Spend Proposal: Margined protocol sqSCRT liquidity deal

Hey everyone,

Summary

This proposal asks for 100k SCRT from the community pool to be deployed as community owned liquidity for the upcoming sqSCRT/SCRT concentrated liquidity pool on osmosis.zone. The liquidity is to be managed by Margined protocol and ~2 (to be chosen) representatives of the Secret Network community. This will enable enough liquidity for sqSCRT to be launched as an asset on Margined protocol.

About Margined protocol

Margined protocol is a decentralized power perpetuals platform build on osmosis. Power perpetuals are a DeFi native instrument first introduced by Opyn on Ethereum that allows traders to go long the squared price of an underlying asset without liquidation risk. People go long by buying sqAssets on the open market and receive an asymmetric/convex risk profile in comparison to a 2x leverage position. In return they pay an in-kind funding rate which is determined by the deviation of the mark price from the asset index price. Short instead deposit the base asset as collateral (SCRT in this case), mint an associated amount of sqSCRT and can sell this on the open market. Short traders are essentially going short volatility, as long as an asset ranges the in-kind funding from the longs will reduce the collateral they need to return to pay back the loan. If the asset goes very volatile they might be liquidated and longs will make outsized returns. Power perpetuals can be combined with standard linear perpetuals to form a so-called crab strategy which does well in times of low volatility or combined with CL/LOB pools to perform delta-neutral/hedged CL liquidity provision. You can find more information about Margined on the documentation: https://docs.margined.io/

How it will work

We will propose the funds to go to a multisig owned by community contributors (within or outside of SNF/Labs as community wishes) after which the SCRT is transferred to osmosis. The Osmosis CL liquidity can be managed by Margined/community together where having ownership be with Margined would be easiest but combined ownership through DaoDao or native multisig is possible as well. - We would love to get any recommendations by the community as to how this should be managed, it is fluid - The more security/decentralisation is chosen the harder the liquidity will be to manage. Margined has in-house managing scripts and analysis they would like to leverage to manage the liquidity as efficiently as possible. Alternatively the community could decide on a more wide CL range with less active management if it so desires.

EDIT:
A 3/5 multisig of Mohammed (Secure Secrets), Alex Saturn (SNF + Validator), Luigi (Validator), Lisa (SNF) and Ertemann (Validator) will be the keepers of the requested amount of SCRT.

The multisig will Transfer the funds to Osmosis over IBC to another multisig of the same members.

The margined team will gain AuthZ rights on the assets to add and withdraw and change CL positions in the Osmosis pools. This means they have the oppurtunity to sell the assets but not withdraw them. The position will be largely managed by an automated system build by Margined themselves.

The Secret community pool will lose any direct access to the funds after passing of the proposal but the multisig owners are expected to follow any follow-up instructions coming in from the on-chain proposals.

Additionally, if not additional proposal is passed to extend the period the multisig signers are expected to return the funds in full + potential profit to the community pool no later than 6 months after the mainnet launch-date of the Shade Liquidity orderbook dex.

– EXACT addresses will follow –

EDIT2:
The multisig signers will commit to changing ownership of the funds to a DaoDao contract on osmosis with Veto power (over IBC) by secret governance, within 1 month of mainnet launch of CosmosSDK 0.50. Please be aware that this proposal requires some participation from the Osmosis DaoDao deployment to enable Secret-4 gated DAOs and there might be delays due to multisig handover problems and withdrawel timelines set by the margined liquidity requirements.

Why is the liquidity needed

Margined needs to be able to liquidate shorts on Osmosis directly and also retrieve its pricing for the index from an Osmosis spot pool; a significant size pool needs to exist in order to facilitate this. They believe ~30-40k is enough to bootstrap the market after which it can grow on its own. Holding an sqSCRT/SCRT LP position that is often rebalanced equals to being roughly 1.5x long on SCRT. The community pool would gain additional SCRT leverage by deploying this liquidity.

Benefit for Secret Network

  1. Export of SCRT: The export of SCRT throughout the cosmos is a good way to expose SCRT to more users and generate interest. Osmosis is a big liquidity hub for SCRT and having additional utilities within that ecosystem could be an attractive solution.

  2. Enhanced DeFi usecases: Enabling sqSCRT on Margined will allow the Secret community to perform more DeFi strategies that enhance their yield and bring in true fees. With both DemEx and Margined people can now go long and short SCRT volatility and combining it with integrations like Nolus or Shade LOB people can farm funding rates and swap fees while being ~neutral on their position. sqSCRT might be used later down the road in the Shade money market for even more interesting usecases.

Negatives of this proposal

  1. Not native: At this point in time Margined does not have the necessary infrastructure to do cross-chain liquidations, this makes us unable to keep the sqSCRT/SCRT liquidity on the secret network itself. Additionally Margined is in the Asset expansion phase and is not able to deploy natively on Secret network as of yet.
  2. decentralisation: The optimal way of managing the liquidity can never be very decentralized while a more secure/decentralized setup would be less efficient liquidity. This trade-off is hard to navigate.
  3. Risk of total Loss: Due to the exposure the community pool would gain to the sqSCRT power perpetual asset, it is getting additional downside risk on the price of SCRT.

Curious to hear all your thoughts!

Best,
Ertemann
Lavender.Five Nodes

3 Likes

Thanks for putting together a real opportunity related to your last post. This one is interesting :eyes:

I’d like to see SLABS & SNF chime in on this and how it could be managed professionally . I think that it would be right up their alley, especially SNF since it relates to their KPIs and they’re a neutral org. I’d also like to hear more input from people on it in general but it does look interesting.

1 Like

A few details on managing the LP position.

We are going open-source our LP bot which would be used by the protocol to manage the sqSCRT<>SCRT position.

