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OSWAP Token: Incentivizing Liquidity Provision in Oswap Poolsby@obyte
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OSWAP Token: Incentivizing Liquidity Provision in Oswap Pools

by ObyteMarch 29th, 2023
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OSWAP token is designed to reflect the success of the Oswap protocol and incentivize liquidity provision in Oswap pools. The token will be issued on a bonding curve that allows trading OSWAP against GBYTE and ensures always available liquidity. Half of the emissions go to liquidity providers (LPs) and the other half goes to stakers who participate in governance. The price of the token on the bonding curve gradually increases.
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We introduce the OSWAP token — a token designed to reflect the success of the Oswap protocol and incentivize liquidity provision in Oswap pools.


Oswap DEX was launched in the summer of 2020 by our long-time community member Fabien (he also runs an order provider node). It was inspired by Uniswap and became the main DEX on Obyte providing easy and permissionless ability to exchange any token for any other token with always available liquidity.


With the launch of Counterstake Bridge in the summer of 2021, trading activity significantly increased as USDC, ETH, WBTC, and other tokens bridged from Ethereum and other networks became available for trading.


In February 2022, Oswap v2 arrived and brought leveraged trading, more income for liquidity providers, stable pairs, governance, and more.


The OSWAP token that becomes available today will serve two purposes:

  • incentivize liquidity provision in selected Oswap pools like many other successful DEXes are already doing, such as Curve, Sushi, Balancer, PancakeSwap, etc;
  • allow traders to bet on the success of the Oswap protocol by buying OSWAP token, whose appreciation rate depends on how widely it is used.


To summarize briefly its tokenomics:

  • The token will be issued on a bonding curve that allows trading OSWAP token against GBYTE and ensures always available liquidity.
  • The price of the OSWAP token on the bonding curve gradually increases (not including other price changes, e.g. due to trading) at a rate that depends on the current Total Value Locked (TVL) of all Oswap pools. Greater TVL yields a faster appreciation rate. The price increase is achieved by gradually and automatically changing a few parameters of the bonding curve, thus moving to a slightly different bonding curve.
  • There are continuous emissions of new OSWAP tokens (they are also achieved by changing the curve’s parameters). Half of the emissions go to liquidity providers (LPs) to incentivize liquidity provision in Oswap pools. The other half goes to stakers who lock their OSWAP tokens for some time and participate in governance.
  • One can lock their OSWAP tokens in governance for a term between 14 days and 4 years. This also entitles the user to a share of emissions. Longer locking periods yield more voting power and a larger share of emissions.
  • LPs deposit their LP tokens to receive a share of emissions. They can get their LP tokens back at any time.
  • Governance decides which Oswap pools are incentivized and in what proportions.
  • Governance can also update various parameters such as swap fee, emission rate, target appreciation rate, oracles, etc.


The following sections describe the token in more detail.


Bonding curve

OSWAP token is issued on a bonding curve — a mathematical formula that binds the supply of the tokens to the amount of the reserve currency (GBYTE) invested in issuing them. The formula looks like this:


where

  • r is the GBYTE reserve committed to issuing OSWAP tokens;

  • s is the supply of OSWAP tokens;

  • s0 is the maximum supply of OSWAP tokens;

  • c is a coefficient that starts with 1 and changes due to accruing fees, appreciation, and emissions.


The price of the OSWAP token is the derivative of r with respect to s:




So, to buy OSWAP tokens, one needs to send GBYTE to an Autonomous Agent that implements the bonding curve. One can sell the tokens by sending them back to the same AA and receive GBYTE in exchange.


It’s clear from the above formulas that the price grows with the growing supply, and as the supply s approaches s0, both the reserve and the price go to infinity.


This means that early investors get a lower price and every additional purchase further increases the price, while selling the token back to the curve decreases its price.


Appreciation

OSWAP token is designed to reflect the success of the OSWAP protocol and it’s programmed to appreciate at a rate that depends on the TVL of all Oswap pools. The initial target appreciation rate is 30% per year at the target TVL of $1m (both values can be changed by governance). If the actual TVL is different from the target TVL, the appreciation rate is scaled accordingly. For example, it would be 15% per year at $0.5m TVL.


The TVL is reported by an oracle which can be changed by governance. In case new pools are added, new versions of Oswap are released, or Oswap is forked, the liquidity locked in the new pools is supposed to be included.


Appreciation works by changing the parameters s0 and c in such a way that the reserve and the supply remain the same while the price increases. This morphs the bonding curve, and after appreciation trading continues on the new bonding curve.


The higher price at the current supply is not a magic increase in the wealth of OSWAP token holders. It comes at a cost — the shape of the curve changes in a way that provides worse conditions for those who redeem (sell) the tokens last. In particular, the minimum redemption price (at 0 supply) would be lower.


