The Liquidity Baking Mini-Series – For/Against (Part 2 Of 3) – Tezos Wake ‘N’ Bake And Kryptstar

by | Jan 16, 2022 | Latest, Opinion

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

Part 2 continues with the Tezos Wake ‘N’ Bake and Kryptstar teams.

This is an opinion piece where the thoughts of Tezos Wake ‘n’ Bake https://twitter.com/Tz_WnB are reflected. Also Mack Tezos https://twitter.com/MackTezos (Kryptstar) has added his opinion regarding the use of the escape hatch to this piece.

We oppose LB in its current form

LB is funded by a 0.3% annual inflationary tax created by extra XTZ that is minted by the protocol to reward liquidity providers. Taxpayers are all the XTZ holders because they suffer the extra 0.3% annual inflation on XTZ.

We all hoped that LB would bring more trading volume, healthy liquidity and more users to Tezos. Unfortunately, LB in its current form is not generating any trading volume in the liquidity baking contract. That means that LB is currently not returning any form of value back to the Tezos ecosystem.

The current tzBTC – XTZ version of LB only brings increased inflation for XTZ at this point, while it should return value to its funder, the XTZ holder. That is why we oppose LB in its current form.

Whether or not LB will be a success in the long run has to be seen, but we feel that tzBTC is not the right token to get the job done. We would rather see a token with global recognition like USDC, a token that is widely listed on any CEX or DEX.

There is a small group of people that profit from LB at this point. Only liquidity providers do. This group of people has a conflict of interest on keeping LB running with tzBTC, despite the fact that it is not returning any value back to all XTZ holders. 

Why we vote nay to Ithaca

The way LB is set up is a subject that concerns all holders of XTZ. It’s different from other upgrades because LB brings an extra 0.3% of inflation to the table.

We feel that decisions on how to influence the inflation rate of XTZ, should not be taken lightly, and no boundaries should exist for XTZ holders to co-influence decisions on that matter.

In other words, decisions on LB should be held to a higher standard than other proposals that do not influence the XTZ inflation rate.

This means, in our opinion, that if an entity brings change to a matter like the inflation rate, they should acknowledge the fact that they have a responsibility in that matter to make sure all holders of XTZ, rich or poor, should be given a choice. 

In the previous upgrade (Hangzhou) it was clear that a substantial part of the community was in favor of a change in LB. The score was 20.50% in favor of tzBTC-XTZ versus 20.74% in favor of USDtz-XTZ. 

In the following (and current) upgrade, Nomadic Labs (NL) has created the Ithaca proposal which included the continuation of LB with the tzBTC-XTZ token pair.

We were not given a choice. In our opinion, due to the fact that we think LB should be held to a higher standard, NL should have included variations of Ithaca.

At least an option that did not include LB’s continuation. We’re not asking for much, just an option that does not include LB. Let the XTZ holders speak on the matter. 

Why should NL do this? As argued above, the fact that they include a feature in their upgrade package that holds increased inflation gives them a moral responsibility to offer a choice. 

Secondly, because of the fact that they have extensive knowledge of the total upgrade, they are the preferred party to make any changes.

They are the most trusted party that can responsibly change the proposal and create several options responsibly with a small investment of time and resources. 

And there is another factor. Everyone is very much occupied building cool stuff on Tezos, which means that developers are scarce and have a packed agenda.

It has proven to be very challenging for other parties to find developers that can create variations of the Ithaca proposal. Not every holder and baker has a network of developers they can tap in to. And not every holder of XTZ has the capital to pay for developers to create a variation.

The TF also received funding from non-LB non-supporters. We feel like they are turning their back on us by not supplying a non-LB choice.

Why do we not use the escape hatch?

The escape hatch, which is a foreign governance system with other rules as our only way to vote to end LB without having to end Tenderbake.

Escape hatch should only be used for emergencies in case of smart contract exploit, it should not be a replacement for a proper No-LB option in the main on-chain governance protocol that is based on the 80% super majority governance rule, which the escape hatch clearly doesn’t have.

Mack Tezos https://twitter.com/MackTezos (Kryptstar) added on the ‘Escape Hatch’ topic:

“Bakers shouldn’t be required to tweak with their baker any more than they already have to.  We need to keep configuration simple so we can attract more bakers. 

Documentation for the escape hatch was poor.  Yes, maybe the core devs could read it easily, most bakers don’t bake full time and can’t dedicate more time tweaking their bakery for every escape hatch. 

It also adds an opportunity for human error that isn’t present in our normal governance process.”

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