment and reward periods, token purchases will utilise a Time Weighted Average Price (TWAP).
Using a TWAP for token buybacks maintains the payment schedule of the rewards whilst reducing the potential for price manipulation.
Alkimi will facilitate the creation of API keys so users can monitor the level of buybacks and may also include these numbers on a dashboard in future. The fees and buybacks the protocol completes are written to the blockchain for transparency.
In addition to farming yield from fees generated by AlEx, LP providers will earn trading fees as liquidity is added and removed from the balancer liquidity pool.
Rewards Formula
To represent the need for increased transactional capacity. AOP-1 updated collateral requirements for validators and a new reward structure. The previous structure heavily incentivises the Liquidity Pool which was altered in AOP-1.
Alkimi validators support new functionality and provide the network increased utility, AOP-1 redressed the balance of rewards to incentivise both LP providers and Validators equally.
The new formula for rewards will be 1 $ADS = 1 Reward. In its simplest form, whether an $ADS is provided as collateral or as Liquidity, it will be treated equally for rewards.
The ETH provided as part of the LP however will not be included in the rewards pool. This means that LP providers receive rewards for the 80% they provide as $ADS, but the 20% will only receive liquidity rewards from Balancer (or any other LP’s created in the future).
Rewards
The total rewards from the pool are composed of two main components:
LP (Liquidity Provider) Rewards and Validator Rewards.
Below is the detailed calculation for each:
Rewards = LP Rewards + Validator Rewards
LP Rewards Calculation
LP Rewards are allocated to liquidity providers based on their share in the Balancer Liquidity Pool.
LP Rewards = Rewards Pool X Total LP Rewards Share
Where, LP Rewards Share , is calculated as
LP Rewards Share =
$ADS in Balance Liquidity Pool / ((No of Validators x Collateral) + $ADS in Balancer Liquidity Pool)
Validator Rewards Calculation
Validator Rewards are allocated to validators, based on their staked collateral.
Validator Rewards = Rewards Pool X Total Validator Rewards Share
Where, Validator Rewards Share is calculated as:
Validator Rewards Share =
(No. of Validators x Collateral) / ((No. of Validators x Collateral) + $ADS in Balancer Liquidity Pool)
Summary
LP Rewards are determined by the proportion of ADS in the Balancer Liquidity Pool relative to the total sum of validators' collateral and ADS in the Balancer liquidity pool.
Validator Rewards are determined by the proportion of the total validators' collateral relative to the same total sum (validators' collateral + ADS in the liquidity pool). Both LP Rewards and Validator Rewards are percentages of the total Rewards Pool.
Example
Validators - 1,000
$ADS in LP - 14,000,000
Rewards Pool - 1,000,000 $ADS
Validator Rewards
No of Validators (1000) Total Collateral (50,000) = 50,000,000 $ADS
Total Collateral (50,000,000) $ADS + $ADS in Balancer Pool (14,000,000) = 64,000,000 $ADS
Validator Rewards = 50,000,000 / 64,000,000 = 781,250 $ADS =78.125%
LP Rewards = 14,000,000 / 64,000,000 = 218,750 $ADS = 21.875%
The rewards for the Validators will continue to be paid in $ADS and LP providers rewards will be placed in the pool and the stADS will be distributed to them.
Alkimi Self-Sustainability
As an organisation, Alkimi requires an income to fund salaries, marketing, sales and further expansion. Alkimi intends to derive this income from holding and farming LP tokens like every other $ADS holder derives yield, aligning Alkimi and all $ADS holders.
Alkimi intends to employ the following strategy to build an LP token holding:
- The $ADS side of the Alkimi LP token will come from the $ADS initially set aside for Reserve, Staking Rewards and Platform Rewards.
- The ETH side of the Alkimi LP token will be derived slowly as the treasury $ADS are sold to buybacks.
As the buybacks progress and ETH becomes available, more and more of Alkimi’s $ADS will be paired 80:20 and added to the Liquidity Pool until all Alkimi’s $ADS are staked.
This update supersedes the previous tokenomics around platform rewards and $ADS incentives for AlEx users.
There will be no more token inflation via the platform rewards (discontinued) or incentives for publishers/advertisers (discontinued).
Exchange Liquidity
Higher liquidity ensures high stability, reducing large swings in the token price due to large trades.
By providing additional liquidity in the Alkimi order book, Alkimi can reduce the price impact of both buy and sell orders, reducing unwanted price swings while generating fees to reward LP providers over time.
Summary
In any functioning economy, liquidity is crucial to allow frictionless value exchange.
Alkimi’s Exchange (AlEx) is taking $700* bn per annum digital ad spend on-chain by utilising AlEx, including the Ads Explorer, Validators and Liquidity Pools to create a decentralised programmatic ad exchange.
Liquidity pools enable the protocol to take fees generated from activity on AlEx and distribute them trustlessly.
Liquidity Pools enable centralised business functions to operate as decentralised services. The Liquidity Pool, the Validators and our community and industry governance architecture create the mechanisms for Alkimi to become a self-sustaining ecosystem.
Alkimi’s self-sustaining business model will become ubiquitous as Web3 proliferates. Alkimi guarantees the future of the Open Web by providing a transparent and efficient marketplace for ads to fund the Internet.
*https://www.statista.com/statistics/237974/online-advertising-spending-worldwide/