However, this effect is offset (at least partially) by the fees accumulated from trading and added to the reserve — they morph the curve in the opposite way, thus providing better conditions for those who redeem last.


Also, there are incentives to lock OSWAP tokens for a long time (see below) which make the possibility of large redemptions more remote.


Appreciation is applied continuously, without any abrupt changes. The small changes to the price are calculated before every trade and are proportional to the time elapsed since the previous trade.


Emissions

New OSWAP tokens are continuously emitted and distributed among stakers of OSWAP tokens and liquidity providers in incentivized pools. Initially, the emissions are split between the two groups 50/50 but the shares can be changed by governance. The initial emission rate is 30% per year, and it can be changed by governance too.


Unlike many other DeFi protocols that distribute their tokens to incentivize the use of the protocol, OSWAP emissions never end, and there is no risk that the protocol will be abandoned as soon as incentives end. However, governance can both increase and decrease the emission rate depending on the market conditions, in order to best serve the protocol (as the governance participants think).


Like appreciation, emission works by gradually changing the s0 and c parameters of the curve while keeping the reserve and the price unchanged. Like appreciation, emission comes at the cost of worsening the redemption conditions for late redeemers. Like in appreciation, this effect is offset, partially or fully, by the accumulation of trading fees. Plus, there are incentives to lock OSWAP tokens for a long time, which make the possibility of redemptions more remote.


Emissions directed at stakers are distributed among them in proportion to their voting power (see below), which favors those who lock for a long time.


Emissions directed at LPs are split among multiple pools. Which pools are eligible, and what shares they receive, is decided by governance. Each governance participant indicates their preferred shares for each pool, and their votes are weighted and averaged. The weight of each voter is equal to their voting power, which depends on their locking period and locked balance.


Governance, locking, and voting power

As already mentioned above, many things are decided by governance.


To participate in governance, OSWAP token holders lock them for a certain time. They cannot sell the tokens until the locking period ends, and they do not receive any liquid tokens in exchange. This makes them interested in the long-term success of the token and ensures that they feel the long-term consequences of their decisions.


For their participation in governance, they are rewarded with emissions of OSWAP tokens.


Both the weight of their votes and the share of emissions they receive depend on their voting power (VP). The voting power is determined by the locked balance and the time left until the lock expires. If a user locks for the maximum locking period — 4 years — they get the maximum voting power, which is equal to their locked balance. Then, their VP starts decaying exponentially, so that it is halved every half a year, or decays 4 times every year. So, it will be ½ of the balance after half a year, ¼ after a year, and 1/256 after 4 years.



To prevent the decay of one’s VP (and the share of emissions), one needs to extend the locking period. By constantly pushing the unlock date to 4 years from now, one can always have the maximum VP available with their balance. Re-staking (compounding) the received emissions helps to further increase the VP and get a bigger share of future emissions.


If a user locks their OSWAP tokens for a period shorter than 4 years, their initial VP is calculated such that on the unlock date, it would be equal to 1/256th of the user’s balance. As a result, the VP would be lower than when locking for 4 years.


The idea of voting power being dependent on the locking period was inspired by CRV and its veCRV (vote-escrowed CRV) token.


The share of emissions a user receives is equal to the user’s VP divided by the total VP of all users.


Farming

Liquidity providers can deposit their LP tokens to receive a share of the emissions of OSWAP tokens. This might significantly increase the APY of liquidity provision and attract liquidity to the incentivized pools, which is especially important for newly launched tokens.


LPs can harvest their rewards as often as they like. Once harvested, they can do one of three things:


  • sell the received OSWAP tokens to the curve,
  • just hold them (anticipating appreciation),
  • lock them in governance to receive more emissions as stakers and maybe vote for redirecting more emissions to their favorite pools.


LPs can of course withdraw their LP tokens at any time (and stop receiving emissions). They are not time-locked, unlike the staked OSWAP tokens.


Distribution of rewards among pools

As said above, it’s decided by governance. Every governance participant sets their preferred distribution, e.g. one voter could allocate 20% of their voting power to pool1, 30% to pool2, and 50% to pool3, while another voter votes for 40% to pool2, 30% to pool3, 20% to pool4, and 10% to pool5. For every pool, the total VP it receives from all voters determines its share in OSWAP emissions.


Even if only one voter voted for a specific pool, it still receives a share of emissions.

Since new token projects are interested in creating liquid markets for their tokens, one way to achieve this is by acquiring OSWAP tokens, locking them in governance for the maximum term, and allocating one’s VP to the pools where the new token can be traded. Assuming competition among projects for a larger share of emissions, we can expect additional demand for OSWAP tokens. This is something that supported the price of the CRV token in the “Curve Wars”.


Grants to a management team

The price of the OSWAP token depends on the adoption of the Oswap protocol. If the growth is too slow, additional efforts might be required to promote the protocol and develop new versions. To fund this work, OSWAP governance participants can decide to pay a portion of the bonding curve’s reserves to a team that commits to promoting and developing the protocol.


