Financial proposal: Updating Aragon's DEX strategy

Proposal summary

Please vote here

Due to recent market circumstances, it is relevant for Aragon to become more independent and increase the DEX liquidity position of ANT. Therefore, the AA Finance team proposes to update the outdated Aragon DEX strategy by updating the current Balancer pools.

This proposal will be executed with Aragon Association funds. This means that the allocation of the Balancer Pools will be redistributed in favour of the ANT/USDC pool. The additional allocation of $750k in the Balancer pools will be made from this wallet address:

0xfb633f47a84a1450ee0413f2c32dc1772ccaea3e

@Joan_Arus @AlexClay @joeycharlesworth

Why DEX liquidity strategy?

Noticing current events in the market, Aragon should not only rely on centralized liquidity providers who could stop providing liquidity due to whatever reason. Therefore, it becomes more and more important for Aragon to control its own liquidity. Having Protocol Owned Liquidity (POL) is a more sustainable and less expensive way to create DEX liquidity than for instance liquidity farming. By owning liquidity, Aragon will be in control to ensure it meets the required liquidity targets. Furthermore, POL also functions as an extra revenue stream that creates a sustainable liquidity flywheel as the revenue earned from the trading fees can be reinvested into the pools.

Currently, Aragon relies for 98% of their trading volume on central exchanges (CEXs), with Binance as the largest liquidity provider with 30% of the daily volume. The average daily trading volume of the last year and last three months were respectively $52 MLN and $13MLN.

The objective of this proposal is to have at least 4% of the daily trading volume executed on DEXs. This said, we recognise that liquidity depth is only one of many factors that influence new or existing ANT holders on where to trade their ANT and more specifically, whether they use a CEX or a DEX. Increasing liquidity on a specific DEX pool from its current level may have very little impact on the amount of ANT traded on that pool. Some reasons why many traders prefer to trade on CEXs include;

  • Ability to prevent frontrunning
  • Ability to trade in fiat pairs
  • Better UX
  • No need for storing seed phrases

This said, we’re of the opinion that we should attempt to measure the correlation between liquidity in a specific pool and increasing trading volume in that pool. The hypothesis we are testing is that increased liquidity will lead to increased use of DEX’s that support Aragon’s vision. If correct, this will result in Aragon decreasing its dependency on CEX liquidity and enabling decentralized trading with low slippage for its token holders.

Different DEXs

Overview of the top 5 DEXs based on trading volume:


(source: Defillama)

From the top 5 listed DEXs, Uniswap and Balancer are the most significant ones for Aragon (Curve is focused on stables, Pancakeswap’s volume on ETH mainnet is negligible, and DODO is focused on bridging).

Spreading across DEXs
The spread of liquidity is a trade-off between “liquidity fragmentation vs. DEX lock-in”. Spreading liquidity over multiple DEXs will result in fragmentation (more slippage), yet being dependent on only one DEX results in a lock-in. Therefore, Uniswap V2 & Balancer would be a good initial focus (Uniswap V3 will be more efficient with the right management of concentrated liquidity, so that should have the long term focus).

Executing strategy

Current allocation
Aragon currently provides liquidity in 3 different pools on 2 different protocols:

  • Uniswap V2 Pool: ANT (50%) / WETH (50%) - $1,3MLN
  • Balancer V1 Pool: ANT (80%) / WETH (20%) - $300k
  • Balancer V1 Pool: ANT (80%) / USDC (20%) - $250k

Updated strategy
The new strategy consists of the following 5 decisions:

Immediate execution

  1. Aragon will maintain the Uniswap V2 Pool, as it currently provides 1.5% of the total daily trading volume.
  2. The current daily trading volume that Aragon’s pools on Balancer V1 generate are negligible, as one of the factors may be that they are issued on the outdated V1 protocol. Therefore, the Balancer Pools on V1 will be migrated to V2, as that version is more efficient and robust.
  3. The total allocation to the Balancer Pools will be $1.3mln, so that the distribution between Uniswap and Balancer is equal for the short term. In this $1.3mln liquidity allocation, the Balancer pools are proportional to the aggregate ANT trading volume across both CEXs and DEXs which approximates to 15% and 85% between ETH and Stables/Fiat respectively.

Execution in the coming month(s)

  1. The liquidity pools will be closely monitored and adjusted based on performance.
  2. Aragon will start looking into migrating Uniswap V2 towards the more efficient V3 and make a decision to actively manage V3s concentrated liquidity in-house or outsource it (like other DAOs such as Index Coupe & Olympus DAO outsource it to a trusted third party like Visor Finance).

Trading Volume Changes

Results from the experiment to increase liquidity on these 2 Balancer pools will be updated in the table below after the updated strategy is live for 1 month.

Pair Volume: 30 day period daily average to 16th Nov % of overall volume (across both CEX and DEX) Volume: 30 day period daily average from start of liquidity increase % of overall volume (across both CEX and DEX) % change in volume % change as proportion of aggregate
ANT/WETH $5,765 0.04% TBD TBD TBD TBD
ANT/USDC $5,350 0.04% TBD TBD TBD TBD
6 Likes

Thanks for this Rick, have been involved here as well. I am of the opinion that the goal should be to increase the pool of USDC initially and see the results. There will also need to be education on self custody for users as well which will be a separate discussion. In support of the V2 balancer and increasing the pools.

2 Likes

Thanks to you and the team that put this together. Very much agree with the direction!

2 Likes

Thanks Rick for the proposal!

+1 on doing this!

2 Likes

Hey Rick, excited to see this proposal come together and happy to have been able to help by sharing some insights!

1 Like

Voting is now live via Aragon Voice

1 Like

Glad to see this getting through. As we have discussed during the drafting:

  • Easily available CEX liquidity can be an attack vector, and boosting DEX liquidity is a sustainable way for the DAO to have true sovereignty.
  • For a governance token having the DAO own the liquidity, as opposed to incentivizing pools, is a better path

On Uniswap, I think sticking with V2 is the right path. Aragon’s treasury today is largely unused and the Uniswap position itself is a small part of the treasury. The opportunity cost of relative capital inefficiency of V2 vs. V3 is not high enough to justify investing resources in evaluating options for an actively managed V3 (regardless of whether that’s managed externally or internally)

1 Like