SCP-187 Change the FOX burn to a FOX/ETH LP burn in rFOX

Proposal Discussion
1

Summary

This proposal seeks to innovate the use of RUNE fees previously allocated for direct conversion and burning of FOX tokens, building on the strategic framework established by SCP-166. Recognizing the limitations of merely reducing the token supply through burning, we propose a more dynamic approach: utilizing these funds to equally purchase FOX and ETH on the Ethereum mainnet, subsequently creating FOX/ETH liquidity provider (LP) tokens, and permanently locking these tokens by burning them. This method is designed to significantly enhance the liquidity pool’s depth and stability, directly contributing to the stabilization of FOX token value on the Ethereum mainnet.

Motivation

SCP-166 marked a landmark step in shifting FOX tokenomics by directing a portion of RUNE fees towards the purchase and burning of FOX tokens. While effective to a certain extent, direct burning alone does not address the underlying market needs for sustained liquidity and price stability.

The direct conversion and burning of FOX tokens is inferior to the LP and burning of LP tokens, as LP tokens permanently existing better contributes to FOX token’s health, such as liquidity depth and resistance to price shocks. By pivoting towards creating and burning FOX/ETH LP tokens with the allocated RUNE fees, we introduce a robust mechanism that not only tightens supply but also secures a stronger liquidity foundation.

Creating LP tokens and subsequently burning them translates into a direct investment in the market’s infrastructure. This strategy enhances the token’s usability by ensuring there are sufficient liquidity pools that can handle larger transactions without significant price impacts, thereby reducing slippage and making the market more attractive to both small and large investors. Moreover, permanently locking away liquidity in the form of burned LP tokens removes the risk of these funds being withdrawn suddenly, which can lead to liquidity crunches and increased volatility.

In essence, this approach not only aims to maintain a stable trading environment but also fosters confidence among holders, ensuring the FOX ecosystem is resilient against market adversities and attractive for new market participants. By enhancing the liquidity pool’s stability and depth, we safeguard against drastic price fluctuations and provide a steady platform for the FOX token’s growth on the Ethereum mainnet.

Specification

  • Re-allocation of Funds:
    • Half of the RUNE fee allocation designated for FOX burning will now be used to purchase FOX and ETH on the Ethereum mainnet.
    • These assets will be paired to create FOX/ETH LP tokens.
  • Action Plan:
    • Convert the designated portion of RUNE fees into FOX and ETH on a monthly basis on the Ethereum mainnet.
    • Use the purchased FOX and ETH to create FOX/ETH LP tokens.
    • Permanently lock these LP tokens by burning them, effectively removing them from circulation.

Key Performance Indicators (KPIs)

  1. Market Liquidity Enhancement on Mainnet:
  • Goal: Significantly increase the liquidity depth in FOX/ETH pools on the Ethereum mainnet.
  • Measurement: Monitor the monthly percentage increase in total value locked within these pools.
  1. Price Stability Index (PSI) on Mainnet:
  • Goal: Enhance the PSI by ensuring a more stable price environment for FOX through increased liquidity on the Ethereum mainnet.
  • Measurement: Track the PSI monthly to assess reductions in price volatility.
  1. Slippage Reduction on Mainnet:
  • Goal: Lower slippage rates for significant trades on the Ethereum mainnet to enhance trade efficiency and market confidence.
  • Measurement: Evaluate slippage for trades of $1,000, $10,000, and $20,000, maintaining it below target thresholds.

Benefits

  • Enhanced Liquidity on Mainnet: Creates a more robust liquidity foundation on Ethereum, buffering the market against large withdrawals that could impact FOX prices.
  • Improved Market Stability: Greater liquidity leads to reduced price volatility, providing a stable trading environment on the Ethereum mainnet.

Risks and Considerations

  • Market Risks: Price fluctuations of ETH and FOX on the Ethereum mainnet could influence the effectiveness of the strategy.
  • Operational Complexity: The execution of purchases and the creation of LP tokens require careful management.

Conclusion

By strategically reallocating RUNE fees to create and burn FOX/ETH LP tokens on the Ethereum mainnet, this proposal aims to provide a more sustainable and impactful liquidity provision strategy, supporting the long-term stability and growth of the FOX ecosystem.

Vote

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1 Like
2

Snapshot Ideation

1 Like
3

I am conflicted on this proposal, I think it is a cool idea that may be worth experimenting with and also adds further PoL that can never be removed as the LP tokens get burned but I am not necessarily convinced that the current burn function has gotten a fair chance to succeed (there have only been 2 burns so far) or that what is proposed here would actually be more efficient than just buying and burning FOX as rFOX currently does.

Is the buying and burning of FOX actually inferior to the adding of LP tokens and burning those tokens? I am not sure about that and/or I would want to understand more what backs that argument.

From my perspective when the DAO buys and burns FOX, that is actually a highly efficient way to add liquidity to the current pool(s). In a given example if $1000 worth of ETH is used to buy and burn FOX, $1000 worth of ETH has been added to the pool (which also adds some ETH to the DAO’s current PoL position) and the FOX is burned and never able to come back on the market.

In the buy and burn LP token example $500 worth of ETH is bought and $500 worth of FOX is bought and then added to the liquidity pool as LP, then the LP tokens are burned. This means net less ETH is actually added to the liquidity pool than in the burn example and that FOX may very well come back on the market as it gets bought and sold from the pool. It does have the nice effect of increasing liquidity some on both sides, but I don’t see how its necessarily superior to the buy and burn method given all this when I think the main challenge is always getting enough ETH into the pool, adding enough FOX is not usually the problem.

So this part isn’t entirely clear to me, is the proposal that half of the burn bucket is allocated to this or the entire burn bucket converted to this? If its half or whatever the intention is it would be good to probably be clear about what % of rFOX buckets is going where in regards to this as proposed (so if it was half of the current 25% it would be 12.5% each).

I might like the idea of trying this with half of the bucket for whatever its worth (but still maintaining some burn) then they could be compared side by side for a few epochs, but either way some clarity around this portion would be helpful. If this is the intention, it may make most sense to just create the “buy, add LP, burn LP tokens” as a new bucket which can be allocated to.

4

the 12.5% /12.5% option i think? there was alot of diff setups. so maybe on of those?

(course, i liked the no burn…)

i dont know if its better for the burn rate… but maybe it increases the lp Pool some…

there so many diff ways to look at this.
I am hoping the dfc did alot of modeling.

I just …dont know.