SHD <> JKL Protocol Liquidity Match Proposal

General
1

Greetings Jackal community,

Today I wanted to carve out some time to talk about expanding JKL liquidity & accessibility in a way that does not involve any of the following:

  • An OTC
  • Emissions to open market participants

Protocol swaps / OTC deals (as are being leveraged by Manta) carry a unique risk as you are trusting the other protocol to not sell your token. Additionally, because you are swapping tokens you are essentially short your own protocol token.

Liquidity emissions are tough because tokens are given to 3rd party liquidity providers that are not as long term aligned as the protocols themselves.

I would propose the following alternative structure that involves both protocols working together to create deep liquidity without incentivizing 3rd parties & without swapping tokens with each other:

Jackal foundation brings $37.5k worth of JKL to ShadeSwap

ShadeDAO brings $37.5k worth of SHD to ShadeSwap

This $75k worth of value is merged into a SHD/JKL LP token

There is now $80k (already $5k of liquidity on the platform) worth of liquidity available for traders to interact with.

Key points:

The Jackal foundation would own ONLY the JKL portion of the liquidity token.

The ShadeDAO would own ONLY the SHD portion of the liquidity token.

If either community would like to withdraw their portion of the liquidity token, they would give the other community a 30 days heads up after which their portion of the LP token is returned to them.

Advantages:

  • Improved JKL liquidity / accessibility
  • No emissions to 3rd party LPs
  • No speculative risk of owning a 3rd partyā€™s token
  • No speculative risk of trusting a 3rd party to own a significant portion of your protocolā€™s token
  • The protocols are the only liquidity providers
  • Can withdraw at will

Risks:

  • Impermanence Loss, but only for the single sided portion of liquidity provided.

This is an interesting dynamic. If JKL decreases in value against SHD, JKL will have access to more JKL tokens if they decide to exit the liquidity match deal. If JKL increases in value against SHD then the Jackal protocol has tapped into the liquidity of SHD and appreciated in value which is a collective net win for Jackal.

ShadeSwap is an excellent venue for JKL as we are seeing quite a bit of DeFi success and traction:

We believe the trading community on Secret Network would massively benefit from being able to acquire JKL on the DEX. Additionally, with our Secret Ethereum campaign on the horizon there will be a variety of ETH users that will gain exposure to the JKL token.

About Shade Protocol

Shade Protocol has existed as a brand since 2021, with multiple product launches in the last two years. We believe private DeFi that is front-running resistant and metadata protective is the future of DeFi.

App: Shade App

Social: https://twitter.com/Shade_Protocol

Would love to get your feedback on this type of structure, as I truly do believe this is the most protocol aligned risk-averse approach to expanding liquidity.

Weā€™d love to put up a signaling proposal to see if the community would be in favor of this type of collaboration / initiative.

-Carter Woetzel (Shade Protocol Lead Researcher)

2

First and foremost, by comparison, this is a better deal than what Iā€™ve seen so far from Manta proposals.

I do have some more questions Iā€™d personally like clarity on before voting though.

  1. ā€œcan withdraw at willā€ and ā€œ30 day heads upā€ seem significantly conflicting.

Thatā€™s more than twice the unbonding period for something that should be immediate. Can they be withdrawn immediately or not?

  1. ā€œThere is already $5k liquidity in the pool.ā€

Why is there not more? If you want the liquidity why donā€™t you incentivize it higher? If Shade protocol earns taker fees, and this both enables that, and has single-directional TVL trading, Iā€™d like to see Shade offer more than just the opportunity for exposure. Part of emissions would be a great start, which are actively being used for other pools.

  1. ā€œImpermanen[t] Loss, but only for the single sided portion of liquidity providedā€

this actually makes impermanent loss FAR more significantā€¦ by a LOTā€¦ for whichever side appreciates comparatively. This is in essence a short against JKL, and long of SHD for JKL holders. This makes for odd incentives and potential gamified plays that are at the least worth understanding and mentioning.

  1. Where would these tokens come from?

Jackal Labs? Community Pool? Who would custody the funds? What duration would this be for? If indefinite, why not just do a token swap that has notably less risk?

Conclusion:

The structure of this deal seems to benefit Shade a lot at the expense of nullifying would-be opportunities for the JKL community and adding quite a few risks. The accessibility to privacy maxis is interesting, but the Secret Network community is certainly well familiar with Jackal already and hasnā€™t seemed interested enough to bootstrap this pool itself.

Iā€™m currently a ā€˜noā€™, but am definitely open to changing my answer as there ARE benefits, I just donā€™t yet see them outweighing the risks. Iā€™d prefer the agreement to include at least some of the following:

  1. Impermanent Loss protection for JKL

If JKL does well comparably, SHD should be owned by the JKL to make up for the single-sided loss of funds.

  1. Boosted APR

SHD incentives should be given to the pool that more than match what is earned by the SHD taker fee. If weā€™re going to assume risk to boost SHD revenue, make it boost ours.

  1. Sales support

Show that Shade Protocol is measurably growing the adoption of the Jackal protocol through sales and integrations. Earn commission, purchase storage and utilize it in your projects and for your community. Bring in more clients, and show that this partnership is as much for your desire to grow Jackal as it is for your desire to grow Shade TVL.

4 Likes
3

Is Shade Dex currently using Jackal for itā€™s storage needs? Will you guarantee IL protection for the $JKL? Will you provide a competitive APR on the pool to incentivize others to join the LP? Will you actively and aggressively market this pool for the visibility of both Shade and the Jackal protocols? Can you get your other partners onboard using Jackal for their storage needs?

If the answers to these questions are yes, you got my vote!

