After some more careful thought, I have a proposal for the implementation of locked assets managed by graviton.one.
The idea is focused on the creation of boosted pool tokens (BPT) alongside normal pool tokens (PT) as liquidity is locked.
To exemplify, let’s focus on boosting locked liquidity on staked GTON. The assets of a holder could be compartmentalized as follows, where both locked and non-locked assets are being held. For the sake of simplicity, let’s assume pool tokens do not auto-compound.
In this example, locking liquidity for 1 year creates additional pool tokens (i.e. BPTs) that double the share of the liquidity in the staked pool.
For this example, I work with an APY multiplier that is linear with the locking time, and reaches 100% when locking assets for 365 days. As such, the APY multiplier is calculated as
APY mult. = lock time * 100 / 365 in this example. Other options such as exponential curves that model this relationship might be desirable, as they would further boost longer locking times.
Arne does not want to be tempted into trading his tokens and locks 100 GTON away for one year. Staking APY is at 80%. Locking his assets for one year doubles his share in the pool, resulting in an APY of 160% (as a function of the 100 GTON). Arne holds 260 GTON by the end of the year.
Bert likes some flexibility and chooses to lock his assets (100 GTON) away in periods of 3 months. Assuming he re-locks his assets immediately after they are freed and he does no trades, Bert was given 2.5 additional BPT during each locking period. After one year, Bert holds 200 GTON.
Releasing locked tokens
As an optional feature, it might be desirable to have an emergency feature that allows liquidity holders to release their tokens before their lock time expires. Reasons could be varied. The main idea of implementation would be to enforce a fee on the holder as to not abuse the higher locking time rewards without actually providing liquidity for that amount of time. The fee scales as a function of the liquidity tokens, total lock time, and lock time left.
The following curve depicts the cost incurred when locked liquidity is released by the holder. This cost is represented as the distance between the green and brown curve (i.e. red area).
This curve only takes into account the rewards as a result of locking liquidity. When locking 100 GTON for 365 days, the reward received from BPT after 182.5 days is 40 GTON, or 50% of the total reward of 80 GTON. This is represented by the green curve. The curve can be described by several principles:
(B) The break-even point determines the point in time at which no profit or costs are made when releasing locked liquidity. In this example, that point as situated 182.5 days. The brown curve represents the net reward when releasing locked assets. as such, points on this curve are positive downstream of the break-even point and negative upstream.
- Annie chooses to release her 100 GTON after half of the locking time (182.5 days). The fee incurred is equal to all of the GTON obtained through her BPT. After half a year Annie holds 140 GTON, where the 40 GTON is rewarded through her PT share.
If Annie had considered better and locked her assets away for only half a year, she would have had 160 GTON.
(A) The fee incurred when releasing locked assets should be smaller when the remaining time is closer to the expiration point of the locked assets.
- Berta locks her assets (100 GTON) away for 1 year, she really needs her GTON back after 51 weeks. The fee can be calculated as the difference between the twee curves.
f(x): -100 + 200 / 365 * x (brown curve downstream of breaking point)
g(x): 100/365 * x (green curve)
g(357) - f(357) = 97.81% - 95.61% = 2.2%
The fee is obtained by multiplying the percentage award with the total reward in the case the locked tokens expire normally:
0.022 * 80 GTON = 1.76 GTON
(C) The fee incurred on the liquidity holder should not be too large for liquidity that was only recently locked, and can be set at a set percentage (e.g. 10%).
- After charlie locks his assets (100 GTON) away for 2 weeks, he realizes he made a mistake. He chooses to immediately unlock his assets. The fee payed equals 10% of the total reward obtained from the additional BPT received for 2 weeks . The total BPT reward would be:
0.038 (APY mult.) * 0.8 (APY) * 100 GTON * 14/365 = 0.116 GTON. Thus, the fee would be 0.0116 GTON
Note that the fee is at its maximum at the break-even point.
The fees make sure no unholy strategies can be created that try to leverage specific set-ups. Locking your liquidity for as long as possible with no interruptions is the best strategy.
The value of the break-even point and maximum initial cost incurred can be discussed:
Fees can be burned or redistributed to the liquidity providers of the pool.