Summary
For the balance of nQUEEN-BNB pool, Tranchess uses a parameter commonly called as “A”*, which was initially introduced by Curve and later adopted by many other protocols for their AMM pools with customized adjustments. nQUEEN-BNB started with an A of 5000, intended to incentivize fund utilization. One month into the launch of V2, we propose to decrease A to 200 in order to decrease the divergence risk and impermanent loss of nQUEEN-BNB pool, after close observation and calculation.
Abstract
The nQUEEN-BNB pool has two primary purposes:
- When BNB fund’s utilization rate is high and most/all BNBs are delegated to the validator node on BNB Chain, the pool ensures nROOK swap to function normally.
- When a user needs an urgent BNB redemption and the redeeming amount has exceeded the “buffer” amount left in the BNB fund, the user can redeem through the pool instead of waiting for undelegation process to complete.
The nature of the design has determined that most swaps that happen within the pool will be from nQUEEN to BNB, causing a larger and larger imbalance within. Currently, nQUEEN-BNB organically reaches an internal balance at a 1% discount with the primary market redemption swaps and ROOK swaps counter-trading each other, maintaining a self-sustaining balance with minimized variance from par value.
However, the gradual swaps from nQUEEN to BNB might slowly drain out the provided BNB, making it eventually impossible for users to redeem a larger amount of BNB from their nQUEEN with the pool when urgently needed, which was precisely the opposite of what the pool was initially designed to do.
Voting for this proposal starts on July 20 and will conclude in one week’s time at 2 pm UTC, July 27. If approved, the process will be conducted in two steps:
- Week 1 (July 28 ~August 4), A will be reduced from 5000 to 1000;
- Week 2 (August 4 ~ August 11) , A will be reduced from 1000 to 200.
Motivation
Lowering the A parameter will reduce divergence risk from the imbalance of nQUEEN and BNB in the pool.
nQUEEN-BNB pool started with a larger A to increase liquidity efficiency within the pool. 4 weeks into the launch, we’ve observed a clear trend of one-way swapping within the pool. Lowering A at this point can efficiently reduce risk to LPs by incentivizing pool balance and reducing divergence loss (i.e., “impermanent loss”).
For
Lowering A will disincentivize the continuous imbalance between nQUEEN and BNB in the pool, avoiding tail-end distribution and keeping the swapping ratio in the pool consistent with the primary market.
Against
Lowering A might reduce fund efficiency within the pool and potentially increase slippage when swapping in larger volumes given the increased price sensitivity.
Please click here to vote on Snapshot.
Footnote*: “A” is known as the “Amplification Coefficient”, defined originally in Curve’s whitepaper. Simply put, A enables an AMM pool to dynamically adjust between a constant sum model and a constant product model (similar to Uniswap v2). AMM pools with larger A behave more like a constant sum model which has less relative price movement impact, usually used in stablecoin swap pools. An AMM pool with a small A functions more like Uniswap pools, which are more sensitive to price changes and trading directions.