LBSP. A Novel ISPO Mechanism For Bootstrapping Liquidity
TL;DR
Many Cardano projects launched ISPO to reward their users. Usually, it was done for token distribution and/or fundraising. We propose a novel mechanism to reach those two defined goals and also the liquidity bootstrapping goal — Liquidity Bootstrapping Stake Pool. Liquidity bootstrapping is very important because an AMM protocol can’t provide its users with good prices without deep liquidity. The protocol’s primary high-level goal is to distribute a significant amount of SPF governance and utility tokens among long-term liquidity providers.
LBSP leverages the staking mechanism of the Cardano blockchain and its opportunity to make a contract address a delegator. In our case, a contract called Pool (represents a liquidity pool) becomes a delegator of all ADA deposited on it. In exchange, the protocol will reward liquidity providers with the SPF governance and utility token.
The initiative also includes the creation of a standard Initial Stake Pool (ISP) for those users who do not want to provide liquidity for some reason. The rewarding formula is delegated_ada * 0.006 SPF per epoch. To gain x2 rewards, provide liquidity to Spectrum Finance Cardano AMM liquidity pools marked with the “LBSP” tag using the interface. To generate x3 rewards, provide liquidity to theADA/SPF pool which will be launched at the beginning of the 10th epoch of the LBSP.
The event will last for 36 epochs. Stake Pools will be launched and open for delegation starting from epoch 426. Reward accumulation begins from epoch 428.
Disclaimer
REMEMBER THAT PROVIDING LIQUIDITY INVOLVES, BUT IS NOT LIMITED TO, THE FOLLOWING RISKS:
- POSSIBLE VULNERABILITIES IN THE PROTOCOL THAT MAY LEAD TO THE LOSS OF ALL YOUR CRYPTO ASSETS
- IMPERMANENT LOSS IN STANDARD 50/50 LIQUIDITY POOLS
The Idea Of LBSP
The idea of LBSP comes from the ISPO mechanism used many times by multiple Cardano projects. If you are new to Cardano, here is a brief explanation of what ISPO is:
ISPO is a method of distributing tokens and raising funds using the Cardano staking protocol. In order to take part in ISPO, users are required to delegate their ADA to a specific Stake Pool. As a result, they typically receive the project’s native token as a reward. The specific reward approach may differ and is generally disclosed prior to launching an ISPO. The two primary classifications of ISPOs are Community-Building ISPOs and Fundraising ISPOs.
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The LBSP approach goes beyond merely employing the Cardano staking protocol and leverages its potential to turn a smart contract into a delegator. This presents an opportunity to utilize the ISPO method mentioned earlier, not just for distribution and fundraising but also for liquidity bootstrapping in a specific protocol. The figure below illustrates the actual flow of the LBSP:
(1) Liquidity providers perform a deposit to an ADA/X liquidity pool;
(2) Liquidity Pool delegates ADA to Liquidity Bootstrapping Stake Pool (LBSP);
(3) LBSP generates rewards for the project’s treasury;
(4) Users are rewarded for liquidity provision to a protocol.
Well, now we have an overview of how LBSP works. Let’s dive into the details.
Spectrum Finance LBSP
High-Level Details
Allocation: 80,000,000 SPF (8% of total supply)
Minimum delegation: 10 ADA
Maximum delegation: N/A
Duration in Epoch: 36
Stage start: 428
Stage end: 464
Rewards per Epoch per 1 delegated ADA for standard ISP: 0.006 SPF
Rewards per Epoch per 1 ADA liquidity added for LBSP: 0.018 SPF
Rewards per Epoch per 1 ADA liquidity added for ADA/SPF LBSP: 0.021 SPF
SP fee: 99%
Mechanics
The first stake pool with a ticker SPF0 is a standard ISP that accepts direct delegation. This stake pool is for those users who want to participate in token distribution but do not want to take impermanent loss risks that come with liquidity provision. However, it has the lowest reward rate compared to LBSPs. So the rewarding formula looks like the following:
SPF per epoch = 1 delegated ADA * 0.006
We have also launched SPF1 which is identical to SPF0.
