BIP-42 v2: Liquidity Mining Extension and Transition to Protocol-Owned Liquidity

Ben

Summary

Extend Botto’s Liquidity Mining (LM) contract one year to October 2025 while pursuing long-term liquidity solutions such as OTC investments to raise funds earmarked for protocol-owned liquidity (PoL).

The goal is to pave the way toward sustainable $BOTTO liquidity while softening sell pressure from ongoing subsidies.

Rationale

Botto has no existing path to liquidity beyond the scheduled expiration of its LM contract in October 2024.

Botto pays _100k USD worth of $BOTTO per month to LPs (given a $BOTTO price of ₂₀ cents at the time of writing).

This proposal reduces the rate of rewards while creating time for the DAO to raise funds for PoL or pursue other long-term liquidity solutions.

PoL will remove the need to rent liquidity in the long run, which creates sell pressure and dilution for most $BOTTO stakeholders.

Context

Botto’s LM contract currently has ₅.3M $BOTTO remaining to be distributed in the next ₈.5 months, with 125k $BOTTO distributed per week.

The pool has ~$3M in liquidity in total, of which ₂₃.3% or $687k is protocol owned.

Renting liquidity is costly and unsustainable. Botto spends ~$25k per week in $BOTTO to LPs. This exceeds Botto’s current revenue.

This program creates sell pressure. For example, the pool’s largest LP recently market sold over 800k $BOTTO in 5 minutes. This LP is currently on pace to receive an additional ₁.2M $BOTTO in LM rewards in the next 9 months.

Botto has significantly higher DEX liquidity than most crypto projects around the same valuation. We reviewed the 50 tokens on Coingecko that have adjacent but higher market caps than Botto, so we’d expect them to have roughly similar but greater liquidity needs, all else equal. Only one of these tokens has higher DEX liquidity than Botto (and it’s a pair of mirror assets with significantly lower IL risk, so liquidity is less costly).

This suggests that Botto is paying for more liquidity than it needs. If $BOTTO trends up in price in the next 1-2 years, which many members of BottoDAO think is likely, this will increase Botto’s reward APY in USD terms. This will incentivize more liquidity into the pool, all else equal.

When Botto implemented its LM program, it had no ETH revenue or liquid treasury assets. Two years later, circumstances have changed. Botto now has a deep and growing treasury. It no longer makes sense to pay 125k BOTTO per week in exchange for short-term liquidity.

This proposal facilitates BottoDAO to pursue long-term, sustainable liquidity. Outside of raising funds earmarked for PoL, other potential solutions that may be pursued include:

Centralized exchange (CEX) listings
New incentive structures for LPs such as increased VP allocation
Using $BOTTO burn equivalent to build PoL

Proposal Specification

Botto’s LM contract is extended one year to October 2025.
In the interim, the BottoDAO pursues OTC investment(s) to raise funds earmarked for protocol-owned liquidity and/or other solutions to build long-term liquidity such as CEX listings.
BottoDAO may use up to 4M treasury $BOTTO for such OTC deals and/or other liquidity solutions. This is independent of the $BOTTO allocated for OTC in BIP-35.

Criteria of Success

Botto achieves long-term sustainable liquidity with most or all DEX liquidity protocol owned by October 2025, diminishing ongoing sell pressure and token dilution
A higher long-term price of $BOTTO as a result of the above, all else equal.

Risks

Possibly lower liquidity until either Botto builds more PoL or the price of $BOTTO rises, thus incentivizing more LPs to join the pool
BottoDAO seen negatively for changing on an earlier commitment to LPs

Mitigation

Working with LPs to win buy-in for this plan.
Show long-term thinking on token and reasonable adjustment to conditions.

choobie

I'm all for this. We should put a subsequent BIP up to build up PoL.

Ben This proposal facilitates BottoDAO to pursue long-term, sustainable liquidity. Outside of raising funds earmarked for PoL, other potential solutions that may be pursued include:

Centralized exchange (CEX) listings

New incentive structures for LPs such as increased VP allocation

Using $BOTTO burn equivalent to build PoL

Definitely! This is what we are actively looking at. The signal that this BIP should send is that we're looking at building out sustainable paths forward, and that this isn't just kicking the can down the road (I understand why this has come up). The LM Programme in terms of rewards is not sustainable in its current form. This is not to say upon contract ending that there won't be another iteration, just that we should align economic incentives with participants and the DAO better.

