Core Team Proposal - PATHWAY: automated collateral management protocol

PATHWAY: automated collateral management protocol

In this article, I present PATHWAY, a protocol for automated market making of DAO projects, and propose to put it into practice for Graviton treasury fund management.

Concepts

Market Making

Launching a tokenized project in the field of decentralized finance necessitates bootstrapping initial liquidity for the new token and keeping a large enough backing for sustainable and efficient market making. A multitude of such projects launch via a direct token sale or an initial DEX offering. In many instances, the project’s team itself is not willing to engage in market making, and it unfolds either organically (mainly on AMM decentralized exchanges) or with the involvement of market maker partners which are usually focused on liquidity and volumes on centralized exchanges. One way or another, the team or market making partners need to provide enough liquidity to support the tokenomics, in order for the project to succeed in the long run.

Share Repurchase (Buyback)

In traditional finance and the stock market, organizations can sell their securities to the market increasing the supply, and also buy securities back from the market decreasing the supply. These decisions are made by the boards of directors and are aimed at optimizing the balance sheets, capitalization or liquidity of the company.

DAO Treasury

In decentralized finance, a functional equivalent of an organization’s balance sheet is a “treasury” smart contract, which is usually either a simple multisig contract or a more complex structure that automates transactions of digital assets owned by the organization. Project’s assets aimed at covering operational and market-making costs can be stored in a treasury. An equivalent of shares in a decentralized organization is usually a token which allows its holders to influence product updates, smart contracts or protocol parameters. Such a token is usually called a “governance token” and its mode of operation has many parallels with the governance framework used by traditional organizations.

Traditional MM Issues

  • Decisions on how to distribute assets to influence the token price (either directly or indirectly) often lack transparency and only serve the interests of a narrow group of people, which turns it into a lottery for most of the minority stakeholders
  • The market for a particular asset can be manipulated to serve some hidden aims of the organization itself or its partners, and not the stakeholders or users in general
  • Usually, when no proactive market making is being done on behalf of the project or its partners, the token becomes vulnerable to the natural movements of the market (bull and bear cycles) or to pump & dump manipulations
  • Market-making usually lacks long-term planning and sets no expectations of project’s capitalization and growth trajectory

Introducing PATHWAY: MM Concepts

  • DeFi Projects can use treasury funds as a market-making tool by simply selling the token to the market replenishing the treasury with a collateral (for example, in stablecoins), and then buying the token from the market using the collateral assets
  • DeFi projects and their token holders can collectively define targets for project market capitalization on a one-two year timescale or other specified intervals, based on the assessment of similar projects in terms of market, ecosystem, investors, etc.
  • Governance stakeholders can reconsider the capitalization target when new factors begin to impact the project, e.g. new products’ release, new partners, investors, market conditions, etc.
  • These target trajectories of the project capitalization growth can be approximated algorithmically and followed through a system with feedback loops for calibrating/influencing the market price
  • This automated system should be completely transparent, and third-party market makers or traders can follow its dynamics and synchronize, further neutralizing the attempts at price manipulation or spontaneous pumps & dumps

Treasury as an Automated Collateral

In this article of Graviton blog (https://medium.com/graviton-one/eb -treasury-as-collateral-for-gton-e9ad77da1223), the option of using Treasury funds as a collateral was proposed in order for the token to attain liquidity and create buyback pressure automatically by expending assets in the Treasury.

This approach is promising, however, its major effect is replacing the stablecoin collateral with LP tokens, ultimately leaving traditional and/or spontaneous market making strategies at play, the disadvantages of which are described above.

With PATHWAY, the treasury smart contract should not only regularly buy tokens from the market and put them in liquidity in the form of LP, but also monitor the current moving average of the token price, determining how far the current dynamics is from the trajectory agreed upon by the governance. The smart contract then buys the token if the deviation breaks the pessimistic corridor or sells it if the deviation is higher than the over-optimistic trajectory (“excessive pump” case). The buy and sell actions have conditional probability which will depend on the remaining amounts of collateral in the treasury, ensuring sufficient funds to achieve price stabilization.

