PSP-IPΔXX: PSP Liquidity Balancing Strategy
PSP Liquidity, Balancer
To migrate liquidity from the outdated Bancor pools and add new liquidity onto UniSwap V3 to balance the sePSP2 skewed pool liquidity.
Context and Goals
The proposal seeks to address two issues that the redactor has noticed from the current liquidity situation of PSP: The skewed liquidity depth, and Bancor V2 liquidity. To best approach the issues and solutions required, this proposal can be roughly divided in two sections:
1. Skewed Liquidity Depth
Since the release of PSP 2.0, liquidity for PSP on Ethereum has seen a significant boost thanks to the sePSP2 token. Its TVL has grown by ~650% from a value of $1M USD to $6.5M USD. This has allowed for a significant amount of new stakers being able to participate in the ecosystem and reduced the pressure for other sources of liquidity provision, such as liquidity mining, which were leading to unsustainable mercenary liquidity.
To reduce the amount of potential impermanent loss experienced by sePSP2 stakers, the DAO opted for sePSP2 to be composed of a balancer pool token (BPT) made of 80% PSP and 20% ETH. However, while this has led to stakers experiencing more exposure to PSP and reduced IL, the dominance of the Balancer Pool has led to a very skewed liquidity depth. Seen below is an example of the consequence of this: while a 20 ETH > PSP tx only has a 1.7% impact, the opposite scenario has a 10% impact.
To mitigate this imbalance, a skewed pool is going to be needed aimed at providing liquidity on the PSP > ETH side.
2. PSP <> BNT liquidity
Currently, around 1.5 Million PSP is parked on Bancor V2. This version of the protocol is currently deprecated, and for this reason, this proposal seeks to also withdraw this PSP and place it into the newly proposed solutions for liquidity described in the next section.
Means and Metrics
To resolve the aforementioned issues, the proposal suggests for the following actions to be taken:
- Unstaking of the PSP on Bancor - this unstaked PSP will be used as a source of liquidity in the new liquidity positions being opened. In total, there are approx. 1.5 M PSP staked in Bancor V2.
- Creation of a 1% fee PSP / USDC Uniswap V3 position -
- For the first liquidity proposal, we propose to deploy 10M PSP ranging from spot price from a +5% of the time of management to ~ $0.5 PSP.
- Creation of a 1% fee 20% PSP / 80% ETH Uniswap V3 position
- For this first ETH liquidity position, we propose a 15 ETH deployment from the DAO treasury, with additional ETH being deployed if this liquidity position is found to be effective. We find this amount to be a good stating amount, as it constitutes a significant position while not being a significant amount of the DAO treasury (less than 30%). The remaining PSP will be dependent on the price ratio at the time of the opening of the position.
- Permission for the Governance committee to manage the positions as needed as long as they are within range.
- Fee claiming can be done without communicating, and will be part of the DAO treasury automatically.
- If necessary, position adjustment can be done by GovCo, but a clear communication will be needed following the potential alteration of a position
- Finally, if the Governance Committee deems it necessary, an active liquidity manager could be appointed in the future to maximise the capital efficiency. Depending on the demands of the manager and the budget required for this, this last part would have to be discussed through govenance channels first.
The easiest way to measure the growth of this proposal is by assessing the liquidity depth of PSP after the implementation of all pools.
This proposal was written with the current price and liquidity of PSP in mind. In the future, some of these positions might become out of range and might need to be either re-assessed or funded with additional treasury funds.
It is also important to note that , due to the nature of sePSP2, if we see a significant growth of amounts staked in sePSP2 the aforementioned proposal might not be enough , and the divergence between upwards and downwards liquidity could re-emerge.