That’s the best phrasing for LaaS.
LaaS can be a value proposition for teams to join the AEZ. We need that as there are teams migrating away, or at least double pivoting, such as the announcement of CANTO today with Zkevm.
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Good questions. Before getting into my answer, I want to reiterate that my proposal is a long-term strategy. In the short and medium term, I believe that the Hub should prioritize maximizing distribution of ATOM by significantly increasing the amount of ATOM liquidity lent to all ATOM-aligned and potentially ATOM-aligned endeavors.
The meme/narrative value of ATOM being the reserve asset of the interchain will almost certainly be worth far more than the interest it could possibly extract. The Hub should charge little-to-no interest and not require burdensome security guarantees until the meme of ATOM as preferred reserve asset of the interchain has fully sunk in. No unnecessary obstacles should be placed in the way of maximizing distribution of ATOM liquidity where strategically relevant.
As for specific short-term deals to pursue, Stride’s proposed next steps and the two use cases Noam proposed above are good places to start.
All that said, I still believe that the Hub should set expectations that it will eventually charge interest on the liquidity it lends so that liquidity borrowers are not surprised when the time comes. I also believe that it should begin investing now in the machinery that would enable the Hub to charge interest so that there is not a significant lag between the community’s desire to start charging and its ability to do so. Therefore, I think that the Hub should do a phased proof of concept with Stride, Neutron, and Astroport to double down on what is already working.
Phases
Phase 1
Goals: 1) gain first LaaS user, 2) demonstrate that the trustless software for LaaS works, and 3) responsibly allocate additional ATOM liquidity
Hub offers a line of liquidity credit to Stride (e.g., up to an additional 500K ATOM for the stATOM<>ATOM pool on Astroport). The interest rate paid on this liquidity would be determined by the line of credit’s utilization rate, similar to Frax’s time-weighted variable interest rate. Set the starting interest rate at 0% and the target utilization rate high (e.g., 95%). Stride will want to borrow at least up to the target utilization rate since it would be able to do so for free. Stride could then do its own cost-benefit analysis to see how much more ATOM liquidity it can bear profitably. This way, the focus is on getting adoption (Stride becomes first LaaS user), proves that the trustless software works, and allocates more ATOM liquidity.
The Hub shouldn’t try to make this line of liquidity credit a profit center (yet) because it would place the full extent of the liquidity burden on Stride, which doesn’t seem fair because Neutron and Astroport are also benefiting from the liquidity [and because it should be prioritizing distribution]. That’s where phase 2 comes in.
Phase 2
Goals: 1) gain additional LaaS users, 2) gain information about value splits, and 3) responsibly allocate additional ATOM liquidity
Hub offers identical lines of liquidity credit to Neutron and Astroport (i.e., additional 500K ATOM each for the asATOM<>ATOM pool on Astroport). Use the amount of ATOM borrowed by each of the three borrowers to understand the relative value of the liquidity to each party. For example, if Stride borrows up to a 1% interest rate, Astroport up to a 0.5% interest rate, and Neutron up to a 0.25% interest rate, we could infer that the value of the line of the liquidity credit to Stride is approximate twice that of Astroport and four times that of Neutron. This information will be important for Phase 3.
Phase 3
Goals: 1) prove AEZ’s ability to strike multilateral deals, 2) prove that trustless software for multilateral deals works, and 3) responsibly allocate additional ATOM liquidity
Hub offers an additional line of liquidity credit with an interest rate that is paid by Stride, Neutron, and Astroport for the same stATOM<>ATOM pool on Astroport. The three parties would use the data in phase two to reach alignment on the interest fee split between the three organizations. Any of the three parties may borrow from this shared line of credit ONLY if they are already borrowing at least the target utilization of their individual line of credit. Any party opt to freeze this line of liquidity credit at any time.
By phase 3, if none of the parties ever borrow beyond the target utilization rate, the Hub may be making zero revenue. If the Hub ever feels the need to turn LaaS into a profit center, it could implement a minimum interest rate and/or reduce the target utilization rate. That said, the Hub should prioritize distribution over profits for the foreseeable future. The meme of ATOM becoming the reserve asset of the interchain will be far more valuable than the revenue it would generate on interest for the time being.
P.S.
After stages 1 and 2, all parties involved at that stage should reflect on what worked vs. what didn’t and determine whether/how the planned next stage can be improved. After stage 3, all parties should get together to propose what a stage 4 might look like.
P.P.S.
This post does not include any senior debt provisions because there is a lot of low hanging fruit that the Hub can pursue before resorting to more complicated mechanisms and the Hub should not place any unnecessary obstacles in the way of distribution of ATOM liquidity to strategic positions. I agree with Noam that the Hub would be smart to use concentrated liquidity to reduce IL risk.
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Excellent inputs! Commencing with incremental, well-defined steps is indeed the prudent path forward. Stride’s pragmatic approach outlines a clear trajectory with actionable measures, marking a substantial advancement for the AEZ.
The use of $ATOM as a denominator for LPs merits serious consideration, while revising the Community pool architecture, as suggested by Noam, appears judicious to fostering improved coordination between cc and the Hub.
