🌊Liquidity Incentives
Background
Following a governance proposal, the DeXter contributor community voted in favour of introducing liquidity rewards as part of the token distribution. For full details of the proposal that was shared to the community, please see the following link:
The revised tokenomics can also be found here
Summary
20,000 DEXTR (20% of supply) is awarded to liquidity providers every fortnight.
16,000 DEXTR (80%) is awarded to any market or limit order which is executed (partially or fully).
4,000 DEXTR (20%) is awarded to "Active Liquidity" (see below for definitions).
Providing Liquidity
The importance of liquidity to an order book exchange cannot be overstated. The efficiency of trades and minimisation of price slippage are directly related to the liquidity and depth available. As a result, DeXter considers liquidity providers as "Liquidity Contributors", providing a valuable contribution to the success of the platform.
There are 2 ways in which a user can provide liquidity to the exchange:
Market Buy/Sell - Any order which is executed immediately at the best available price.
Limit Buy/Sell - Any order which is placed at a price away from the current market price.
As the order book allows an order to be placed at any price, we have to incentivise the providing of liquidity in a price range that stimulates trading activity. This is where the term "Active Liquidity" comes in.
Active Liquidity refers to an unfilled limit order which is placed at a price between the 10th and 90th percentile of all prices executed in the previous 2 week period.
For example, let's assume the DEXTR/XRD pair has traded within a price range of 1-4 XRD in the past fortnight. The majority of the prices paid however were within the range 2-3 XRD, with only a few trades at the extremes of the range. By filtering out the extremes, we incentivise liquidity to be applied closer to the mid price.
DeXter therefore only rewards liquidity which is considered "Active" as per the definition above. As we ultimately want to reward the facilitation of trades, rewards are weighted in favour of executed trades (80%), with the remainder being allocated to Active Liquidity providers (20%).
Calculation & Distribution
At the start of each nomination phase as described here, a snapshot of all trading activity is taken via the AlphaDEX API.
The snapshot details all of the trades executed and liquidity provided in the past 2 weeks.
In order to calculate the rewards, we first calculate all of the trades executed, which comprises both market orders and limit orders which are partially or wholly filled. 16,000 DEXTR are then allocated proportionally to these trades. In the case of market buys/sells, these rewards are allocated to the trade receipt NFT, and in the case of limit orders, are allocated to the account address which placed the trade.
For liquidity rewards, we first filter out any limit orders which do not fall into the category of "Active Liquidity" as defined above. We also filter out any orders which were placed within 2 days of the snapshot being taken. This is to prevent users placing liquidity just before the snapshot is taken to farm rewards. 4,000 DEXTR are then allocated proportionally to the remaining limit orders, proportional to their size.
Rewards are only calculated based on orders submitted within the previous 2 week period. This means that if a user places a limit order in week 1 which doesn't get filled until week 3, they would not be eligible for any liquidity rewards. This incentivises users to be more active with their liquidity and make alterations periodically to encourage trade.
All rewards calculated will be paid into a smart contract and claimed by the user using their NFT trade receipts and their account address. At the time of writing, the Scrypto smart contract is still in progress, so in the meantime all rewards are retained by the DeXter treasury until the smart contract and front end claims website are ready. In the interest of reducing the size of the smart contract on-ledger, rewards less than 1 DEXTR are not included in the calculation.
Each period, the liquidity rewards are calculated and summarised in the Google sheet below for transparency. The community is invited to Save a Copy and filter by their own addresses and order IDs to view their rewards.
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