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.
- A smallish amount, 1,000,000 $FRY
- A short experiment of maximum a week.
- A slightly longer buckets to increase the gas efficiency somewhat. Max 42 hours per bucket.
- Fewer buckets (due to 2. and 3.)
- A Balancer pool so we can set the fee.
- 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.