[DRAFT PROPOSAL] Levana POL: Bootstrapping Liquidity on Neutron's First Perp DEX

Bootstrap NTRN Perps Liquidity on Levana

Levana is excited to present a proposal for providing NTRN liquidity to the NTRN/USD market on Levana.

Link to the NTRN/USD Market on Levana: Levana Perps

This proposal is to action STEP 1 of a triphasic liquidity process:

Step 1: Provide $100k of liquidity to NTRN/USD market on Levana to enable meaningful trading activity

Step 2: Provide liquidity to balance the market and enable more efficient trading with a cash and carry operator

Step 3: Scale up liquidity on NTRN/USD market to enable larger trading positions.

About Levana

Levana is one of the leading perpetual swap platforms built on Cosmos. Already operational on Osmosis, Injective and now, Neutron, the protocol has handled $2.7bn of trading volume and collected $3.45m of fees to date.

Uniquely, we offer users the ability to provide liquidity to our markets and earn from the market fees and trader losses, allowing users to act as the ‘house’.

Levana is also the only perps which supports liquid stake derivative markets, closely aligned with the goals of Neutron to become a liquidity hub for LSTs.

Why Levana on Neutron?

Levana’s mission is to empower users to leverage any asset, and we believe that by providing NTRN liquidity to bootstrap the Perpetuals market, we can unlock a host of new opportunities for the Neutron community and NTRN holders.

This proposal outlines the benefits and potential of adding NTRN liquidity to the NTRN/USD market on Levana and invites the Neutron community to vote on whether to allocate 140,000 NTRN tokens (currently worth ~$100,000) to bootstrap NTRN leverage trading liquidity on Levana.

Key Benefits

1. Enable Leveraged Perps trading for NTRN

Leveraging allows users to increase the capital efficiency of their holdings, enabling them to trade with larger positions than their initial capital would permit.

Providing NTRN liquidity to Levana will bootstrap the NTRN/USD market, enabling users to open leveraged long or short positions using NTRN as collateral.

This means NTRN holders will be able to use their tokens as collateral to open trades, and, if successful, earn additional NTRN without reducing exposure to the underlying asset.

Launching the NTRN/USD market adds more utility to the NTRN token and offers more avenues to earn rewards and yield.

Traders can capitalize on bidirectional market movements more effectively by using leverage to increase exposure to the underlying asset, increasing utility for NTRN and reducing NTRN spot selling pressure.

2. Providing Liquidity in the NTRN Market

NTRN holders can provide liquidity to the NTRN/USD market on Levana thus earning market fees and benefit from trader losses, as the liquidity pool acts as counter collateral for traders opening positions.

Statistically, the vast majority of traders are unprofitable and Levana is no different with current LPs on other chains and markets benefitting. To view historical data on trader PnL on Levana, refer to our stats page on Levana.

However, LP is not without risk as if the traders on the market are highly profitable, the winnings will come from the LPs until such time as there is no more money left to pay them in the LP and no more trades can be opened.

For more information on risks refer to the docs linked at the bottom of this proposal.

This not only improves market liquidity but also offers liquidity providers (LPs) a consistent income stream from trading activities. LPs play a vital role in ensuring market stability and depth, and their participation is incentivized through fees generated by the platform.

This proposal to bootstrap liquidity to the NTRN/USD market is critical to break inertia with the market and provide a sufficiently large liquidity pool to enable meaningful trading activity to start on the market. Users can then permissionlessly add to this liquidity pool and earn from market fees and potential trader losses.

3. Innovative DeFi Strategies and Risk Management

Providing NTRN liquidity to Levana opens up new and unique DeFi strategies for NTRN holders: through leveraged long or short trades, users can manage risk, hedge their holdings, or engage in price or funding arbitrage opportunities across different platforms while maintaining underlying exposure to NTRN.

4. Leading to more DeFi opportunities for NTRN holders

The approval of this proposal will lead to Levana continuing to contribute to a thriving DeFi ecosystem on NTRN. Levana’s unique ability to offer leverage trading on liquid staking tokens could unlock significant utility for LSTs from the upcoming Drop liquid staking protocol. The ability for users to supply liquidity to earn dynamic rewards from real yield mechanisms offers new and exciting alternatives to NTRN holders and the Neutron DeFi ecosystem.

