The Liquidity Contribution Model

The DutchX #4

Having introduced the DutchX and explained its mechanism design, we’d like to provide you with more details about the exchange in a series of bi-weekly posts. We hope this series will shed light on the exchange’s features and leave you not only well prepared for the DutchX launch (planned for the start of Q2), but also ready to participate.

In our previous post, you learned about how to trade, list, and initiate tokens in the DutchX. This week’s post presents the liquidity contribution mechanism and describes how Magnolia tokens will lower your liquidity contributions.

Magnolia Tokens

Magnolia tokens are intrinsic to the DutchX and solely used to lower the participant’s platform liquidity contributions (of buyers and sellers): One Magnolia is generated for trading one ETH worth of any token and is automatically credited to users.

Magnolia are inflationary as their creation is based on the volume traded on the DutchX — there is no mechanism in place to reduce their volume.

Magnolia are credited to the user by the time funds are claimed, and are locked by default. Only locked Magnolia count towards the liquidity contribution reduction. You may unlock Magnolia at any point in time — after 24 hours have passed, you may trade them freely. They can be re-locked at any point in time. When unlocking Magnolia, it has to be done for all Magnolia of one particular wallet.

As for GNO and OWL, you do not need Magnolia to participate as a seller or buyer in the exchange.

Liquidity Contributions in the DutchX

Liquidity contributions paid in the DutchX stay in the DutchX! They remain and are redistributed within the ecosystem, and do not go to Gnosis or any other specified party. Participants holding Magnolia tokens will pay lower liquidity contributions. All participants benefit from being credited part of the total of these contributions thanks to a redistribution model.

Consequently, frequent and high-volume users will become the main beneficiaries of the exchange: They can gain ownership of the exchange by generating Magnolia tokens and hence reducing liquidity contributions, and even benefit on a large scale from the contributions paid by others.

Both sellers and buyers pay the same amount of liquidity contributions. Without holding any Magnolia, the liquidity contribution is 0.5% of their trading volume. However, participants will automatically pay a lower liquidity contribution if they already hold more than 0.01% of the entire Magnolia market volume.

The amount by which the liquidity contribution will be lowered depends on the percentage of the total amount of Magnolia tokens held, in relation to the entire Magnolia market volume.

Hence, the more Magnolia you hold as a percentage of the total Magnolia market volume, the lower your liquidity contribution:

The liquidity contribution reduction function is implemented as a step function with the reduction steps shown in the graph. This way, there is an incentive for participants to get to the next level of liquidity contribution reduction. Additionally, Magnolia that are not needed (at that point in time) could also be sold — note that the Magnolia market volume will only increase, so you may need those Magnolia in the future! Users are of course also able to buy Magnolia in order to jump to the next level of liquidity contribution reduction.

A liquidity contribution reduction is already possible with more than 0.01% of the total Magnolia market volume. That is, with less than one hundred thousand users holding the same amount of Magnolia, each one can already reduce their liquidity contribution percentage to 0.4%! Benefiting from a reduced liquidity contribution should, therefore, be feasible for both sellers and buyers. Hence, the liquidity contributions a participant ends up paying (besides the gas costs on the Ethereum blockchain) may actually not only become trivial but may even become “positive” in the sense that more contributions are earned than paid!

Paying Liquidity Contributions

Sellers and buyers can either pay in the token they are participating with in the auction (seller uses sellTokens and buyer uses buyTokens), or pay up to half of the platform liquidity contributions in OWL.

One OWL can be used to pay for the equivalent of one USD ($1) in liquidity contributions. Check out how to generate OWL here.

To make the liquidity contribution payment process as smooth and transparent as possible for both sellers and buyers, it is fully automated: In the wallet you have connected to the DutchX, the exchange will automatically deduct OWL only if you a) have previously set an allowance for the DutchX to do so and b) hold OWL tokens in your wallet.

The liquidity contribution reduction will also be automatically calculated based on your locked Magnolia. After calculating your liquidity contribution level (after a possible OWL deduction), it will simply be deducted from the token balance you are participating with before it is attributed to the auction.

As mentioned above, liquidity contributions paid are kept in the ecosystem. But how does the DutchX achieve this? Liquidity contributions paid in a token will go into the next running auction for the same token-pairing to be auctioned off (as an extra balance of sellTokens). Thus, they get credited to participants of the next auction. Tokens paid in OWL are consumed (i.e. “burned”).

To ensure for an optimal user experience, we highly encourage you to have the OWL you would like to use to pay up to half of the liquidity contributions in the same wallet connected to the DutchX, and to make sure that your Magnolia are locked.

We designed the liquidity contribution model with the aim to incentivize a continuous use of the DutchX on the one hand, and on the other hand in order to attribute ownership to those providing volume and liquidity to the platform. It pays off to participate in the DutchX from the very beginning.

Next up: What are the key benefits of our mechanism design? Stay tuned!