Terrible timing to incentivize stable pairs

A little background. my main participation in Defi has been speculation on Defi tokens, liquidity provision for stable swap amms and most profitably arbitrage.

I have left my participation in blockzero on the back burner over the past few months as my focus has been turned to other projects, so it seems I’m too late but none the less since a search of the forums had produced no result for my concerns having previously voiced I’ll still make this post.

By incentivizing XIO for stable pairs you create arbitrage opportunity across the pools, this is fine and is part of the Defi ecosystem for price discovery. however unless you believe that this current bull market has come to an end and we are about to endure another crypto winter this is the worst possible timing for such a measure.

By creating a pair with multiple stable coins, at the bottom of the market for Ether you have ensured that XIO will fail to track with recovery. Defi is still a zero sum game, if Eth increases in value, the value of xio in the xio/eth lp increases, meanwhile the value of xio in xio/dai remains the same. by purchasing xio in the dai pair and selling to the eth pair I bring these into equilibrium and pocket a profit. My profit comes directly from the capital invested in XIO as generated by the vol in ETH.

this is actually good for projects because it stabilizes price however, this measure should have been introduced at 4k eth to reduce down side not now. by introducing incentivized stable pairs at the bottom of the market you have retarded XIO ability to recover in price. To apply game theory to this problem a step further should there be no fundamental drivers for xio price in coming months the inflationary nature of the tokenomics compounded by likely poor performance vs eth will reflect poorly on technicals further driving away speculative capital.

this is a bad move.

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Further, by creating multiple pools for multiple stable pairs. you have created deeper liquidity for tracking of the stable pair, and multiple pools to diffuse slippage on the sell pressure on XIO. this means that arbitrage participants will be able to tolerate larger slippage from the xio/eth pair, creating even higher sell pressure. You’ve even increased the efficiency of such practices by circumnavigating stable swap amms for us so as we don’t have to pay fees to exchange any usdc owned to take advantage of the dai pool.

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Hey @andro91 ,
thanks for voicing your concerns here. I am not sure I do fully understand.

As I read it your main concern is that attracting people into a XIO / StableCoin pair would loosen XIO’s from ETH’s price movement. Because you expect ETH price to appreciate from where we are at the moment that would mean that XIO cannot profit from a higher ETH price as it could otherwise.

The actual question seems to be how ETH will move in the future. That’s something we obviously don’t know.

Or have I missed some argument you make?

XIO net holders did not increase overly dramatically over the period of December to May. so the biggest impact for price in dollar terms over this period is due to XIO being tied to ETH price.

I understand that the statement that Ethereum will appreciate in value over the next 6months is probabilistic not deterministic but the risk to reward sits firmly in the upside. Is XIO with a marketcap of 5million robust enough to not take advantage of the potentially upside? well. No.

btw this process works in the counter, but with less efficiency but still with a negative gradient for the medium of transfer.

that is to say should ethereum go down in value, there by decreasing the value of XIO in the ethereum pool I can buy from the XIO/eth pair and sell to the xio/usdc pair and pocket the change.

by incentivizing multiple pools you create MEV for arbitrage bot operators like myself to extract value from the market cap of your token.

I’m not saying arbitrage is evil and I’m not saying its not something that should not be considered ever. Incentivizing stable pairs vastly increases liquidity as investors are more likely to risk their usdc against a micro cap coin than their ETH . however at 5m market cap block zero is simply not robust enough of a project yet to be able to handle the sell pressure that is created by such pairings.

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Thanks again. These are some valid points you bring forward. For the time being the addition of the two stable coin pools to the program aims at increasing overall liquidity. Therefore it is currently not planned to allow the actual migration from one pool to another without loosing a achieved multiplier. Once the overall market situation can be assessed differently we might allow people to also move their liquidity. (If that makes sense?).

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the issue isn’t with liquidity providers moving their lp, although the Ether pair becoming more illiquid while the stable pair is more liquid would compound the issue as thats how liquidity pools work, deeper depth in a pool allows for higher volume tolerance before slippage, which means a higher price impact can be tolerated by the arbitrage bot on the Ether pair and remain profitable - which was my point about incentivizing multiple stable coin pairs being a bad idea.

the issue is with creating extractable value from your token for arbitrage bot owners, like myself.