The next two stake pools serve as LBSPs. The stake pool with a ticker lSPF0 accepts all ADA from all liquidity pools listed in the “LBSP Liquidity Pools” section. The reward for liquidity provision is calculated with the following formula:
SPF per epoch = 1 ADA liquidity added * 0.006 * 3
In the interface, those liquidity pools will be labeled with an “LBSP” tag like this:
The lSPF1 accepts all ADA from one liquidity pool — ADA/SPF. The reward formula for liquidity provision to the ADA/SPF pool is as follows:
SPF per epoch = 1 ADA liquidity added * 0.006 * 3.5
It is important to note that this liquidity pool will be launched at the 438th epoch and will start generating rewards from the 440th epoch of the event. Simultaneously one more important event will occur at this time — unlock all the rewards accumulated during the last 10 epochs. It means that those users who were participating in the LBSP event during the last 10 epochs can now start providing liquidity to the ADA/SPF liquidity pool and gain more rewards by supporting the protocol with liquidity. Starting from this point, further reward distribution will occur epochly.
If we consider that all the stake pools will be saturated from the day of their launch, the distribution diagram will look like the following:
The figure below shows a detailed overview of the various opportunities provided by the Spectrum Finance protocol within the LBSP event. Select the option that best aligns with your desires:
Rewards Calculation For LPs
The base rewarding formula for those who provide liquidity to “LBSP” labeled Liquidity Pools is:
spf_reward_per_epoch = ADA liquidity added * 0.006 * 3
But this is a simple formula for basic understanding. The amount of ADA given as liquidity will constantly change over time, hence the ADA liquidity added will vary each epoch. This value will be recalculated each time an epoch n passes to epoch n + 1 as a derivative of the number of LP tokens you possess. That is, if at the beginning of an epoch n your LP tokens corresponded to 1000 ADA, and at the end of it they correspond to 1050 ADA, the reward will be credited to 1050 ADA for this epoch. Keep in mind that the ADA value can be either higher or lower than what was originally provided. It all depends on the ratio in the liquidity pool at the end of each epoch.
Example
Let’s say that, among others, we have 2 participants, the well-known Alice and Bob. Alice is a conservative DeFi user. She would like to participate only in the standard Stake Pool. In contrast, Bob knows well that with high risk comes high reward and would like to participate in LBSP, providing liquidity to the protocol.
Alice has 1000 ADA and redelegates it to SPF0 from the very beginning (on epoch 426). That means she will start accumulating rewards from epoch 428. Let’s assume Alice plans to keep her ADA in the stake pool for 10 epochs. In this case, her final reward will be 10 * 1000 * 0.006 = 60 SPF tokens.
Bob has 1000 ADA as well. He decides to provide all his ADA to ADA/WMT liquidity pool (assuming that he has 1000 ADA worth of WMT tokens). After keeping his position in the liquidity pool for the same time of 10 epochs we will be eligible for 10 * 1000 * 0.018 = 180 SPF tokens. This example is rather crude because it does not take into account changes in the ratio of the liquidity pool over time.
❗️Important Notice
Please note that LBSPs (tickers lSPF0 and lSPF1) WILL NOT function as standard ISPs. This means if you directly delegate your ADA to LBSPs, you will not receive SPF rewards in return. ADA reward will be returned to you at the end of the event.
What If We Reach Full saturation?
Based on the present statistics of the Cardano DeFi ecosystem, achieving complete saturation in LBSPs would be difficult. However, even if oversaturation occurs, it will not impact the reward rate for liquidity providers.
In the event that the standard Stake Pool reaches full saturation, we plan to introduce an additional Stake Pool, with a maximum limit of launching five.
Leaving Early
You can unstake your ADA or remove liquidity any time you want. In this scenario, you will be eligible to receive only the amount of tokens proportional to the number of epochs you’ve staked ADA or provided liquidity. Remember that you receive a reward for epoch N at the beginning of epoch N+3.
Unreleased Tokens
All unreleased tokens will be burned.
