Would DEX Aggregators Route Through These New Pairs?
This question is for people who regularly provide liquidity in pools, or understand DEXs and DEX Aggregators very well. I want to know if ...
#1. Do you think this idea will work? Will DEX Aggregators route through these new token pairs if they save the trader money?
(After you read this, if you think, whats the point? I will explain at the end.)
So I created a protocol that (may hopefully) allow people to earn yield from DEX Aggregator volume and to earn yield without the negative effects of impermanent loss. Now let me explain how users can earn yield without the negative effects of impermanent loss.
On the protocol I built, users lock to mint tokens and provide liquidity with the new liTOKENS and they have the option to earn yield from any token they want while having 100% exposure in that same token, so if the token skyrockets, you will still have earned 100% of that one token. Let me explain both.
-Impermanent Loss mitigated
-Earn from Dex Aggregator activity.
So my protocol allows anyone to lock any token to mint a (Liquid Locked Token) liTOKEN "liquid-locked version of that token". (Stakedao did this with governance tokens, its called Liquid Lockers).
The user can provide liquidity for the following pools...
TOKEN/liTOKEN - Essentially no IL
liTOKEN/WETH
liTOKEN/USDC
Now, in the normal market, MEV bots and arb bots dominate alot of txn activity, and the rest of the activity comes from regular traders, same for the yield with these liTOKEN pairs, it will be alot of MEV bot and Arb bot activity, but liTOKEN LPs will get real trading volume from real traders through DEX Aggregator volume.
Now here is my biggest question...
"Say, liTOKEN is 3% cheaper than its native version TOKEN. Someone on 1INCH swaps TOKEN for WETH, but the DEX aggregator see's that it can route through liTOKEN for a better price, so instead of TOKEN -> WETH or TOKEN -> USDC -> WETH, the route looks something like TOKEN -> liTOKEN -> WETH or TOKEN -> USDC -> liTOKEN -> WETH.
Now the people with liTOKEN/TOKEN and liTOKEN/WETH and liTOKEN/USDC pairs earned yield from that swap route. Can you see this actually happening?
My next question to this is...
"If the mint and redeem fee is 3% the spread % between the prices of all TOKENS and liTOKENS would be minimum 3% because if bots are minting/redeeming and the spread gets lower than 3% they would no longer be profiting off the arbitrage."
So if both senerios above works, then users can provide liquidity for liTOKENS and earn consistent attractive yield.
You may think, well why would someone want to do that, liTOKENS seems redundant or unnessesary, or LPs won't earn attractive APR%, but let me explain.
If this does work, and the price % spread between liTOKENS and their native TOKENS keeps the spread around 3%, DEX aggregators will consistently/frequently route through liTOKEN pairs to execute better prices for the trader that is swaping. When this happens, users with liTOKEN pairs will be earning attractive yield because the liquidity will most likely be lower than its original TOKEN pool while still getting real trading volume from DEX aggregators, even if its a small percentage routed through, these small liquidity pools with these liTOKEN pairs are capturing frequent DEX Aggregator trading volume.
Also for everyone that only holds coins, and never provides liquidity, or people that don't like impermanent loss, can provide liquidity for TOKEN/liTOKEN so it feels like they are staking a token, but they are actually earning real yield.
I know this is long, but I had to explain the new protocol, and explain the questions.
So lastly, my questions are...
Will DEX Aggregators find and route through liTOKEN pairs if it saves the trader money.
Will DEX Aggregators route through the liTOKEN pairs frequently.
Will a 3% mint/redeem fee maintain a 3% spread between liTOKEN and TOKEN (so DEX Aggregators can continuously route through liTOKEN pairs.
Or do you think DEX Aggregators will not see liTOKENS or not route through frequently, or the spread getting too close to 1:1 consistently, because the theory/idea is that this would be perfect for volitile coins because the peg will frequently swing and adjust.
What are you thoughts? Thanks.