A simple example would be splitting the 50% voter rewards into two pots: one for governance stakers, and one for LP providers staked in the LM contract. LM stakers can receive a higher proportion of these rewards provided they vote. $394,000+- USD in rewards were distributed to participants in 2023. This can be feasibly directed more towards LM stakers directly (splitting the reward value and distributing proportionate to LP staked) or by proxy (receive more VP relative to your stake).

Couple this action with the DAO building its own PoL further (take the equivalent of what would have been burned, and match a percentage of it using a portion of the 50% Active Rewards), that would be in my opinion ideal. To crystallize this idea a little bit, imagine 10% of the active rewards is allocated directly into PoL with the BOTTO equivalent. Using the 2023 rewards value of $394k USD, we're looking at about $79k USD in added PoL. It's not a lot, but it's a concrete start.

Ben BottoDAO may use up to 4M treasury $BOTTO for such OTC deals and/or other liquidity solutions. This is independent of the $BOTTO allocated for OTC in BIP-35.

This is also a clear way in which we can build PoL significantly faster to remediate long term PoL concerns. It is subject to timeliness (token price is the obvious one), deal structure with OTC partner, and also state of other liquidity solutions (i.e. CEX listings).

It should be noted that discussions in the DAO are already ongoing on other ways to amplify PoL. For example, sync has recently proposed in Discord other ways to build PoL, i.e. 1) taking 10% of weekly revenue and matching it with BOTTO, and/or 2) generating ETH through special edition access passes, where the DAO pairs the ETH raised with the apportioned $BOTTO to PoL initiatives. I believe @thomahawk69 also mentioned ETH raises through the community at some stage as well, albeit in different form. I think there are a lot of ways in which we can activate PoL over time, and this BIP is the preliminary step forward.

I hope this is indicative of the direction I see us moving.

dencryptus

Thanks for putting up this BIP, Ben.

I hope this BIP can be approved. We can´t afford getting to to Oct. 2024 and abruptly discontinuing the LM program. Extending (and diluting) the LM program in time (again) was never ideal, but it's the simplest and smoother solution at hand. Factually cutting the monthly rewards will also give us some insights.

I would add "increased volatility" to the risks section, as a risk that follows from "lower liquidity", meaning that buys and sales will (likely) have larger impacts on prices. Not everyone might be fully aware of this, and it´s intellectually honest that the DAO makes it as explicit as possible.

Not fully aware of all the pros and cons of getting more CEX listings, but might be worth exploring. If someone is more knowledgeable, please share.

Also, perhaps, we could consider establishing a threshold for considering/activating those incentive structures (e.g.: granting additional VPs if liquidity falls under, say, 50% the current size). Let´s, at least, plot a target that will prompt us to take some action should it become necessary.

hudsonsims

dencryptus

we are exploring CEX listings, which can help mitigate the liquidity needs while still pursuing PoL for long-term DEX sustainability. main consideration is that CEX listings can be very expensive, so we are looking for ways to develop low-cost partnerships which can be in part-achieved through a strategic OTC.

re: vp for LPs, i think this is an useful approach and am exploring some options here with the devs for a BIP that will propose revising the VP generation method.

Ben

dencryptus Also, perhaps, we could consider establishing a threshold for considering/activating those incentive structures (e.g.: granting additional VPs if liquidity falls under, say, 50% the current size)

I'd sooner increase $BOTTO subsidies at that point than tweak around VP generation. My guess is the largest LP doesn't even use their VP. While there are pros and cons of the current active reward structure, one downside is that it incentivizes large holders to vote and use all their VP even if they lack any real preference/conviction/taste or time to review fragments. This issue would be amplified in the case of mercenary LPs. It would also effectively dilute ownership for most token holders, similar to increasing $BOTTO subsidies.

dencryptus I would add "increased volatility" to the risks section, as a risk that follows from "lower liquidity", meaning that buys and sales will (likely) have larger impacts on prices. Not everyone might be fully aware of this, and it´s intellectually honest that the DAO makes it as explicit as possible.

