Should GnosisDAO launch a Liquidity Mining program for prediction markets using Gnosis Conditional Tokens?

Summary

GnosisDAO will launch a Liquidity Mining program for prediction markets using Gnosis Conditional Tokens that would reward liquidity providers with GNO to incentivize a curated set of markets and thus boost the use of Gnosis Conditional Tokens.

Abstract

The GnosisDAO will allocate 120,000 GNO from the treasury for the first 12 months of this liquidity incentivization initiative. It will dynamically manage the GNO rewards distribution by assigning “allocation points” to specific markets that the GnosisDAO votes on in order to stimulate the markets with a higher participation potential or that would generate quality predictive data for the GnosisDAO. Currently, it means incentivizing mainly liquidity providers for Omen markets on xDai but the program would be open to any solution using Conditional Tokens (for example, it could also incentivize ERC20 wrapped conditional tokens on exchanges such as Uniswap, Balancer, SushiSwap, and 1inch).

Motivation

In the current environment full of yield farming opportunities, providing capital to any protocol incurs a high opportunity cost. Moreover, prediction markets are known to be more attractive to users and more potent at predicting events when the markets are liquid and efficient enough to allow for high-scale arbitrage (cf. Vitalik Buterin Prediction Markets: Tales from the Election blog post).

Anyone can add liquidity to prediction markets using Gnosis Conditional Tokens by minting them for existing markets or even creating their own markets. Liquidity attracts traders, trading generates prediction market fees, and ultimately this profitability attracts more liquidity. This is a flywheel effect that has to be incentivized within the Conditional Tokens ecosystem in order to position ourselves in the prediction market scene.

Regardless of the venue, early liquidity providers take on more risk and opportunity costs: including contract risk, low initial profitability, etc. Moreover, conditional Tokens users should get to participate early on in deciding how the GnosisDAO evolves and plans to build new versions of the Conditional Tokens.

Toward this end, we propose implementing a Liquidity Mining program for prediction markets using Gnosis Conditional Tokens rewarding liquidity providers with GNO tokens. These types of initiatives are proven to attract significant amounts of capital into products and to kickstart a virtuous cycle of additional liquidity (see the examples of Balancer, Sushiswap, and 1inch) and thus improved user experience and efficiency which will, in turn, bring more usage to Conditional Tokens.

The indirect benefits of this program for the GnosisDAO are multiple:

  • Fostering the use of one of Gnosis core products (CT framework).
  • Upgrading the distribution of GNO by rewarding it to valuable community members.
  • Improving the quality of data generated by prediction markets using CT.

The potential direct benefits to the GnosisDAO are just waiting to be unlocked by the governance. In the future, it could take the form of the implementation of a redemption fee mechanism embedded into the Conditional Tokens framework, or of a trading fee in exchanges controlled by the GnosisDAO. Legacy prediction markets like PredictIt charge significant fees (10% of the profit on a market and 5% of withdrawals), blockchain prediction markets like Augur or Cover charge a smaller redemption fee (~1% for Augur and 0.1% for Cover). As long as the GnosisDAO provides continuous support and development for Conditional Token, a small fee will probably be accepted by the users.

It would also be possible for the GnosisDAO to find novel revenue sources around Conditional Tokens. For example, frontends controlled by the GnosisDAO could also allow users to burn some GNO in order to have their markets displayed in more attractive positions of the UI.

Specification

The GnosisDAO liquidity mining program for prediction markets using Conditional Tokens will be inspired by Balancer and SushiSwap liquidity mining programs.

For the first year, 120,000 GNO tokens (or 10,000 per month) will be distributed to liquidity providers staking their conditional tokens liquidity into the GnosisDAO liquidity mining contracts. For networks other than Ethereum mainnet (in particular xDAI), those GNO tokens would be wrapped on the particular network.

The amount of GNO distributed to a particular liquidity pool will be determined by an allocation point system. The GNO will be distributed between pools in proportion to their allocation points and within pools in proportion to participant liquidity.

For example let’s assume there are 3 pools A, B, and C with 100, 400, and 500 allocation points, Alice has 200 ETH of liquidity in pool A which has a total of 500 ETH of liquidity. Alice would receive 10000(200/500)(100/1000)=400 GNO per month.

In order to be able to rapidly incentivize new markets when opportunities come up, setting up allocation points will be done through a fast-track procedure on Snapshot which does not require going through the complete governance procedure.