Big thanks to @Noam and @Stride for their contributions. Looking forward to seeing what unfolds following this discussion.
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For those interested, there’s a Twitter space happening today on this topic.
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Thank you for the proposal!
In general i am in favour of more tooling in the departement Noam and Stride are thinking but think this proposal is way too large to also include strategic decisions on the actual deployments.
I think we should first push for a so called “AEZ-module” and think about features we want included there and how it can collaborate with solutions like DaoDao and Timewave.
From that we can then make more strategic decisions on actual deployment.
In its current form i am quite hesitant about deployments to Astroport, mainly for 1 reason - usage.
For now usage is low and Astroport also has no significant integrations further into the Cosmos ecosystem or Neutron defi space. There is no money market using it for liquidations, the LP tokens cant be leveraged further, its not a hotspot for aggregators or abstraction UIs etc.
Although building liquidity can be seen as a first step i think we should be hesistant deploying significant capital to a Dex that has found little PMF/usage in the AEZ so far and does not properly leverage IBC to combine its multiple deployments currently.
So my general feedback is
Please split up the potential proposal later down the road in 1) a discussion around the module and the levers/tools we need to have build and 2) a strategic proposal with the pools, weighting and other parameters in deploying the capital strategies.
It leads to a potential situation where the tools might not be used, but i think we can take that risk.
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Thanks for this reply! So, I want to make it clear this forum post is not a proposal, but rather a research paper to start the dialog around Liquidity-as-a-Service and financial alignment.
I agree the actual first step is a phase one proposal that configures the Hub to enable to plug into the AEZ more effectively. Specifically, this would include the following:
- Enabling the Community Pool to hold multiple addresses
- Making sure x/gov is the true owner of the Community Pool so that it can do more than just a spending proposal (e.g. IBC Transfers, contract calls, etc)
- Enabling the ICA host module so that the Hub can create Interchain Accounts on other chains and interact with them
After this, AEZ members can make specific proposals that ATOM holders assess on a case by case basis. Other entities like Timewave could build the infrastructure (that would likely sit on Neutron I assume) to make sure our proposals get executed in a secure, automated and decentralized manner.
Phase two of this work would be focussed on enabling ATOM holders to vote with their ATOM on Consumer Chains in case the AAT holds funds (e.g. the Neutron Airdrop.
I want to be clear that this work does not take a specific stance on which protocols to integrate with (e.g Astroport or some other). This is purely an infrastructural solution to empower the community’s choices.
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This is an excellent write-up on protocol value accrual
It’s specifically relevant to this thread in a number of places so I hope it’s OK to link to it here.
At the every end it talks about behaving like Amazon (big first, then profit), the potential of dApps with no tokens, and sort of rolls out the red carpet for the Hub’s competive advantages, doing so seemingly with no knowledge that the Hub even exists.
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CONTEXT:
Looking at the history of @Noam we were expecting quality and depth on this post and we must admit that we have been served. The context of this study shows great improvement on the initial vision that was kickstarted by the ATOM 2.0 proposal and it’s Treasuries ideas.
We must also stress our great pleasure to see discussions around the LaaS (liquidity as a service) finally seeing ground within a broader part of the community. At Govmos (the governance arm of PRO Delegators’ validator) we have always emphasized the need to shift the narrative toward financial services in the Hub instead of sticking to the existing political debates & community pool spending. Of course these two are essential, but our models also predict that the Hub will evolve to resemble more and more to a decentralized bank. That is a topic we explored with greater detail in our ATOM Tokenomics - Currency Types Modeling in Markets post.
On this front we must say that we have been pleased to read the replies from @maximus which clearly shows that they are also understanding the mechanisms through which the Hub’s financialization path could begin to exist beyond SaaS (Security as a Service).
ANALYSIS:
Based on a simplified model of banking activities and revenue, we will assume the Hub’s financial activities to be specifically targeted to businesses & companies.
If we zoom into this category we would see two sub-categories, commercial banking and investment banking. The scope of the AAT falls into the realm of commercial banking activities. LaaS would correlate to bank lending facilities and specifically into “trade finance” and “asset backed finance”.
To us, the fact that the proposed infrastructure of this post could enable the creation of financial services akin to those of currently existing financial institution isn’t just a coincidence. These are indications that the current propositions are well positioned to be market-fit and find great utility to bring financial stability into the Cosmos while also bringing sustainable revenues to the Hub.
CONCLUSION:
We strongly support the innovations proposed in this research. We think this Treasury infrastructure is critical to the success of the AEZ into becoming the Financial Hub that the Cosmos need. One that is decentralized, transparent and driven by a well-informed community. Therefore we also want to note our great pleasure to see more financial profiles to join the discussions in the forum.
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It’s great to hear about the initiatives and ideas you’re exploring for the Cosmos Hub and the ATOM Economic Zone (AEZ). The concept of the ATOM Alignment Treasury (AAT) sounds intriguing, and the transparency in sharing your design process for community feedback is a commendable approach.
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