RNIP3: Liquidity Manager Success & Next Steps

General
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TLDR

  • On 1st December RNIP2 passed, introducing Amber and Selini as “liquidity managers” alongside Elixir’s sdeUSD
  • This led to outstanding staking yield performance. Each Liquidity Manager has performed well, with diversification also leading to higher yield with no daily drawdown.
  • This is shown in the following table, where you can see the yield is higher than sUSDe (by way of comparison) without a day of drawdown since RNIP2 went live.

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  • Given the success of the pool, it’s time to take the next steps regarding Reya Network rUSD Staking (LPing). Here we propose
  1. Staked rUSD is tokenised as srUSD. Initially this will be a non-transferable asset that can be used as trading margin only. Over time, full transferability of srUSD will be explored.
  2. A proof-of-concept ‘Hedging’ Liquidity Manager, to enable rapid market launches that will make Reya DEX more competitive, attracting more traders and trading fees for Stakers.
  3. A more even distribution across LM’s as below. We propose this takes place over time, as the TVL of the pool grows.
    1. The greater if 10% or 2m rUSD for trading / deposits / withdrawals
    2. 250k rUSD for a new “Hedging LM” proof-of-concept (explained below)
    3. 20% of the remaining in rAmber
    4. 20% of the remaining in rSelini
    5. 60% of the remaining in sdeUSD

Introducing srUSD

  • Reya Network has its own native stablecoin, rUSD. As of today this is 1:1 backed by USDC, providing confidence to traders whose trades settle in rUSD.
  • Users can stake rUSD into a pool of Network Liquidity. This Network Liquidity plays a central role, enabling deep, reliable trading across a variety of markets (AMM), as well as bringing pro-trading and order flow across from CEXs (RNIP1 and RNIP2).
  • Here we propose
    • Those positions are tokenised as srUSD (staked rUSD)
    • They are made non-transferable, to manage risk as the token is rolled out
    • They are placed into Stakers trading accounts, so they can be used as trading margin.
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  • The key question here is what risk does this introduce and how is that mitigated.
  • The use of srUSD as trading collateral potentially presents two types of risks:
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  • Solvency risk, on the other hand, is minimal, since the pool will never collateralize its own positions with srUSD, and much less mint new srUSD to make up any losses. Additionally, the capital used by the AMM is relatively low, and its returns uncorrelated with the other apportionments of Network Liquidity.
  • To understand the liquidity risk posed by srUSD, consider that it will ultimately need to be redeemed against rUSD to make up traders’ losses. This implies a net outflow of rUSD from the pool, and may strain its rUSD reserves because of the redemption times for the LM tokens.
  • To get quantitative range of estimates, we consider different proportions of srUSD usage (immediately liquidatable upon losses, to simplify analysis) and the corresponding proportion of the pool’s TVL at liquidity risk. The various lines represent the relative size of OI to TVL, and we have used a one-day VaR at 10% (to take into account redemption times). Obviously, not all scenarios (dots) are equally likely.
  • If we conservatively take the highest likelihood to be an srUSD usage of 20%-40%, with the middle OI/TVL ratios more likely that the tails, then we can assess the liquidity risk on a range of 2.5%-10%.
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  • Estimating price risk for srUSD based both on historical data, supplemented with hypothetical but plausible scenarios, we find that it is in a range of 0.5% - 2.5%.
  • As a result, when initially rolled out, we also propose that
    • srUSD has a haircut factor of 10% when used as trading margin;
    • further, the liquid rUSD balance of the pool remain above 10% or $2M, whatever is greatest.

Introducing a Hedging LM

  • Given the success of the LM proof-of-concepts with Amber and Selini, here we propose a new proof-of-concept that will allow for the rapid introduction of new trading pairs
  • To rapidly launch new markets, the pools exposure needs to be hedged. As a result, we propose $250k is allocated to a Liquidity Manager - either Amber, Selini or Keyrock (as a new partner) - via the existing Liquidity Manager structures. This partner would then be able to hedge any exposure the pool may pick up on new markets that are launched.
  • The impact of this will mean
    1. The pool won’t be exposed to excessive market movements
    2. Markets will be listed much faster - e.g. TRUMP would have gone live the day it was launched vs. 10 days later.
    3. Reya DEX will become increasingly competitive, attracting more users and more trading fees for rUSD Stakers

Updating the LM Allocations

  • We propose pool TVL is more evenly distributed across liquidity managers, to help with diversification of returns. We propose the following split
    • The greater if 10% or 2m rUSD for trading / deposits / withdrawals
    • 250k rUSD for a new “Hedging LM”
    • 20% of the remaining in rAmber
    • 20% of the remaining in rSelini
    • 60% of the remaining in sdeUSD
  • This diversification should further reduce drawdown risk, or any risk to deUSD depegging.
  • We propose this takes place over time as TVL grows.
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