I see this as a potential downstream effect of lower liquidity. There are multiple consequences of lower liquidity, and this is not necessarily the most significant. So I think just mentioning lower liquidity here suffices.

hudsonsims we are exploring CEX listings, which can help mitigate the liquidity needs while still pursuing PoL for long-term DEX sustainability. main consideration is that CEX listings can be very expensive, so we are looking for ways to develop low-cost partnerships which can be in part-achieved through a strategic OTC.

CEXes will help with access, but I'm not sure they would help much with increasing liquidity for large holders. One option to address that would be to facilitate OTC between BottoDAO and whales looking to build large positions. This could be a win-win: BottoDAO receives liquid assets, whale receives better price than open market. Pros and cons to this approach.

dencryptus

Ben There are multiple consequences of lower liquidity, and this is not necessarily the most significant. So I think just mentioning lower liquidity here suffices

IA potential downstream effect of inhaling a virus is infection. You do care about the practical consequences, not about whether the virus overcame the nasal barriers, escaped the innate defenses, started replicating itself or any other intermediate "in-some-way-more-or-less-significant" link of the chain.

Some of the main consequential problems of lower liquidity have been thoroughly explored in discord, and imo deserve some place here. Among them are: increased downwards (but also upwards) volatility, impaired/artificial price discovery (it´d be easier to manipulate the price, and thus there might be an increased incentive to do so and profit out of it), crowding out effect on large purchasers (who might have to join through OTC deals only), speculative behavior (you for instance said you would take the opportunity to accumulate more), shitcoining signaling...and ultimately, eventually (and yes, this would be a downstream one), damage to the project. These are the main risks I can come up with, but feel free to add/list any other one that you consider probabilistically or materially relevant.

Ben

dencryptus speculative behavior (you for instance said you would take the opportunity to accumulate more),

How is people wanting to buy more $BOTTO because of improved economics a risk? It sounds like a good thing to me.

dencryptus

Ben How is people wanting to buy more $BOTTO because of improved economics a risk?

I will assume that you misread me. The risk is that people start to believe that the token can be pumped and dumped for a profit. You know: good fishing in troubled waters. It´s such a powerful temptation that you (candidly, which honors you) almost dare to wish a dump. Pepe put it more succinctly a few months ago in discord: the risk of enshittinning the token

thomahawk69

Fully supportive of this BIP - thanks for putting it together Ben and resurfacing the discussion.

My only comments re: the proposal specifications as you listed:
1) Supportive
2) Not sure if this call out is necessary - but yes, another OTC investment would be great
3) Instead of using another chunk of the Treasury - can we use our existing ETH (and new ETH from sales) and a small amt of BOTTO towards PoL? This would mean, we slowly build up our PoL over the next 2 years (follows the same extension till Oct 2025). Yes, this would mean we tinker with our existing rewards. For example, for every week, 25% of the rewards will go towards PoL. So if a given week, Botto makes 6 ETH, 3 ETH will go to the DAO Treasury, 2.25 ETH will go to holders/stakers and 0.75 ETH (+ some BOTTO) will go to PoL.

As for CEX - to be listed, BOTTO needs to have demand - the current # of txn and volume is too low/small for any market maker - and without a market maker to provide liquidity depth. listing on a CEX is almost impossible.

My vote is to extend and try to restructure the rewards payout to fund PoL over time - instead of doing an OTC deal immediately. But I guess it doesn't hurt to have #3 listed in the proposal for optionality since it's a soft request and not a firm commitment.

Ben

thomahawk69 Thanks for the input and support. I think the ideas you shared would be something to look at for a subsequent BIP. Want to keep this one max simple to hopefully get it through asap.

Ben

dencryptus I said that if the token sold off on what I believe is a long-term positive catalyst, I would take the opportunity to buy more. That has nothing to do with pumping and dumping. I'm a long-term holder.

zoku

I fully support this bip. Thanks Ben for making it clear and simple so we can all understand it.

I think it's good to keep it simple to speed up its implementation since it is a matter of high need. In the future, I would like to see the Carbon Bip work in line with this issue. What if we dedicated the profits from Botto staking to providing liquidity? The difference will be slight but I think it gives consistency and coherence to the structures.