Growth Trajectory

The trajectory, which will reflect the desired evolution of the project’s capitalization in time, is determined by governance via voting for the parameters of a certain function (a superposition of linear, polynomial and exponential).

This function will describe an optimistic trajectory which the project and its community are striving to. However, in order to determine which actions of the algorithm should undertake to adjust the rate, some fuzzy over-optimistic and pessimistic boundaries are required to be set beforehand.

These boundaries are not clear-cut, but rather can be described as the sigma coefficient of the Gaussian function whose mean value is the optimistic estimate. The higher the average, the more overoptimistic is the capitalization dynamics, the lower - the more pessimistic. At every time step, this function has its own parameters, however, the further ahead in time, the greater the variance of estimates and the allowable interval of price volatility.

Example

For instance, let’s assume the fully diluted cap for Graviton to be at $50 billion in three years and review a similar project, e.g. Chainlink, as a reference. However, it is important to note that the over-optimistic score should not be significantly higher than the industry leader BNB that went above 150 billion in three years. At the same time, we understand that if the project grows linearly, this will only lead to a pessimistic estimate of around $2 billion.

Thereby, when creating a forecast for the next one or two years through expert analytics and multisig voting, we can combine the basic functions and determine the most optimal parameters to generate a resulting PATHWAY function. The treasury smart contract will then attempt to follow this target trajectory and the team will be referring to the planned growth in operational tasks and sprints.

Randomness

In order to stay robust to manipulation of trading bots, all decisions to buy or sell the token for a specific amount should be made in a non-deterministic manner, with a certain probability. For example, if the EMA of the GTON price is approaching the pessimistic zone, then the probability that the PATHWAY Calibrator smart contract will start to redeem the token from AMM Dexes should increase. Vice versa, if a pump occurs, the likelihood that the SC will sell more token increases. This scheme is probabilistic and gives no guarantees for the growth of the token or any other metrics, but rather, on average, statistically stabilizes the evolution of capitalization within the target values, leaving the natural volatility intact.

Adaptiveness

The market may evidently change, new partners or “celeb” contributors may enter the team, which may require a revision of forecasts and adaptation of PATHWAY parameters in accordance with the new conditions. This can be carried out through a regular consul/multisig voting that can take place once a month or several weeks.

Proposal

I propose to the community to consider the PATHWAY algorithm as a foundation for automated market-making of GTON on decentralized exchanges.

Looking forward to your feedback in this thread!

9 Likes

Wonderful! Happy to see the team looking to define an innovative automated pathway with governance that tries to address traditional MM issues.

4 Likes

Really nice proposal about pathway smart contract to maintain the DAO treasury. However, we will looking for the next stage of adding BTC, Eth…etc to estimate our utility tools?

Cheerful
Paolo

2 Likes

It seems PATHWAY is a breakthrough mechanism for AMM in general because of the ability to a flexible combination between automated algorithms and human decisions (DAO). Actually, PATHWAY helps most of projects only focus on entire their time to develop product but also assume that market-making, liquidity & another issues of finance are made well.

2 Likes

PATHWAY is an innovative solution compared to those traditional AMM. However, I think better documentation is needed for newbies or ordinary Defi participants to understand the whole concept. Currently the protocol design is a bit too complicated which may incur a unnecessary difficult learning curve.

3 Likes

How do we prevent unrealistic projections from the community? Could the overly pessimistic curve theroretically be set to 10x/a year? Do we need some absolute minimum/maximum parameters and if so, who gets to set those?

1 Like

agree!
this is idea of PATHWAY
the exact formulas and parameters will be simulated and published later

probably we need some special Experts/Consuls roles from the community who is able to propose PATHWAY based on fundamentals and project traction

Perhaps “pessimistic, realistic and optimistic” might fit better here, what do you think everyone?

3 Likes

Honestly, I don’t quite understand the connection between the functions mentioned in the proposal (linear, polynomial, exponential) and the trajectories. Can somebody explain?

1 Like

“With PATHWAY, the treasury smart contract should not only regularly buy tokens from the market and put them in liquidity in the form of LP, but also monitor the current moving average of the token price, determining how far the current dynamics is from the trajectory agreed upon by the governance.”

