Summary
This proposed Incentive Alignment proposal aims to adjust the fee to emission ratio used in the Astroport Incentive Framework on outposts where passive concentrated liquidity pools (PCL) have been deployed.
Comparing XYK to PCL
Passive concentrated liquidity is a concept introduced by Curve in its V2 model. It is a way for liquidity providers (LPs) to participate in a concentrated liquidity pool without actively managing their price ranges. This approach reduces the management complexity typically associated with concentrated liquidity and allows for a more hands-off experience for LPs. See a more detailed explanation on PCL here.
PCL is significantly more capital efficient than its constant product counterpart. We estimate that this addition to the Astroport protocol is about 3-4 times more efficient than XYK, making it the ideal place for anyone to bootstrap liquidity in Cosmos.
The chart above shows that for typical trade sizes PCL has far less slippage (and thus gives better execution) than XYK given the same liquidity depth. In fact even at 25% of the liquidity depth PCL still gives better execution than XYK for typical trade sizes.
The table above takes two Astroport pools and compares the slippage at various trade sizes.
Astroport is overpaying for liquidity
As outlined in the original incentive framework, Astroport is paying out $10 in incentives for every $1 in fees it captures. This figure at the time was based on a comparison of this ratio across other AMMs and reflects the importance of liquidity depth for XYK pools.
However as shown in the section above, the introduction of PCL enables Astroport to give the same or better execution than XYK even at significantly decreased liquidity depth.
Thus we are proposing that the currently high ratio of fees to incentives of 10:1 should be reduced significantly to reflect the decreased importance of liquidity depth to Astroport. The effect of this would be far less ASTRO being released - ASTRO that can be preserved for potential future incentive programmes.
Incentive reduction
This proposal recommends that incentives be reduced for outposts on which PCL has been deployed by 75% - that is to adjust the ratio from 0.1 to 0.4. This change is in line with the efficiency gains brought by PCL.
If this proposal passes the change would apply immediately to Terra mainnet as the first and currently only outpost to have PCL. Once the Astral Assembly votes to deploy PCL on other outposts, the reduction would be applied there too.
Proposal Timeline
We welcome any input from the Astroport community regarding this proposal. In roughly 7 days from now, we plan to put this proposal up for vote in the Astral Assembly.
Copyright
Copyright and related rights waived via CC0.