Proposal: Support more long-tail assets trading on MUX natively - Prepare for the MUX-DegenLP pool launch and lend $1M from MUXLP POL to fund initial liquidity & hedging

Background

To adapt to the ever-changing market, MUX will launch MUX - DegenLP pool to support more trendy long-tail trading pairs. The DegenLP pool will be stablecoin-only and serve as traders’ counterparty for the trading pairs it offers. Upon launch, the DegenLP pool will be integrated into the MUX Aggregator.

Since the DegenLP pool is stablecoin-only and will have higher risk exposure, the pool will only be open to a whitelisted sophisticated trader initially. After a certain period of runtime and proper risk evaluation, the pool can be potentially open to more whitelisted LPs. In the beginning, DegenLP pool liquidity will be 100% supplied by a whitelisted sophisticated trader, who will also help to manage the risk exposure.

Proposal

Based on the context, MUX contributors propose to lend up to $1M from MUXLP POL to a sophisticated trader to supply initial DegenLP pool liquidity and carry out external hedging activities.

The DegenLP pool will require strategic hedging to counter potential risks. Therefore, around 60% of the lent fund will be reserved for external hedging activities facilitated by the sophisticated trader; around 40% of the lent fund will be added to the DegenLP pool as initial liquidity. The ratio between funds reserved for external hedging and DegenLP pool liquidity can be adjusted based on market conditions.

The isolated DegenLP pool will fully bear the position-holding risks from the pairs it offers and won’t affect MUXLP. The DegenLP pool protocol income will be allocated as follows:

  • DegenLP Pool Income × 85%: Allocate for veMUX holders (in ETH)
  • DegenLP Pool × 15%: Purchase DegenLP and add to the DegenLP pool

After the DegenLP pool is open for more whitelisted LPs, the whitelisted LP income is proposed to be allocated as follows:

  • Whitelisted LP Income × 70%: Allocate for Whitelisted LPs (in USDC)
  • Whitelisted LP Income × 30%: Allocate for DegenLP pool protocol income

After launch, MUX contributors will gradually improve DegenLP parameters based on market conditions and user activities to ensure stability and reasonable performance. The contributors aim to progressively increase DegenLP pool liquidity and market diversity at a moderate pace.

Next Steps

  • Community discussion surrounding this proposal
  • Community members vote to approve/disapprove of this proposal
3 Likes

I fully support that. It’s a good initiative to list trending tokens & attract new traders.

LFG :fire:

1 Like

A few questions:

1- Will the new pools have any mechanism to reflect the IV, spread and liquidity conditions for said assets? Any price impact mechanism akin to what Aark Digital is using or some sort of semi-Markov decision process for bid-ask spread based on what other MMs are offering and mirroring that in realtime to calculate execution price on MUX?
2- How is this sophisticated trader going to manage inventory skew? I’m guessing programatically - checking long-short skew on MUX every X minutes based on the IV of each pair; the higher the IV the higher the hedging frequency ought to be.
3- Will the new mechanism have funding rates to have the market participants balance out the skew?
4- Has the sophisticated trader provided any backtest simulations on performance and strategy parameters recommendations?
5- Most importantly, what stops this sophisticated trader from rugging MUX? Are you guys aware of firebricks off exchange settlement infrastructure which can be connected to MUX frontend to show the profitability of the strategy and that the 1M is fully accounted for etc. Ideally - we should strive for transparency akin to ethena.fi or drift’s circuit vaults (https://app.circuit.trade/)

I like the proposal a lot but some assurances on transparency and risk management are needed imho.

2 Likes
  1. The new protocol won’t have a direct mechanism to reflect the IV, but conditions and spread will be reflected; the price impact mechanism will consider multiple factors to calculate execution price on MUX, but currently can’t disclose the exact factors yet to avoid potential attacks or exploits.
  2. The sophisticated trader will programmatically manage inventory skew and potentially adjust hedging frequency based on IV.
  3. There will be OI-based funding rates, but it still won’t have positive & negative funding. The less skewed side will have lower funding, but long or short funding will always be positive, and the fees will go toward the DegenLP pool.
  4. Yes, the sophisticated trader has provided backtest simulations on performance and strategy parameters recommendations.
  5. Really appreciate the suggestion and will forward to contributors to look into adding more needed info for transparency.
2 Likes

Thanks for the quick response. Looking forward to playing around with the new setup.

2 Likes

Thanks a lot for the feedback everyone!
The voting process is now open: Snapshot

1 Like