Entropy Liquidity Incentives

Entropy is a promising exchange. The UI is slick and responsive and the products are interesting.

It seems like it’s had a problem with bootstrapping meaningful liquidity, as all perp exchanges do.

I propose we launch an incentives program using Entropy’s native token to incentivize more passive liquidity on the book. The payout can be similar to dydx or to Mango. I prefer Mango’s as it rewards single sided liquidity and seems less complex.

Dydx incentives: Trading Rewards - Governance Documentation.

Mango: Liquidity Mining - Mango Markets

The payout should start with more token in the beginning and have it taper off later, as early liquidity is most important.

I think anywhere from 20-40% of the native token should be emitted in liquidity rewards.

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While reward tokens have been successful in attracting liquidity, they have a death spiral in terms of maintaining value for holders. Any thoughts on countering this?

I think this is a good idea. We have seen some trouble attracting more market making liquidity on the exchange. Azrangar is right in that we need to be cautious in emitting too much Entropy token.

What are your thoughts on rewarding passive liquidity via token versus negative exchange capture (Paying more rebates in USDC for makers than takers have to pay)?

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I think that unlike a perpetuals exchange, Entropy has a bigger issue attracting both makers and takers. Generally, the key factor in determining the success of a perp exchange is the depth and the liquidity. And that’s the reason DYDX grew to be so dominant in the first few months of launch, their liquidity incentives were so great that market makers were willing to provide way tighter quotes than any other DEX (which leads to problems later down the road but can be discussed separately). But the idea is that this hopefully attracts sustained taker interests which makes it more profitable for makers to continue market making down the road even if rewards are reduced. (Side note, this is not happening even at DYDX, they’re struggling to keep their main market makers these days) Perp exchanges never needed to worry about demand though, because they know if the liquidity is there, people will come to trade on their platform. Entropy, as a first step, would need to be able to incentivize makers, but there’s the added problem that there isn’t many natural taker demand. The crab volt will solve some of that issue, but there still needs to be sufficient incentive for more takers to want to trade this product over any other exchange. Taker fees will also incentivize any arbers to be a lot more effective and efficient in closing the arbs.

Anyway, some initial thoughts, we should definitely carry out more research into emission schedules in order to prevent the death spiral mentioned above.

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Interestingly enough, I’ve seen Vega exchange help design their own market making bot and allow retail users to just deposit funds to contribute to providing liquidity. Depositors will be rewarded but at the same time, less dependence on external market makers may allow us to be less aggressive in providing liquidity incentives

I think rebates is a good idea…will help cover the cost for MM.

Depending on the profitability, definitely could make this a NFT vault.

Probably Arb and MM vaults could solve the double sided issue here.

After much consideration I have come to the conclusion that a volt is perhaps our best and most simple solution.
What this vault does is the following:

  1. Tracks index price
  2. Tracks mark price
  3. When mark > index we take a short position to earn funding rate and vice versa

The funding rate is paid out to participants in the volt. Obviously, we could optimize it by taking a delta-neutral position with shorting SOL-perps + long SOL but I think it’s best to take one thing first.

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Thank you for the thought out response, you made a lot of good points. It’s definitely a chicken and egg problem of finding natural takers and finding natural makers. We’re prioritizing volts that bring organic taker flow onto the exchange.

Drift and Mango both are focusing on retail market makers and traders to drive most of the spread-crossing flow.

We don’t have the the resources/manpower in our current state to compete on the technical side of new features/UI with the likes of Mango and Drift, which means we have to focus on a different market segment.

Friktion already has a great product market fit with users searching for completely passive yield in options generation. Targeting the same market with yield generation from perp-trading volts via Entropy through unique strategies (like power perps and volatility perps) is the key to growing this segment.

With that in mind, perhaps the better way is to incentivize the depositors in the Volt with native Entropy token instead of the market makers. That way, there is still a lot of organic spread crossing flow that will incentivize market makers without coming at too much of a cost of Volt depositors. Volt depositors are probably better long term holders of the token than market makers and will value the token greater than market makers as well.

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Agreed - this is something that ClockworkRainbow is working on. It will require us taking on other forms of collateral for deposits other than USDC.


Proposed Tokenomics for Entropy.

  • No team allocation
  • Large incentives for Volt depositors that compose on Entropy
  • Allocation for DAO led market making research
  • Allocation for public contributors to the Entropy exchange (UI, backend, etc.)
  • Allocation for market making rewards program, trading competitions, etc.
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In addition to attractive liq mining and a notable airdrop, DYDX was successful because they had a lengthy build period with long-term institutional partners who were genuinely invested in the protocol. Its a bit more nuanced than just “heavy rewards”.

In my opinion, the retail flow of this is the more organic side of Entropy with the DOVs being proof of concept (and look at squeeth “crab”). Obviously it makes sense to offer rewards to retail for marketing and flow capture but the real value will be in scaling this. And for that you need deep books. Squeeth is struggling with that issue now (no one wants to LP ETH/SQTH) and on-chain CLOBs are even harder.

full disclosure: we do not MM on entropy

edit: impressive there is no team allocation. why leave that out?

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I do like the vault idea. I agree that it does fit into the product offering of Friktion. Trading is both difficult and competitive so offering a passive solution would be unique. Considering the narrow profit margins that MM may face I think they are likely to quickly realize gain on the token causing downward pressure.

If it is offered as an incentive to depositors, could a buy back and redistribution mechanism be in place to maintain the token value? This mechanism could be driven by vault and withdrawal fees.

I like the token distribution and period. A question though, what’s the idea around Friktion and Entropy in terms of organizational structure? It would appear base on the graph that both entities are separate but wouldn’t the two entities complement each other? Also, from a managerial perspective, wouldn’t managing two DAOs and Tokens be intensive?

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Not an expert on tokenomics, but the entropy tokenomics does seem reasonable, looks like a very healthy emission. FolkvangJeff makes a good point, there are usually long-term institutional partners that allow the success of these DEXes, but then that comes with the risk of these partners dumping these tokens as they unlock. Do you think there is any way to get contribution from these partners without extending them a large supply of locked tokens?

Yeah the governance token would hypothetically get a share of Entropy fee rev.

No team allocation because we believe that the success of Entropy already adds a lot of composability value in the form of a liquid perp market for future volts. We want to make sure that public contributors and DAO researchers are properly incentivized to make this the best decentralized derivatives exchange in DeFi.

We’re in the process of finding long term institutional market making partners. DEXes on Solana (mainly Mango) have for a large part struggled to get long term partners. Many institutional mm desks have been hesitant to commit to anything before seeing real flow. If you have any ideas on who to pursue, would love to hear them.