Network-Owned Liquidity(NoL): A Deep Dive
Last updated
Last updated
The central problem of DeFi today is apps have to bootstrap liquidity on their own, which is a multi-year process. Market makers are only willing to provide liquidity with significant token incentives, and as more and more venues prop up, market makers get spread too thin, leading to liquidity fragmentation. Users are not loyal to the trading applications they use, also described by the lack of stickiness. Major reasons are over-engineered token incentives, paired with a bad product, leading to users leaving the protocol after TGE.
It is with good reason that we have barely seen any innovation in the DeFi ecosystem since the last cycle. Almost all new products are mere improvements over previous protocols that came last cycle. DeFi has hit a standstill, and so have all incumbents. There is no feasible path for innovation in existing protocols, as they are either
Not Permissionless
Not Flexible and Customizable
Involve Governance Processes to even get started.
The second problem DeFi faces today is rampant liquidity fragmentation and misalignment with the underlying network. We believe that liquidity should be a public good, and should be bootstrapped by the underlying network, which can then be inherited by apps building on top of the network. In other words, enshrine liquidity at the network layer, which can then be shared programmatically between applications, aligning incentives between the network and applications, and solving liquidity fragmentation once and for all.
Spicenet enshrines liquidity at the network-level, and allows applications to inherit or borrow this liquidity as they see fit. Spicenet concentrates liquidity on an open, canonical, and transparent limit orderbook(aka Flashbooks), following a Uni-v3 distribution curve. Applications can permissionlessly plug into this source of liquidity and utilize it for their use-cases, be it for memecoin trading, advanced futures trading, or custom contracts. Liqudity for anything and everything can be established on Flashbooks. But, where does this liquidity come from? The answer is Network-Owned Liquidity.
Fundamentally, Network-Owned Liquidity is a flywheel aligning incentives between the network, applications and users. Each actor has different expectations and priorities. The network wants as much liquidity as possible that it can serve to it's applications. Applications want users so that they can grow. Users want fun and rewarding experiences. Network-Owned Liquidity turns this "trilemma" into the NoL flywheel. The NoL flywheel is underpinned by oPEP, an option token around PEP. oPEP's unique incentive mechanics weed out farmers while rewarding stakers, core to creating incentive alignment between users, applications and the network.
How does the flywheel work? Users deposit into various Network-Owned Liquidity vaults as per their risk appetite and requirement profile. This capital is then diverted to supplying liquidity on various network primitives. As a receipt of deposit, LPs get a ephemeral token that can be used across Spicenet DeFi(more on this later). Network-Owned Liquidity LPs are eligible to get oPEP rewards as part of the hourly emission cycle. oPEP can be executed to PEP at a variable discount and can either be staked or sold. oPEP -> PEP discount varies depending on whether one wants to stake or take a profit. PEP can only be sold at a meagre, one-time discount of 15%. However, if PEP was staked, the discount available could be upto 85%(depending on stakeweight).
This simple mechanism separates -EV farmers from +EV stakers. Farmers sell PEP and lose all stake in the network, while stakers stake PEP and grow their stake in the network via stakeweight. As LPs stake PEP, their stakeweight increases. This is where the applications come in. Applications on Spicenet implement the oPEP module(like Network-Owned Liquidity does) to incentivize specific actions(like NoL incentivizes depositing). NoL depositors are now incentivized to use these applications and complete set actions not because they receive base oPEP emissions, but because they receive boosted oPEP emissions. This is because oPEP emissions are a function of stakeweight. More the stakeweight in the network, more oPEP emissions one receives in the hourly emissions cycle.
This creates a self-reinforcing and self-motivating flywheel as users are motivated to grow their stakeweight in the protocol in order to receive boosted oPEP. And any such oPEP received, creates more incentives to stake, as they further grow their stakeweight and further boost their oPEP rewards. Applications implementing oPEP rewards can also implement secondary rewarding mechanisms, such as boosted yield as per stakeweight. In fact, yield given back to NoL LPs varies depending on the stakeweight of the LP. More the stakeweight, more the amount of yield the LP gets. This way, applications can drive growth, users and volume by simply implementing the oPEP module, and optionally implementing secondary reward mechanisms.
In fact, oPEP can also boost network security as validators can incentivize more stake with oPEP by promising more staking rewards. With Spicenet's unique multi-staking model, validators can hold stake in network governance in any token, which includes PEP too. This allows validators to incentivize users to delegate their staked PEP by implementing the oPEP module, that creates natural incentives via stakeweight. Validators can also provide secondary rewards, which can include boosted staking rewards for staked PEP delegators, incentivizing more users to delegate their staked PEP to validators.
Network-Owned Liquidity strategy vaults are by design curated, operated and managed by the Spicenet DAO. At network genesis, the DAO has the right to vote on appointing the initial set of strategy vaults underpinning the NoL flywheel. For the foreseeable short-term, creating third-party vaults as part of Network-Owned Liquidity will not be possible. Meaning that although vaults can be created permissionlessly, they can't plug into the oPEP module and thereby incentivize capital supply.
Although this may be harmful short-term, this is done in order to aid progressive decentralization of the network. And in the process, there are many unknowns. Third-party NoL-backed strategy vaults involve a third actor, the vault curator, who has to be incentivized too. The incentive structures and mechanisms for the vault curator are still Work-In-Progress, as the network needs to provide sustainable enticing incentives to vault curators, that align the vault curator with the network's and depositor's objectives.
To conclude, oPEP sits at the centre of Network-Owned Liquidity value alignment flywheel, that aligns incentives between the network, applications and users. Fundamentally, oPEP creates a two-way supply-demand market between users that have supply of capital, and various actors on the network, that demand this capital and put it to use in various ways. Network-Owned Liquidity is one such demand creator of capital that incentivizes deposits with the oPEP flywheel, and secondary rewards like boosted yield. Any actor can express demand for capital by implementing the generic oPEP module and optionally adding secondary rewards.
