Proposal for DOT Liquidity

DOT is the engine oil of the DOT ecosystem and economies sorounding DOT. It is to every DOT holders' benefit to help increase DOT utilization and the velocity of DOT.

Acala is a DOT-based parachain that creates instruments to increase DOT utilization and the velocity of DOT:

1. Acala's flagship product - Acala Dollar (aUSD) is the decentralized monetary reserve for web3. It uses DOT and DOT derivatives as reserve assets and collateral to generate stable currency to be used as medium of exchange in the decentralized web. It is also a multiplier instrument that increases hodlers' exposure of DOT.
2. The supporting Dapp Homa Liquid Staking: creates a non-custodial staking pool and an L-Token that tracks DOT principle and staking yield earned. LDOT enables multiplying exposure of DOT with compounded staking yields.
3. The other supporting Dapp Acalaswap: provides liquidity pools for aUSD liquidation, DOT-based trading pairs, using DOT and DOT derivatives and other accepted tokens as fee token.
4. Acala also created a fungible crowdloan DOT derivative LCDOT based on strong community feedback on 2-year deadlock of DOT liquidity. Currently there are 24M fungible LCDOT in circulation, 1:1 redeemable to DOT once lease ends. There is now strong community demand for LCDOT/DOT trading pair in Acalaswap to facilitate liquidity demand and also provide discounted rates for future DOT.

All of these instruments have a classic chicken-and-egg challenge: it requires liquidity to enable utility, which will then generate more liquidity.

We'd like to ask for DOT holders to grant DOT from the Treasury to be used as liquidity to help booststrap these instruments on Acala. We'd like to ask for an initial 3M DOT

• a portion which can be used to mint aUSD and LDOT
• the tokens will be used to provide liquidity into DOT and DOT-derivative based swap pools. this can potentially be distributed but not limited in the following ways
  • LDOT-aUSD pool est. 1M DOT in total
  • DOT/LCDOT pool est. 1M DOT in total
  • DOT/LDOT pool est. 1M DOT in total

At the time of writing, 1M DOT pool is equivelent of $20M which is tiny in DeFi terms, but we'd like to kickstart this initiative and help build a strong DOT-based economy.

Managing the Funds

Acala Treasury has the ability to host multiple accounts that have no private keys and are managed via governance e.g. on-chain referendum. The received funds can be stored in a separate account under the Acala Treasury; deployment proposals can then be voted and executed on-chain.

Other Considerations

Staking rewards

It's expected that the bigger pools in Acalaswap would be LDOT (Liquid Staking DOT) based pools, where deployed DOT liquidity will continue to earn staking rewards.

Capital Efficiency

For DOT (including DOT-derivative) and aUSD based pools, SuperLoans (using LP token as collateral to borrow aUSD) can be created to significantly improve capital efficiency e.g. 1 DOT can potentially create 2x DOT worth of liquidity (depending on required collateral ratio at the time).

DOT Exposure

With the ability to borrow stablecoin using DOT and DOT-based derivatives, we do not need to sell off DOT for liquidity, and instead we can borrow and keep the DOT holdings. However we will recommend relatively conservative collateral ratio when making deployment proposals.

Discounted DOT

LCDOT (Liquid Crowdloan DOT) is guaranteed 1:1 redeemable to DOT once parachain lease ends. LCDOT also is expected to have a discounted value due to lost of staking yield. Long term DOT-LCDOT liquidity provider can then acquire DOT at a discount.

LP fees

Providing DOT-based liquidity in Acalaswap are essentially actively using DOT for market making. The better the liquidity of a pool, the more trading volume there will be, and more trading fees will be generated for the liquidity provider.

Tracking

The following metrics can be used to track progress

• trading volume for respective pools overtime: targeting $500k for aUSD based pools and $250k for non-stablecoin pools
• insights on pools responding to significant liquidation events

Fellow DOT-holders, we appreciate your time reviewing this proposal. Let's build a strong DOT-based economy, together~