Mettalex Tokenomics 2.0
Apr 8, 2022
Author: Matt McDonnell, CTO, Mettalex | Fetch.ai
The Mettalex team is devoted to the development of a blockchain-based commodities exchange that will enable market participants to gain economic exposure to the spot price of commodities. The Mettalex DEX allows hedging of risk for physical holders of the commodity or leveraged positions for speculators.
True to foundational DeFi principles, to acquire sufficient liquidity, Mettalex markets rely on liquidity providers (LPs) to supply the collateral backing long and short position token pairs. In the original design of the system, this collateral had to be a stablecoin such as USDT, BUSD, etc. This however limits the amount of liquidity the system can attract as cryptocurrency holders typically prefer to hold their crypto assets rather than sell them for stablecoins to provide liquidity.
This document summarizes designs for using the Mettalex governance token, MTLX, to allow use of multiple cryptocurrency tokens as collateral for the system.
Mettalex Tokenomics 2.0 achieve the following:
- Traders continue to use the DEX by entering positions, exiting positions, and paying fees in USD-based stablecoins
- Liquidity providers can now supply liquidity in non-stablecoin tokens (including MTLX) to borrow the stablecoin used internally by the system
- Liquidity providers’ borrow fees are paid in MTLX tokens, creating buy pressure on the MTLX token
- Vote escrow token locking of MTLX tokens to veMTLX receives a fraction of trading fees earned and allows governance operations, creating an incentive to lock MTLX tokens
- Bonding can be used to purchase MTLX at a discount for MTLX/USD liquidity pool tokens, creating an incentive to increase protocol owned liquidity
The Mettalex system diagram shows the core components of the current system:
- An exchange layer where traders can take long and short positions against a range of reference assets or related derivatives based on data delivered by industry-leading index providers.
- A tokenization layer that provides tokens representing the long and short positions, together with autonomous market makers linked to the reference assets.
- A liquidity provision layer where lenders can supply liquidity to the autonomous market makers in return for a proportion of the market-making fees.
- A governance layer that rewards liquidity providers with governance tokens in proportion to the amount and duration of liquidity they supply to the system.
Since the launch of the Mettalex system in late 2020 there have been a number of liquidity mining campaigns to distribute MTLX governance tokens. In this document, we outline the plans to modify the governance layer to:
- reduce the need for liquidity mining incentives AND
- provide more use of the MTLX token within the system
Currently, the Mettalex DEX relies on LPs supplying stablecoin liquidity to back the creation of position token pairs. In exchange, the LPs receive trading fees from traders using the DEX, as well as MTLX governance token rewards.
There are future plans to make use of the MTLX token for governance decisions such as market creation and setting fees. However, currently, the main use of the token is as an additional rewards mechanism for liquidity providers, which has the drawback of producing downward pressure on the token price.
Click here for a full-size image.
We propose a more flexible provision of liquidity to the system through the use of the MTLX token and other non-stablecoin tokens as collateral to back position tokens. This section focuses on the use of MTLX as collateral.
The basic idea is that the DEX makes use of an internal stablecoin (proposed names: USDM or MettalexCoin) that is backed by USD or overcollateralized by non-stablecoin tokens.
An important point related to the graphic above is that when the system is in balance LPs are paying nothing in MTLX but are still receiving USD fees from traders.
Benefits to Users
Traders will still be able to enter and exit positions using USD stablecoins. They will experience lower slippage due to an increased amount of liquidity.
Trading fees are split between liquidity providers, price oracles, and the Mettalex Governance system.
LPs holding non-stablecoin project tokens (MTLX) will be able to supply liquidity without having to exit their project token position. This is achieved via a Compound or Aave-like overcollateralized borrowing of USDM versus their deposited collateral.
Liquidity providers earn USD trading fees. MTLX rewards will be in general turned off except in special cases.
A significant difference between the previous system is that interest fees on the borrowed USDM must be paid back in MTLX.
Stablecoin liquidity will have a lower borrow fee than non-stablecoin liquidity, possibly zero for established protocols.
MTLX Token Holders
The requirement for USDM borrow fees to be paid back in MTLX introduces buy pressure on the token price.
Fees paid to the Mettalex Governance system will be used to provide further buy pressure (to buy back MTLX paid out to traders and resold to pool) and/or liquidity deposited in MTLX/USD stablecoin pools.
Risks to Users
MTLX liquidity in MTLX/USD pools is needed to exit a position in USD.
LPs face a liquidation risk if the collateral backing a USDM loan decreases in value below a threshold. If this happens some of the collateral is sold for USD in order to ensure the system is fully collateralized.
MTLX governance token holders will be exposed to liquidity risk causing MTLX price impact if there is too little liquidity in the MTLX/USD pools to support a trader exiting a large position. This mainly applies to MTLX being used as collateral on the DEX.
DeFi 2.0 Features
In addition to the core DEX tokenomics there are some specific capabilities that MTLX holders can access.
Vote Escrowed Locking
Vote escrow token locking of MTLX tokens to veMTLX receives a fraction of trading fees earned and allows governance operations, creating an incentive to lock MTLX tokens.
It is envisioned that MTLX can be locked for a range of different lock periods, e.g. 1 month to 4 years, with longer lock periods minting a larger amount of veMTLX per MTLX locked, and hence earning a higher fraction of the trading fees.
Bonding can be used to purchase MTLX at a discount for MTLX/USD liquidity pool tokens, creating an incentive to increase protocol owned liquidity. This is envisioned as a treasury operation whereby the governors of the Mettalex protocol periodically offer MTLX at a discount to the current MTLX/USD exchange rate in return for MTLX/USD liquidity pool tokens.
An inverse token bonding operation can be used to buy back MTLX tokens for USD if needed, however this is not considered to be the main mode of operation.
We are eager to receive community feedback regarding the above-described Mettalex Tokenomics 2.0 proposal. Please send us your suggestions using the Mettalex Feedback and Feature Request Form.
All relevant feedback will be considered!
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