3 Likes
4

(1) Having talked to various partners on this type of deal, most protocols / traders / users typically like a slow wind down of liquidity - if the Jackal community wanted to decrease the length of heads up weā€™d be more than happy to modify to an instant withdraw.
(2) This is because a protocol liquidity match is significantly more cost efficient than pointing incentives at a pool as we are able to tap into the liquidity budget of the underlying protocols as opposed to needing to incentivize mercenary capital. In terms of taker fee, the fees on non-SHD incentivized pairs are 0.29% to LP, 0.01% to protocol such that in this scenario fees are distributed to both Jackal & Shade within the LP token based on the directional trades.
(3) Impermanence loss with respect to USD? Perhaps. In terms of nominal token amounts, JKL will either end with more JKL than it started with or less. If you end with more JKL that is a net positive for the protocol in the sense that you can pull JKL out of circulation. If you end with less JKL, it means the protocol appreciated in value and tapped SHD market capitalization (which is a net win).

From the protocol perspective, is this exercise in protocol liquidity matching about profit or is it about improving capital flows? I would argue that the value of capital inflows to Jackal from ShadeSwap will outpace any IL the protocol may experience and is the primary goal of the liquidity matching.

(4) As per the post, this would come from Jackal Labs. Duration is entirely up to each community, and why this versus a token swap? A token swap carries significantly more risk as you have direct exposure to holding the other protocolā€™s token instead of only having liquidity exposure.

Onwards to @ThePodocasts questions:

In terms of Shade DEX using JKL, I personally use the product and I know a lot of folks on the team definitely dabble. Always happy to help promote a Cosmos product & help promote Jackal. Consider us a solid reference. In terms of active salesmanship, Iā€™m personally stoked to see the referral program take off :slight_smile:

We are happy to provide the following:

  • Dedicated Twitter spaces covering JKL
  • Blog discussing synergies between SHD & JKL
  • Tweet thread on Jackal
  • Tweet thread promoting the pool / trading pair

In terms of incentivizing other LPs to join, the goal here is that no additional emissions need to be spent from either protocol. Instead, we count on teaming up using the capital base of both DAOs. If there is good volume on the pair, then additional incentives could be added to capitalize on the demand or LPs will organically chase the trading fees being created.

Finally, I want to address guaranteed IL protection. This fundamentally is unsustainable as there is an infinite amount of potential IL whenever you bring two volatile assets together. Many a DEX has dabbled with IL protection but this disappears the instant too much volatility comes into play.

-Carter W.

1 Like
5

Impermanent loss protection with limits is very doable. I wouldnā€™t expect more than the other side of liquidity provided. If you back the deal that if the JKL side loses JKL, then All of the SHD in the position is sold to cover losses up to the amount of SHD in the shared position, Iā€™m in. That doesnā€™t even add upside, just limits downside.

The argument about protecting both protocols from spending more in incentives isnā€™t very strong when only Shade is actively paying out liquidity incentives, and is the one getting the TVL. Basically coming out the gate and saying that you value this liquidity far less than everything that you are actively incentivizing.

I fail to see how this deal would be more than a risky favor.

6

Would this IL protection be bi-directional? If so, I think it would absolutely make sense to add it in as a clause.

We donā€™t value the liquidity less, volume is what determines the value of liquidity. By doing a protocol liquidity match this is a low risk method of establishing liquidity which helps establish volume without either protocol needing to take a large bet on emissions to mercenary capital to simply bring the liquidity. Why pay mercenary capital to bring capital when we have everything we need between JKL & the ShadeDAO to create a meaningful trading experience?

In terms of ā€œJKL isnā€™t spending emissionsā€ that is an excellent place for it to be in - it can continue a fiscal policy of no LP emissions while expanding liquidity by working with another asset such as $SHD.

As a whole, considering the fact the Shade has ~4,000 monthly active users, I believe you are underweighting the exposure Shade as a platform & the pool can give to JKL once there is more liquidity in the pool.

Appreciate your feedback and contributions on this thread +1

7

Hi there,

This is PM from MantaDAO. Interesting proposal, the structure offers a different risk profile from the token swaps we are usually offering and works well if the Jackal community is bullish on SHD relative to JKL.

Presenting it as less risky to what MantaDAO offers is a bit of a stretch though. You said ā€œNo speculative risk of owning a 3rd partyā€™s tokenā€ but that is incorrect, in a scenario where SHD were to experience a material decline in price relative to JKL, Jackal would end up losing a material share of its token due to IL (e.g. per xyk math, a 50% drop in SHD price relative to JKL would result in JKL losing ~30% of the token they contributed).

I also need to address this comment:

This is a moot point: sure there is always a (reciprocal) risk of one partner dumping the token of the other partner, but given the LP tokens are always half owned by each partner (in wallets they respectively controlled), in such scenario, the other partner could reciprocate and the effect of the sell would cancel out. Irrespective of that, we have been working hard to build up our reputation, we have proven to be trustworthy to all our partners, we operate with possibly the highest transparency across the Cosmos (see our monthly transparency reports) and would have a lot to lose by misbehaving this way.

I just wanted to set the record straight on those two points, but I love Shade (we even did a swap deal together) and I think the proposed structure is interesting and complement well what we are offering at MantaDAO. As a JKL holder myself (personally), I will be supportive of the proposed deal.

MantaDAO will also come to the Jackal community with a proposal once this one will have been voted. We believes the two proposal will complement each other well: the more we can all works towards building up sustainable liquidty a that donā€™t require any incentives, the better for Jackal and for JKL price.

2 Likes
8

Thanks for the Pragmatic, your points are well taken. Thanks for breaking down some of those details where I went astray.

Excite to see MNTA <> JKL potentially get established as well. To have JKL available on Osmosis, Kujira, Astrovault, and ShadeSwap is some awesome liquidity expansion for the token. The future is bright for Jackal :slight_smile:

2 Likes