I’m sure there are factors I’m not privy too and able to consider here, and I don’t expect blockzero to implement any changes based on my recommendation although I would support the cancelling of this program if it was put to the vote.

As someone, who has a strong understanding of how arbitrage bots work, and their impact on defi as I fund these myself I thought it was prudent to voice these concerns with Blockzero incase they had not been considered.
Most Defi users don’t even know that front running their Tx, sandwich bots pushing their slippage and arbitrage bots slowly leaching $ out of token pairs exist.

a small caveat these practices can have a net positive effect on a token, if the bot is ordered to accumulate the token instead of $. I rarely see this happening.

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That makes sense. While we can’t control what pools people create nor where they add liquidity offering liquidity mining incentive does encourage people to an extend to add to additional pools.

I assume the arbitrage issue you are describing is not limited to stable coin pools but extends to any two pools that don’t correlate thus offering arbitrage opportunity. If so, would you advise to strictly limit incentives to one pool only?

So I think things get a little more complex here, yes having more none stable pairs for XIO does create more arbitrage opportunities as to say there are more pools, but for example, looking into the future. When XIO becomes more of what it aspires to be - a native token for an ecosystem of projects to trade against. The question of the Net trajectory becomes important, as ecosystems and crypto in general tend to move together having multiple volatile assets paired with XIO may present more opportunities for arb as there are more pools. But if the coefficient of the paired assets i,e how corelated $flash is to ETH is strong, the majority of the volume would still be against the stable pairs. You’ve decreased the problem by increasing liquidity depth in the volatile pairs relevant to the stable pairs (the volatile side now tolerates more volume before slippage which increases the affinity of xio price to the volatile assets).
Also on this note, the majority of these bots are very primitive, I’ve seen sandwich bots inflict $6k slippage to profit $80. So its just easier for users to set these up on XIO/ETH vs XIO/usdt instead of trying to rewrite logic for XIO/ETH XIO/link.

stable coin pairs basically guarantee IL and that basically guarantees divergence in pool values which means a lot more of these rebalancing events by arb bots.

I would actually suggest (and this is painted with my own market bias) that this would be the perfect time to incentivize none stable pairings with XIO.

As always liquidity depth is what matters.

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Mhmm, this is really an important topic that I would love to understand in more detail. I just remembered reading an interesting article almost a year ago describing the draining of value by “vampire bots”. This is due to uniswap v2 having predefined routing pairs for doing token swaps. The recommendation back then was to move back to uniswap v1 with only ETH as pair.

I’ll drop you the link here. They even recommend communities to build their own bots (fork theirs) to counter what is happening.

This makes me wonder if your above advise to incentivize non stable pairings would be limited to the 6 tokens mentioned in the article only or if you’d extend that to any other pair anyways?

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Really appreciate this discussion. Thank you very much.

In short, No I wouldn’t recommend we only pair with those tokens as the routing issues with uniswap had been long fixed.

I would however recommend that blockzero run their own arbitrage bots. this would involve approaching a miner for dedicated services to remain competitive with the rest of the bots there are two reasons why I would recommend such a measure.

Arbitrage bots can be set to accumulate stable coins or to accumulate the native token, I refer to this as the medium of transfer. If the bot purchases XIO at a discount from the XIO/dai pool to sell at a premium to the XIO/ETH pool the owner of the arbitrage bot can choose to sell all the XIO and pocket the remaining dai OR it can chose to sell the amount of XIO required to cover its initial capital, gas and the miners cut and hodl the remaining XIO. Such a strategy has a net positive impact on the price of the token that is being used as a medium of transfer

blockzero has no need for such a bot to be profitable, this gives blockzero the ability to arbitrage on a lower margin giving us a competitive edge against 3rd party owned bots but should such a feature be profitable the xio held by the bot could be repurposed for use elsewhere within blockzero

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Hey @andro91

you really seem to have good knowledge and understanding in the field. How would you feel about helping set up such an arbitrage bot system as you describe it for blockzero?

If that’s something you’d feel comfortable working with blockzero on please drop me a dm so we can explore further.

cheers

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