Any account with at least 1000 GNO (from a snapshot taken at the beginning of the month) will be able to make an allocation point proposal each month for each 1000 GNO it holds (so an address with 3000 GNO would be able to make 3 allocation proposals per month). Those would be put to vote instantly with a 1 week voting period and without quorum requirements.

An allocation proposal would contain:

  • The conditional token liquidity pool to be incentivized.
  • The number of allocation points for this pool.
  • The start and finish date of the incentivization.

Allocation proposals can provide allocation points to new pools or change the allocation of a current pool (including setting it to 0).

Disclaimer

The plan outlined in this proposal is subject to discussion and change. They may also need to be restructured to take account of legal, regulatory, or technical developments as well as governance considerations.

12 Likes

120,000 GNO ~ 8% of the total supply.
That would be at todays prices 10k GNO per month ~ $1.2M in rewards each month. That should create some serious liquidity (not seen in the prediction market space before) but it might indeed be exactly what is needed to lift prediction markets from a mostly theoretical concept to something actually being used and playing a big role.

I would like to connect this proposal with a proposal I did recently: activating OWL.

It does not make a lot of sense to use pure stable coins for prediction markets - capital costs are just insane and your are literally throwing away money. It is also bad to have the markets denominated in all kind of different assets. OWL could solve this problem. If GnosisDAO is not (yet) comfortable with doing efficient yield farming we could still partner with e.g. YEARN. And thus effectively turning OWL into a wrapper for a basket of different YEARN stable coin strategies.

  1. GnosisDAO would provide GNO incentives to provide liquidity for specific conditional tokens denominated in OWL
  2. GnosisDAO would print OWL and sell it for stable coin
  3. GnosisDAO would use stable coins and put them into different YEARN vaults (could potentially buy insurance cover if needed)
  4. Interest on stable-coins is largely payed forward to the user by an steadily increasing OWL/USD rate. (similar to tokens like c-USDC, CHAI, yDAI)
3 Likes

Thanks for the very well written proposal, @jrag.

I personally like the idea of incentivising liquidity on a Gnosis built platform (more than e.g. incentivising LP-ing GNO on other projects’ DEXs). One concern I have with committing such a large amount of funds is that I’m unclear on the monetisation strategy for the CT framework at this point.

If the program was successful and brought significant liquidity to prediction markets, how would we (in the long term) capture value for GNO holders? Is taking a fee on the AMM spread the right approach? Are AMMs in general a good enough market mechanism to provide liquidity or would we need a more order book style exchange mechanism for this to make sense?

1 Like

I don’t have any definitive answer concerning the prediction market value capture mechanisms for GNO holders apart from the high-level ideas cited above. Even though it is tightly linked to this proposal, I think it deserves a full deep dive and discussion in its own thread.

If there is rough consensus on the principle of a Liquidity Mining program for conditional tokens prediction markets but not on the amount of GNO to be allocated to it, I suggest using the phase-2 poll for listing multiple potential GNO amounts to get a feel of what the community would feel comfortable with.

1 Like

I think the easiest is to take a redemption fee or a trading fee. The redemption fee having the advantage of allowing value capture, even without the Gnosis DAO controlling the marketplaces.
But other approaches could also work.
In the current environment the goal is to attract users to position Gnosis as the main player in the prediction market space. I think that current fees would be negligible compared to future fees, so I don’t think activating them should be a priority (the GNO rewards incentivize the LP and the absence of fees incentivize the traders).
We saw other projects successfully launch liquidity mining program before activating fees (ex: Balancer, Uniswap). Seeing market reactions, I think market participants understand that initially the dapps are to be subventioned, but that once they become large and highly liquid, it’s OK to add fees (the benefit of liquidity outweighing the cost of the fees).

I think that in general AMMs have been the most efficient way to get liquidity (providing liquidity via order book is reserved to professional handling trading bots). But order books should ideally complete AMM. We could also incentivize orderbook liquidity but in this case we’d need to determine how to compute rewards (the good part is that the value of conditional tokens is bound, so we could easily set up a scheme rewarding people making orders in function of how close their orders are to the current price).
For Conditional Tokens, we could have AMM with automatic withdrawal of liquidity at a specific time to protect LP from losses when the event is known.

2 Likes

This proposal has moved to Phase 2, please check it out & vote here: GIP-9: Launch Liquidity Mining program for Prediction Markets using Gnosis Conditional Tokens