Further details on the Permafrost test

Over the past two weeks we’ve been refining the metrics for the Permafrost experiment, where we will be giving $FRY in exchange for permanently locking away ETHFRY liquidity.

Here’s where I’m leaning at the moment.

  1. A smallish amount, 1,000,000 $FRY
  2. A short experiment of maximum a week.
  3. A slightly longer buckets to increase the gas efficiency somewhat. Max 42 hours per bucket.
  4. Fewer buckets (due to 2. and 3.)
  5. A Balancer pool so we can set the fee.
  6. A 10% fee so that the permafrost can grow over time.

Balancer Pool of 10%
So the reason for a Balancer pool over the existing market in Uniswap is so that we can set the fee high enough to allow the pool to grow significantly over time.

A concern about this pool might be that it will not be used by regular market participants because the fee is very high. This is likely true, but what we’ve observed with an existing ETHFRY balancer pool at 1% fee, is that arbitrage bots automatically trade against the pool when they can enter FRY into the Uniswap pool and get slightly more out of the Balancer pool. The bots appear to act even for very small bits of profit, only around $2. The bots pay around $6 in network fees. The total of $8 was obviously arbitrage they make from the pool. On a 1% fee, the trade I’m referring to here yielded $0.76 in fees to the pool. That mean’s the pool can be arbitraged at an efficiency of around 90%.

If increase the fee from 1% to 10%, that means we can decrease the efficiency of arbitrage in favor of protecting the pool value. If we assume gas is still $6 for the above type of transaction, that the bot is still happy to net $2, we can now imagine the same trade happening. This time however, the pool gives away $15.60 in liquidity, with $2 still going to the bot owner, $6 still going to the miners but the pool will grow by $7.80. Therefore the efficiency of arbitraging the pool is only 50%, protecting the pool capital.

What’s also interesting about this is that it will likely generate more volume as the bots in the ecosystem automatically arbitrage between Uniswap and Balancer. It’s actually pretty exciting to see the different “organisms” in the ecosystem interact in this way. The trade frequency against the Balancer pool will likely be lower but I suspect the trade volume will be almost the same.

Please tell us what you think.

Is the fee fixed or can it be dynamically adjusted for a created pool? I like the economics and I would participate.

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The fee is fixed unfortunately. This is only the experimental phase and a small % of all the $FRY. If it proves interesting, we can regroup and try to figure out when Uniswap v3 launches which is said to have a more dynamic fee structure.

PS, please note this is not a staking event but essentially a trade of FRY in exchange for permanently locking away ETHFRY liquidity. We will be conducting a separate staking experiment with even more pool capital protections.

I’m very interested to see how this will play out as it seems the market is keen on locked liquidity. However, the current liquidity locks (UniCrypt and TrustSwap) does not seem to satisfy the need of the market in full, well at least for the wary investor, and I think this is where the Permafrost will have an edge.
The one point of concern, which I must admit has not bothered me much up to now, is the total supply and possibility to mint more $FRY

So are you saying the 1% dilution is now a concern for you or that it needs to be more fully addressed with others for whom it is a concern?

I think my “concern” is based on what I have seen in the ecosystem. Investors seem to prefer the following:

  1. Limited supply token
  2. No possibility of inflation/dilution
  3. Token burn (deflation)

I am not saying I don’t like it, perhaps the waters of my mind are merely murky regarding this.

Perhaps, over time, as Foundry runs a few more experiments, this concern could be mitigated either by the dilution capability making sense and having a specific function or by the minting ability being disabled.

So I’ve been reading about bonding curves to understand what they are. Happened upon this useful article: https://www.publish0x.com/behodler-token-swapper/token-bonding-curves-the-movie-xllyxdn

The Algorithmic Hodl part stood out for me as this is fairly close to what the permafrost will be - a permanent sink for ETH.

A final word on liquidity growth: Algorithmic HODL

Suppose I deposit 10 Dai and 10 Eth into a TBC exchange like Behodler and I get given 20 T. Now I accidentally go and lose my private keys. For all intents and purposes, the 20 T is lost and the exchange now has 10 Dai and 10 Eth stuck in it. What’s the only way to get the Dai and Eth out? With more Dai or Eth of course. So if I bring some Dai to buy Eth, not only will I get Eth but I’ll be doing it on an exchange pre-seeded with liquidity (due to my accidental key loss).

Suppose in addition to the key loss above, someone else comes along and deposits another 10 Dai and 10 Eth and also loses their keys. Now we have an exchange with 20 Dai and 20 Eth with no corresponding T. Again, the only way to get at the Eth or Dai is to deposit even more Eth or Dai and again. The mistake of losing keys has inadvertently and permanently increased the liquidity of the exchange. If you think about it, another strange phenomenon has occured: you can never drain the exchange of all its tokens, no matter what. If you try to buy out all the Dai, you’d have to deposit Eth (since no T exists). But now you have an exchange full of Eth. If you deposit all the T in existence created by this Eth deposit, it wouldn’t be enough to redeem all the Eth. By losing T, you have inadvertently created a permanent token sink!

Behodler simulates this key loss phenomenon by burning a small portion of Scarcity on every trade. Essentially the Scarcity is being leaked away with regular trade, meaning that Behodler becomes a bigger and bigger sink with every trade. This also means that the liquidity of every token will increase over time. Whatever trades on Behodler will become increasingly drawn in like quick sand. This black hole sink effect is what puts the HODL into Behodler.

Besides acting as yet another DEX, Behodler provides a service to the Ethereum community by acting as a permanent sink for Eth (amongst other tokens). Eth sinks are necessary to ensure the security of the Ethereum network by providing price support for the payment to miners.