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The Liquidity Baking Mini-Series – For/Against (Part 1 Of 3) – Madfish

In this 3-part mini-series (which will be posted together), Allen Walters looks into the topic of ‘Liquidity Baking’, exploring viewpoints both for and against.

  1. What is the value of LB for the Tezos ecosystem? Some wonder if it compensates the 0.3% inflation that comes with LB.

This particular innovation has ushered in full-fledged on-chain liquidity that does not rely on DEXes and their Liquidity Mining programs. 

It’s also a really healthy trend for an ecosystem where 80% of the token supply is owned by users. Such a spread hampers centralized market-making while instant liquidity is restricted by stringent AMM rules and the volume of the liquidity pool. 

  1. Does it actually cause 0.3% inflation on XTZ?

If we take the textbook definition of inflation, i.e. “inflation refers to a general progressive increase in prices of goods and services in an economy” (https://en.wikipedia.org/wiki/Inflation), it doesn’t.

But it does lead to extra issuance. Which in our opinion has little impact on the Tezos protocol.

  1. Why is tzBTC the most suitable token for LB? (If so)

As Winston Churchill once said, “Democracy is the worst form of government, except all the others that have been tried”. Similarly, tzBTC may not be the optimal choice but we don’t currently see a better option.

  1. Are there any other tokens that would be suitable according to you? (Possibly USDtz, kUSD, uUSD)

Not at the moment. But let’s bear in mind that we might not even fully understand the power and significance of LB as a tool yet. 

For example, suppose more bridges with stablecoins suddenly pop up and kDAO or YOU will incentivize some other CFMM pool with some other bridged dollars or native USDc (make it happen!) or both.

In that case, we even might vote for kDAO or YOU LB options to incentivize liquidity growth in the abovementioned CFMM.

  1. When using the escape hatch, what percentage of total rolls are necessary to activate the escape hatch? 

A third of the last 2000 blocks should signal for leaving LB.

  1. Some say there is a technical boundary to use the escape hatch. It would be difficult and only for more advanced bakers. And it would add a certain risk for error and missing blocks.

That’s quite an irresponsible position. If you’re a baker trusted with maintaining the safety of the protocol, you should really possess some tech expertise or better yet have access to a team of professionals. 

  1. What is your opinion on the idea that Nomadic Labs should offer extra choices when a controversial feature like LB is included in a proposal?

Nomadic Labs are there to do their own thing. If the community members are able to inject proposals with alternative tokens, why should Nomadic Labs ((NL) do anything about it?

We do believe that all of us (developers, bakers, and community members) are responsible for holding a public discussion on disabling LB or switching the token. 

“Nomadic Labs” trademark just adds legitimacy to proposals. But there’s also a problematic side to it, as many bakers vote for NL proposals by default without taking time to closely study them and come up with counter-proposals of their own.

  1. Any other thoughts?

Right now monthly Storage Fee burns approximately 1.3% of the monthly Tezos issuance. And this figure is growing. I don’t think that 0.3% will bear a lasting impact on the Tezos monetary policy.

Matvey Sivoraksha

co-founder, MadFish

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