As proposed by one of our core contributors, besides the moving average, even more sophisticated models like Bollinger Bands could be integrated in the future. This means that the market making algorithm won’t have to react if the price stays within the Bollinger Bands. This would even allow for configuring the different parameters of the activity, so to say “aggressiveness” and “responsiveness” of the algorithm.

1 Like

Will graviton provide a ready-to-use solution for independent integration of Pathway into other projects? What will it look like? What tech will be used? Can this be positioned as a service? If so, what parameters of the treasury as an asset storage will be factored into the design of such a solution?

1 Like

One of the things that is not covered in detail is how to ensure there are enough tokens to take the necessary action. Thus, buy or sell action will be triggered when a condition is fulfilled (conditional probability) depending on the remaining amounts of collateral/token. A set of rules will be established that will allow for automatic and predictable operations for certain ranges of possible situations.
Thus we’ll be able to ensure to always have enough funds in the treasury in order to achieve this goal.

1 Like

Wont the smart contract be vulnerable to sustained efforts to drain treasury

example1;
Big whale decides to start buying a lot, SC decides its a pump and starts selling tokens from treasury. Whale gets to keep buying at low prices since SC is selling. Whale drains treasury at a good cost
vs If SC wasnt buying; regular price pump and treasury has increased value for its tokens.
-Ofc in this scenario ; if SC can determine when others will dump based on pump, it can make more money.

Example 2:
Similarly; whale starts dumping and SC keeps buying, providing whale with sustained good prices. If panic follows and treasury cant sustain the buying, it will have been drained of stable funds and eventually price may still fall further.

Probably smart contract will be smarter than above scenarios and configured for them , but still just wanted to confirm.

3 Likes

regarding the “randomness”: a certain probability isn’t randomness. Sure market participants couldn’t forecast the treasuries exact behavior, but they could forecast the probabilities. It’s for sure better to have probabilities but I think this still leaves the treasury open for exploitation by bots.
My point is, that bots could still abuse this SC by placing +EV bets, even though the “win” is not guaranteed, but if the bot “wins” 60% of the times 1 btc and loses 40% of the times 1 btc, he still expects to make 0.2 btc with each “bet”.

2 Likes

I very much like the proposal. The only thing i wonder is if simple Moving Averages aren’t a bit too simple as a model. What about a bit more profound TA techniques like Bollinger Bands (shouldn’t be much harder to implement) and/or Fibonacci Retracements?

If you use smart contracts to affect prices, you must think of a way that will not be arbitraged by bots. For example, the PCV of Fei protocol will be arbitraged by the bot every time it reweights, resulting in unstabilized prices. In addition, the team can focus on the development of bridge aggregator, because this is the first bridge aggregator project, people tend to focus on the “first”, and this is a tool that many people need. Using the bridge aggregator to promote and expand the community to increase visibility is probably what the project needs most now.

2 Likes

This is an interesting proposal, which I will support. I think the main question will be, if we manage to convince the market that the pathway should not be left - because if it does the firepower of the treasury account might not be enough to withstand selling pressure. This might be the case especially once we are seeing higher prices, because the treasury account will not grow porportionately to the increase in GTON price. But still, it might work out and it is clearly better than just buying back at random prices.

Good point! In order to stay robust to manipulation of trading bots, all decisions to buy or sell GTON will be made in a non-deterministic manner, with a conditional probability dependent both on the amount of collateral left and the divergence from the trajectory.

Voting for Pathway is already available in the governance section at https://v1.graviton.one/proposal?id=1 and will end on June 9, 1pm UTC time.

:face_with_monocle:Please review the Voting FAQ before participation.
Key takeouts:
:white_check_mark: Voting only uses your governance balance
:white_check_mark: No lockup of your GTONs happens until the end of voting, meaning that you can transfer them back to the governance balance at any time
:white_check_mark:You have up to 5 attempts to cast your votes (including adding or removing votes)
:white_check_mark:Graviton covers all the Fantom network fees, so you vote for free

If the community approves the proposal, PATHWAY will come into action by the end of June.