Redelegation Rights In Smart Contracts
The attentive reader may notice that liquidity pools will have a built-in staking functionality, hence there is someone who will have control over it. During the LBSP event, the delegation control over the below-listed liquidity pool will be in the Spectrum Finance team’s hands. However, once the event is over, we will transfer control to a voting contract, so that the community will decide which stake pool the ADA will be delegated.
LBSP Liquidity Pools
During the Spectrum Finance LBSP event, 20 highly tradable Cardano token pairs will be involved. The Spectrum Finance team will set up these liquidity pools initially, with a small amount of starting liquidity. The initial token ratio will reflect the average across the ecosystem on the deployment day. Once the last liquidity pool is launched, swaps will be disabled at the smart contract level for 72 hours. This is a precautionary measure to prevent any major changes in the token ratios of recently created pools with low liquidity, ensuring that bad actors are unable to manipulate the ratios and make the pools unappealing to early liquidity providers.
Here is a list of ADA liquidity pools that will take part in the LBSP event:
ADA/WMTADA/AGIXADA/AADAADA/INDYADA/iUSDADA/iETHADA/iBTCADA/PAVIAADA/DJEDADA/SHENADA/HOSKYADA/SNEKADA/MELDADA/LQADA/NTXADA/COPIADA/CLAYADA/C3ADA/IAGADA/cNETAADA/Lenfi
The list can be expanded in the course of the event. We will promptly announce these changes on Twitter and other socials. If you are a well-known project in the Cardano space and we’ve forgotten to include the pair with your token in this list, please contact us using THIS form.
We chose not to list tokens of other Cardano DEXes due to ethical reasons. However, if you are a DEX project and wish to have your token included and your community is ok with that, you are most welcome to join.
Here are the official stake pool links:
ISPO
SPF0 https://cardanoscan.io/pool/27eba5dbeb2b52f5613aa452cf54cab7f9894538d6efb7d271ccc36f
SPF1 https://cardanoscan.io/pool/1392b9f04cf0d7083651b4e922ed5dfd171d5e593061e84c5cf244c1
LBSP (all ADA liquidity is delegated here) -https://cardanoscan.io/pool/7f95f046d15412681750282e334605ff54bd1d83039300fae504dd6a
LBSP for ADA/SPF pair https://cardanoscan.io/pool/42cf6f455e5abd7904c57a39aa43dd400e634029057516295568b03e
Use Of Proceeds
30% will be used as Protocol Owned Liquidity to launch ADA/SPF liquidity pool.
70% will be used to speed up research and development of the Spectrum Network cross-chain messaging protocol.
How To Participate?
Let’s recap briefly how you can participate in the LBSP event.
Standard Stake Pool
To participate in a standard Stake Pool you will need to use any Cardano wallet that supports staking such as Eternl, Lace, Flint, Yoroi, or Daedalus. You will simply need to find the stake pool with a ticker SPF0 and press the “delegate” button.
Liquidity Bootstrapping Stake Pool
To participate in LBSP provide liquidity to any “LBSP” labeled liquidity pool using the interface.
To achieve x3 rewards multiplier, provide liquidity to the ADA/SPF liquidity pool, which will be available on epoch 438
Why participate?
This event is the main distribution of SPF tokens on the Cardano blockchain. If you are new here, you might not be aware that Spectrum Finance will be migrated to an in-house cross-chain messaging protocol Spectrum Network which consensus will be secured by SPF staking. Spectrum Network makes it possible to build natively cross-chain dApps (e.g. swap native ADA for native ETH). This event is the opportunity to become one of the first node operators once Spectrum Network mainnet is launched.
You can read more about Spectrum Network here.
Spectrum Network open-sourced code — repo.
Conclusion
After the release of the Spectrum Finance Cardano AMM protocol, liquidity providers can start depositing into LBSP liquidity pools. This significant event aims to engage Cardano users, liquidity providers, and the entire ecosystem, fostering unity and active participation. With multiple projects involved, it promises to be an enjoyable experience!
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