I have a few questions.
Secondary Market / Liquidity Pool
1. How do you prevent insider trading?
With such an illiquid LP, how do you stop team members or insiders from creating anonymous addresses and trading on insider information to the detriment of depositors?
- In cases like Celsius, FTX, and BlockFi, secondary markets required KYC for buying or selling claims. This ensured accountability—insider traders could face jail-time.
- Insider trading is unethical and unfair as it extracts value from ordinary users.
2. How do you mitigate frontrunning and bots?
Wouldn’t the LP be vulnerable to frontrunning by bots or fast-acting traders, particularly during:
- LP creation?
- Planned buybacks?
This would unfairly disadvantage regular users.
3. How do you manage price swings in a small LP?
A $100k LP for a $50M TVL seems extremely small. Based on experience, an LP typically needs at least 30% of TVL if it’s the only LP.
- For instance, how could a large third party buy $5M in debt using such a small LP?
- The current setup seems to risk extreme price volatility.
- If you increase the LP and magically get 15M for the LP, that would just sit in the LP and not go to depositors.
Dollarization / Token Distribution
4. How do you avoid unfairly transferring wealth between user groups?
The protocol assumes that:
- Borrowers of BTC still hold BTC.
- Borrowers of USDC still hold USDC.
However, dollarizing claims at different points in time can create significant wealth transfers between groups.
Example:
- BTC price at hack: $60k
- BTC price now: $90k
User 1:
- Initial holdings: $100k USDC deposit, 1 BTC loan ($60k value).
- If dollarized at hack date:
- User1 now has 1 BTC worth $90k + claim of $40k = $130k total.
- But they should only have $10k claim + 1 BTC ($90k) = $100k total.
User 2:
- Initial holdings: 1.666 BTC deposit ($100k value), $60k USDC loan.
- If dollarized at hack date:
- User2 now has $60k USDC + claim of $40k = $100k total.
- But they should have $90k claim + $60k USDC = $150k total.
In this example:
- $30k is effectively taken from long BTC users and given to short BTC users. So you essentially punish those who made the correct market decision and bailout those who were wrong.
- An additional $20k is redirected to DLP holders. DLP holders (shareholders) should be the ones bailing out depositors, not the other way around.
How do you prevent such imbalances across all user groups?
5. When will assets be dollarized?
You don’t specify a snapshot date for dollarization. Depending on the date chosen:
- Some groups benefit, while others lose.
- This could create tension between user groups and reduce the chances of this proposal being accepted.