Liquidity DAO โ€“ย Organic Market Making
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Liquidity DAO โ€“ย Organic Market Making

By Michael Feng ๐Ÿค–

The ONE Liquidity DAO ("Liquidity DAO") is an open collective that exists as both an arm of the Harmony Protocol ecosystem, as well as a wing of the open source Hummingbot Foundation.

It is an experimental, independent organization comprised of members from both the Hummingbot and Harmony communities that will promote liquidity on the Harmony Protocol and for the ONE token by leveraging the open source Hummingbot codebase and its community of liquidity providers.

Core Values

Connectivity: improve market efficiency by integrating across exchanges, bridges, pools

Organic liquidity arises from seamless pathways that connect pools of capital wherever they may be (centralized exchange, DEX, blockchain, fiat account, etc) to one another, along with well-documented APIs and tooling that enables liquidity providers to confidently deploy millions of dollars of value across those pathways.

The DAO will fund initiatives that build the liquidity infrastructure for the Harmony blockchain and the ONE token.

Transparency: open-source connectors & strategies with public metrics & analytics

In traditional finance, information about liquidity is extremely opaque, with hedge funds who tightly guard their algorithms, no way for average users to access exchange order books, and a dearth of publicly available liquidity data.

The DAO takes the opposite approach: it will conduct research in public to assess how to measure liquidity for the ONE token, publish liquidity metrics about the Harmony blockchain, and open source formerly black-box liquidity provision algorithms.

Alignment: balance slippage for traders, fees for makers, vs risk for holders

A liquidity ecosystem can be viewed as a multi-sided market, in which each stakeholder (traders, market makers, holders, exchanges, protocols, developers) plays a part in driving liquidity but also depends on one another. In order for an ecosystem to grow optimally, there should be incentives for each stakeholder to continue investing time and capital, along with disincentives that prevent them from over-extracting rents and diminishing overall system growth.

The DAO will organize campaigns that balance incentives between the stakeholders in the Harmony liquidity ecosystem.

Mandates

1. Promote liquidity on the Harmony blockchain

The maturation of decentralized finance has caused a Cambrian explosion of transaction activity across different blockchains. While Harmony's speed and scalability allows it to be an cross-chain aggregator that bridges multiple chains, achieving organic DeFi liquidity presents a massive chicken-and-egg problem, since a critical mass of venues, liquidity providers, and traders are all needed for transaction volume to grow organically.

Traders need high-quality exchange venues with deep liquidity in order to participate, while liquidity providers need well-documented exchange APIs along with tooling that enables them to interact with those APIs programmatically, but they also need organic taker volume in order to sustain providing liquidity.

To address this problem, Liquidity DAO will coordinate bounties, hackathons, and other programs to promote liquidity provider adoption and transaction volume on the Harmony blockchain. The programs will incentivize developers to build Hummingbot connectors and trading bot strategies for DEXs, bridges, and other DeFi applications on Harmony.

2. Decentralize liquidity provision for the ONE token

While liquidity is important for all tokens, there doesn't yet exist a market standard for how to measure liquidity for one token versus another. This has led to an opaque market for liquidity in which token projects feel compelled to hire market makers, often shadowy crypto hedge funds, to provide liquidity for their tokens in exchange for hefty fees.

In addition, projects have no way to independently verify how much liquidity was provided, while market makers who have access to a significant portion of a token's free float could manipulate the market. The lack of transparency and information asymmetry has allowed large hedge funds to realize tremendous profits, at the expense of both traders and token projects.

Liquidity DAO will take an open, transparent approach to measuring and promoting liquidity for the ONE token. It will incentive developers to build applications that report liquidity metrics related to ONE and other tokens across various centralized and decentralized exchanges. Afterwards, it will organize liquidity mining campaigns on both centralized and decentralized exchanges to drive those liquidity metrics in an open, transparent manner.

Activities

  • Connector bounties: Bounties that reward contributors for building standardized integrations to exchange, lending, asset management, and other DeFi protocols on Harmony, in order for those venues to be programmatically accessed via Hummingbot strategies
  • Application bounties: Bounties that reward community members for creating applications such as front-ends or data services related to Harmony or ONE token liquidity
  • Research grants: Grants that rewards community members for publishing research into liquidity-related topics, such as new theoretical approaches to measure token liquidity in a multi-chain world, or optimal liquidity provision strategies based on academic research.
  • Strategy hackathons: Hackathons that incentivize community members to create and submit trading bot strategies tailored for the unique properties of Harmony Protocol and its dApps, i.e. DEX arbitrage, DEX liquidity provision, DEX liquidation, flash lending, cross-chain bridges, NFT arbitrage, NFT liquidity provision, etc.
  • Liquidity mining campaigns: Campaigns that reward community members for providing liquidity to the ONE token on both centralized or decentralized exchanges

Metrics

  • Transaction volume on Harmony Protocol powered by Hummingbot
  • Trade volume on Harmony-based DEXs powered by Hummingbot
  • Number of unique contributors to bounties and hackathons
  • ONE liquidity metrics: slippage, order book depth, TVL (to be defined and published by Liquidity DAO)

Governance & Funding

  • As a Decentralized Autonomous Organization, Liquidity DAO is independentย of both the Harmony Foundation and the Hummingbot Foundation and will be governed by its members
  • Hummingbot and Harmony will appoint [9] initial members of their respective communities to act as initial governors.
  • Harmony commits $500K initial funding for 2022 (as part of total $2M commitment over 4 years) to a Gnosis SAFE multisig held by the governors
  • In addition to the initial funds provided by Harmony, Liquidity DAO may also receive funding from the Hummingbot Foundation for projects that benefit the Hummingbot ecosystem as a whole

Liquidity DAO + Hummingbot Foundation

  • Liquidity DAO has independent authority to decide what programs to create and how to allocate its funds
  • For programs that result in work submitted the Hummingbot codebase, the resulting pull requests need to pass through the HBOT token governance process in order to be merged and included in an official release
  • This bifurcation enables both DAOs to collaborate while retaining independence of decision making

Deliverables & Budget

From Harmony's DAO Guidelines:

Governors of each DAO have delegated autonomy over its assets and initiatives. Harmony helps define 3 broad mandates, recruit 9 governors, define the deliverables and metrics for the first 3 months, and fund at maximum $1M. We recommend $75 to $350 per hour as the self-assessed salary, 3-month election terms, retroactive peer bonus and performance feedback, 80% passing votes, and openly tracking timesheets and deliverables for each member.

2022 Plan

CategoryQuantityAverage per ItemTotal budget
Connector bounties
4
$10,000.00
NaN
Application bounties
2
$30,000.00
NaN
Research bounties
2
$25,000.00
NaN
Strategy hackathons
1
$50,000.00
NaN
Liquidity mining campaigns
1
$100,000.00
NaN
Governor compensation
1
$200,000.00
NaN

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Interoperability with On-Chain Bridges and Wallets
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