This bot tries to solve a key issue in CL markets that is you may wish to sell an asset at price X but only want to buy at price Y.

Needless to say the bot tries to manage 2 “single sided” LP positions ensuring that the price of sqSCRT is never below the theoretical price and the buy price is always tracking the market price.

However, once the two prices converge it then manages the positions as a single “normal” position until/unless the market and index prices diverge again.

Why is this good?

This means that mispriced assets in CL pools stay mispriced for less time as liquidity between the market price and index price is reduced resulting in a reduction in liquidity required to return a market to the “true” price.

Further this should reduce the IL of LPers in severely mispriced markets.

If anyone has other questions or ideas please let us know :slight_smile:

1 Like

Maybe a very specific question:

Are you able to manage this using just specifc Authz Msg allowances that would prevent you from removing the SCRT completely or transferring it to another account?

Ofc you could do that I think we would just need authz for the messages:

  • MsgCreatePosition
  • MsgWithdrawPosition

However, we haven’t built our bot like that ATM but it’s a really good idea actually (why didn’t we think of it!!!)

2 Likes

Welcome … Covert Big brains dwell here . We just think of it for you, then you, execute.

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I disagree with the proposal, reasons:

  • Using Osmosis as a venue for LPs in no way benefits Secret as a network and ecosystem, besides encouraging non-private trading, which goes DIRECTLY against the idea of the Secret Network

  • sqSCRT is a risky asset

  • Decentralization is challenging in this regard ( not impossible ), in one project we are working on we are also creating a very secure governance solution ( @alexz knows which one ), once the solution is complete I can share it here on the forum

  • The community treasury should focus more on supporting projects that are native to the network, if the treasury first provides liquidity to SCRT/stkd-SCRT on Shade Swap ( this pair is incidentally many times more secure than SCRT/sqSCRT and can also be done in a decentralized way ) then we can talk about creating liquidity on other networks.

All your points are very fair and those are indeed the clear negatives.

but:

Shade is already on Secret, a 100k SCRT of additional SCRT/stkdSCRT liquidity will not really move the needle and the pool would be emptied if it wants to properly support secret.

Margined will deploy sqSCRT because of this and we can work together in the longer term to push more of the value creation to Secret natively. The funding yield coming from sqSCRT will make more people potentially hold SCRT to arbitrage and thats a nice net positive in the short term. So it is a benefit even if its smaller than if margined were to be a secret dApp.

sqSCRT brings nothing to Secret Network , it brings to SCRT
When they are able to create SCRT/sqSCRT liquidity on Shade ( or whatever DEX comes along in the future wink wink ) then we have something to talk about

Supporting liquidity on non-public blockchains from our side seems not only counterproductive but also hypocritical to me if we are using phrases like “private-by-default”

As for Shade, that was just for comparison, but if you really want to compare these 2 options to each other then stkd-SCRT is much more secure and important for Secret Network infrastructure than sqSCRT, not to mention how easy it would be to manage this position.

Jiri, I think you’re being a little bit unfair here, but I’ll try to give my opinion as condensed as I can:

  • Margined Protocol is not yet natively deployed on Secret Network. This deal gives Margined Protocol a good indication of the demand for such a product. Therefore, it could convince them that deploying natively on Secret Network is good, especially post-Liquidity Book launch on Shade Protocol.

  • Margined will give $SCRT holders an additional use for their $SCRT which increases the likelihood of not selling $SCRT (i.e., some downside protection on supply of $SCRT on open markets)

  • Remember that uhmmm “$SCRT is not private” narrative, I don’t greatly like it, but if that’s what is being accepted, this deal is not hypocritical in the slightest. This is a use of the $SCRT asset, not a user of Secret Network.

I entirely agree that we should be growing native protocols as much as we can. However, you can only do so much with such a finite amount of protocols. If Margined Protocol, or a competitor to it, launched on Secret Network, I would support the reclaiming of liquidity in this deal to deploy elsewhere.

2 Likes

If liquidity will be running on Shade I fully agree with the deployment ( just use IBC lol, sqSCRT can be minted on Osmosis but liquidity should be on Secret, crosschain DAODAO can be used for management )

(This opinion is my personal and does not reflect the opinion of SNF in any way):
I agree with @orageux101 arguments. Given that these SCRT would be used as liquidity only I don’t see any major risk aside from smart contract risk and IL. Ofc LPing on this pair effectively going 1,5x long on secret, but with overall market sentiment improving, I see this as an extra upside. Also deploying sqSCRT could set us in a better position for margined protocol to actually deploy directly on secret in the future. I see it as the first step in getting them to deploy their dApp on secret network

like the proposal mentions:

I discussed an IBC framework for having the pool live on Shade LOB instead but at this stage of their product they cannot support cross-chain liquidations and the needed frontend work to make that a success.

I think this is an awesome long term goal, we also need a clearer timeline on LOB launch for that.

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Please provide any last feedback in the coming days

We aim to go on-chain this monday with a final version.

@ertemann when exactly are you planning on saying who exactly the multisig signers are going to be be? During the discussion or when its on chain already? Happy to support but with such a large sum I’d be expecting SNF to chime in and be on the multisig.

Fine with any composition ourselves really.

I think this is supposed to be mainly a community initiative so SNF participation in the multisig doesnt seem required to me but is definitely possible, surely we can convince one of them to do it.

I think best approach for now is 3/5 multisig and then assign CL authz rights to margined.

Happy to be one of the 5 people but if there is a different composition of people then fine with me as well.

How is that the case when all the bizdev work for this was done by SNF?:thinking:

All might be a bit hyperbolic but yes it was me under SNF who pushed this to the point where we are. Community however has the final voice, they provide the money.

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Can you provide any modeling of different scenarios?

Historical performance on other assets would be helpful, too.

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