While our industry has found countless ways to innovate, liquidity management is critical for every protocol and has been a constant struggle for most. Arguably nobody has found the perfect approach and selecting the right liquidity strategy has been about finding what negative tradeoffs you are most willing to live with.
We started building Vest AMM because we know firsthand how much work it is and how expensive it can be to obtain deep liquidity that you can rely on.
While it is relatively easy to quickly obtain liquidity with rewards, the second you stop offering incentives you can count on your liquidity to dry up shortly after. You could argue that market prices and countless other factors impacted the Avalanche chart below, but I would love to see what this would have looked like if they had used a more sustainable approach to attracting liquidity to their system such as what Vest AMM offers.
Avalanche isn’t alone in this. You can look at almost every protocol that offered liquidity mining rewards to pool 2 stakers, including Aelin. Shortly after we launched our token, we obtained liquidity through liquidity mining just like everyone else at the time. Also just like most other protocols, we received a lot of mercenary capital that farmed and dumped our token. We quickly realized this was not sustainable and it ended up being very costly to the protocol in more ways than one. Unfortunately, our LPs were never closely aligned to the protocol.
The only benefit from this was that it helped distribute our token, but we realized there has to be much more effective and responsible ways to do this
We took a step in the right direction and began renting our liquidity. We were able to offer bribes in the form of OP or sUSD to obtain liquidity. This eliminated the sell pressure on AELIN like we had from liquidity mining, but it still was relatively expensive and unpredictable.
After over 8 months and $100k of bribes spent to obtain liquidity, we are still dependent today on sending bribes on a weekly basis for our liquidity. During this time, we realized we needed to make liquidity an asset on the protocol’s balance sheet, not an expense.
We explored all available liquidity options but couldn’t find something that checked all of our boxes. We are known for community fundraising which gave us a great start on coming to Vest AMM which is the liquidity solution we needed from the beginning.
Vest AMM is a liquidity layer that is compatible with all EVM-based AMMs. This means that the following liquidity strategies can be used by any protocol who wants more sustainable and predictable liquidity. We’ll go through the details of each one of these strategies in the future, but for now we will introduce them as:
Liquidity Launch Auction
Priced Liquidity Launch
Protocol Liquidity Growth Round
Community Liquidity Growth Round
Within these liquidity strategies protocols can customize their approach by choosing from unique incentives to reward their LPs. Protocols get to determine the parameters that work best for them and can create real alignment between the protocol and LPs. Key terms of the deal that can be customized include:
How many tokens are retained by the protocol vs. investors
Length of the vesting schedule
Who gets trading fees
What (if any) single sided rewards are offered
The ability to customize the incentives allows protocols to create a personalized liquidity strategy that specifically meets their objectives. While liquidity mining didn’t work for us, it could work for others especially if they can offer rewards locked on a vesting schedule. Liquidity is not something where one approach will work for everyone so liquidity protocols need to be responsive to this.
Having the option to put the LP tokens and any single sided rewards on a vesting schedule is an extremely important feature. This prevents mercenary capital from being able to farm and dump tokens and ensures there will be predictable liquidity for the future. This creates a way for LPs to be aligned with the protocol over the long term.
Our roots are in community fundraising so incorporating the community into a liquidity solution is important to us. Other protocols allow protocols to bootstrap liquidity by selling the protocol’s native token on a tick on Uniswap, but while Vest AMM requires more coordination, we believe this is worth it to be able to incorporate the community and give them the opportunity to have a more vested interest in the protocol’s success.
A Vest AMM (vAMM) instance is created when a protocol selects an AMM and the asset they wish investors to deposit to be paired with the protocol’s native token. During this step the protocol also sets the terms of the vAMM which include the details of the vesting schedule, how many LP tokens are retained by the protocol vs. returned to the investors, how many single sided tokens investors receive, and who receives trading fees.
The protocol deposits their native tokens into the vAMM.
Investors deposit the paired asset chosen by the protocol.
The investors receive locked LP tokens on a vesting schedule, single sided rewards (which may also be locked on vesting schedules), or a combination of LP tokens and single sided rewards.
If you are still reading this and at least a little bit excited about what we are doing, we are actively building this product so if you are a developer there is a good chance we would like to work with you! We are introducing a developer DAO (DevDAO) modeled after what our friends at Kwenta did. Come join our Discord and look for an upcoming announcement where we will explain how to start contributing to what we believe will be one of the most important liquidity solutions.
Also, you are a protocol and any of our pain points have also been your experience, we are here to help! Please reach out to us if you work for a protocol or are a community member who thinks Vest AMM could be the solution you need to create deep liquidity that is both sustainable and predictable.
On March 9th at 9pm UTC, we'll have a governance call in our Discord to go over VestAMM in more detail and introduce several other AELIPs including changes to our tokenomics info on our upcoming DevDAO! Vest AMM is an open-source project, come build it with us.
In the meantime, please join our Discord to ask questions and share your thoughts! Let's build a better liquidity solution together with Vest AMM.