It works like this:

  1. A potential team drafts a grant proposal. In the proposal, they detail who they are, their track record, what they are going to do, what they expect, the term of engagement (e.g. 6 months), and how much money they need to do the work.
  2. They compute a hash of the proposal document and submit it to OSWAP AA to create a formal proposal.
  3. Governance participants vote for or against the proposal with their VP.
  4. If it gains the majority of VP, it is accepted, and the money is paid to the team. Instead of sending the whole amount to the team, it can be sent to an intermediary AA that would release the funds in parts, based on milestones achieved. Completion of milestones can be signaled by some supervisory board that is independent of the team.
  5. The team periodically updates the community about its progress (off-chain).
  6. At the end of the engagement term, the team publishes its final report about the work done.
  7. Then, the same team can submit another proposal to be hired for the next term. Another team can compete to be chosen instead.


When the funds are paid out to the team, the reserve that backs the bonding curve decreases, and the curve’s parameters s0 and c are updated to keep the supply and the price unchanged. The new curve would provide worse conditions to late redeemers (similar to what happens as a result of appreciation and emission). By accepting the grant, the governance members expect this downside to be outweighed by the benefits that the team’s work brings.


Initial sale

OSWAP token will launch on April 6, 2023 at 04:34 UTC. Before this date, potential buyers can deposit their GBYTE to participate in the initial sale.


On the launch date, all GBYTEs collected from buyers will be sent to the bonding curve to buy OSWAP tokens. The price will be determined by the bonding curve and it depends on the amount of GBYTEs raised in the initial sale. The initial price on the bonding curve is 1 GBYTE per 1 OSWAP token but it grows with the growing buying amount. Larger total amount — larger price. Then, buyers will be able to claim their OSWAP tokens according to their share in the total deposited GBYTEs.


All buyers get the same price — the average price of the initial purchase from the bonding curve. This price will be lower than the trading price on the curve immediately after the initial purchase (the opening price of free trading is also the final price of the initial sale). Thus, the next buyer will have to pay a higher price, and the participants of the initial sale buy with a discount relative to the opening price.



However, all tokens bought in the initial sale will be locked in governance for the maximum term — 4 years. This means that:

  • The token will have well-represented governance from day one.
  • The initial sell pressure will be zero as the bought tokens cannot be sold for the next 4 years. And the only place where one can buy them is the bonding curve, with each purchase increasing the price on the curve.
  • There will be a floor price as only tokens bought after the initial sale can be sold back to the curve.


The initial market cap of OSWAP tokens (number of tokens multiplied by the opening price on the curve) will be higher than the amount of GBYTEs sent to buy the tokens. However, these tokens cannot be sold for the next 4 years.


As investors add their deposits, it will be possible to estimate the future average buying price and the future opening price. If a user changes their mind, they can withdraw their deposit before the launch. New deposits are accepted up to 1 day before the launch (to ensure that last-minute deposits don’t raise the price above someone’s maximum acceptable price if they think that such a price exists).


As a precaution, the Obyte team reserves the right to move the launch date further into the future (but it cannot accelerate the launch). This is the only privilege that the Obyte team has, and it obviously becomes irrelevant after the launch.


Buying from other networks

It is possible to buy OSWAP tokens (both in the initial sale and after it) from other networks. Investors can buy the tokens with USDC, ETH, and WBTC on Ethereum or with GBYTE on Ethereum, BSC, or Polygon.


Users just need to connect their MetaMask wallet and send the tokens, and they will be automatically bridged through Counterstake Bridge and swapped through Oswap if necessary. Users obviously need to have an Obyte wallet in order to receive the tokens.


Floor price

As mentioned above, there are incentives for OSWAP holders to lock their tokens in governance for a long time in order to receive a larger share of stakers emissions and be able to direct LP emissions to their favorite pools. This effectively removes a portion of the OSWAP supply from circulation, and this part of supply cannot be sold back to the curve.


This means that there is a floor price of OSWAP token, which is determined assuming all freely circulating tokens have been sold to the curve and the supply has become equal to the locked supply. The price can’t go lower in the short term.


Initial sale is already open

The initial sale website is at token.oswap.io, and after April 6, 2023, 04:34 UTC it will become the website for trading the OSWAP token, staking, governance, and farming LP tokens. You can already preview some governance pages that will be available after the launch.


The testnet version of the OSWAP token is available at testnet-token.oswap.io and you can use it to try all the functions that will be available on mainnet after the launch.


OSWAP token is the first token issued on a bonding curve of this kind, and with a combination of ample initial liquidity provided by the bonding curve and strong locking incentives, we hope that it will help attract liquidity to Oswap pools and prove to be a valuable asset for its holders.


Also published here.