5. Earn Single Sided NTRN Yield

With no staking on Neutron, Levana offers an opportunity to potentially earn a lucrative single-sided NTRN yield on Neutron.

On our other chains and markets, Levana’s liquidity pools (LP) historically have out performed the risk free rate of staking on validators or into DEX’s.

For example, the current xLP APR on INJ is ~30% for providing single sided liquidity, while staking APR sits around ~16%.

The LP pools, while lucrative, carry risks, including platform risk and potential loss due to trader wins as discussed above.

Community Vote: Deploying NTRN Liquidity to the NTRN/USD Market on Levana

It is proposed that the Neutron community vote on deploying $100,000 of NTRN as long-term liquidity (xLP) to the NTRN/USD market on Levana.

Providing NTRN liquidity on Levana has the potential to bring forward a unique opportunity to significantly expand the utility of NTRN in the DeFi sector.

Levana is excited to join the Neutron DeFi ecosystem and the potential growth this integration will bring in terms of network activity, DeFi TVL and NTRN utility.

Implementation Details:

The liquidity will be deposited as xLP to the NTRN/USD market on Levana from a multisig account through the Covalent DAO.

Neutron multisig account address: TBD

Multisig Members: TBD

This multisig will have the authority to

  • Deposit NTRN tokens into the xLP NTRN pool on Levana

  • Reinvest any yield earned back into the xLP NTRN pool on Levana

Withdrawal, transfer and other actions will be subject to further approval of the Neutron community.

The following actions have been tested with a small amount of funds to ensure that there will be no technical challenges with actualizing this proposal

  • Transferring NTRN out of the multi sig
  • Depositing NTRN to the xLP NTRN pool on Levana
  • Unbonding the NTRN from the xLP Pool
  • Withdrawing NTRN tokens from the LP Pool
  • Reinvesting yield
  • Withdrawing yield back to the multisig

Smart Contracts

Levana’s smart contracts are open-source, and comprehensive documentation is available, facilitating easy integration via API trading modules or custom front ends. The platform operates permissionlessly, without necessitating centralized, off-chain mechanisms like order books or sequencers.

Risk Mitigation and Audit History

Levana’s smart contracts are comprehensively audited and you can review our entire audit history in our docs linked at the bottom of the document.

Governance Votes

YES: Indicates support for allocating 140,000 NTRN currently worth $100,000 to Levana as protocol owned liquidity to the LP / xLP NTRN market.

NO: Signifies opposition to the proposal. If the majority votes NO, or quorum is not reached, no token will be transferred.

ABSTAIN: An ‘ABSTAIN’ vote is for members who do not wish to take a definitive stance on the proposal while contributing to quorum. This vote acknowledges the proposal’s implications but chooses neither to support nor oppose the changes suggested.

Levana Docs: Levana Docs

2 Likes

Excited to see Levana on Neutron!
To me the ask seems reasonable to Kickstart a new product for the Neutron community to enjoy. I will ask @maximus from TimeWave to clarify the execution process for using a single party Covenant to deposit the requested liquidity. Covenants allow for decentralised deal making without the need for intermediary multisigs, so this would be my preferred method for providing the liquidity, if the community approves the on-chain proposal.

I also have some questions about the proposal:

  • What do you mean by ‘’ Step 2: Provide liquidity to balance the market and enable more efficient trading with a cash and carry operator". Can you possibly break this down and elaborate a little more on the next stages after Neutron deposits the initial liquidity?

  • How do you plan to scale liquidity? (step 3)

  • How do you plan to differentiate the Neutron deployment of Levana against those on other chains?

Timewave is working on a solution to handle protocol-to-protocol deals like this trustlessly (i.e. without a multisig). However, this solution will take several months to complete so we recommend using a multisig in the meantime.

In the proposal, we also recommend explicitly stating that the multisig members must transfer the assets to a trustless solution once that solution is available and audited since there is no good reason to keep it on a multisig once a trustless solution is ready.

If you have trouble finding multisig members, Covalent DAO could be a good candidate since the purpose of the DAO is to temporarily steward protocol-to-protocol deals until a trustless solution is available.

2 Likes

Steps 2 and 3 will be independent governance proposals.

The second step referenced here is in expanding the volume is to set up a vault to profit from the funding rate produced by the Levana NTRN market.

Typically in retail driven crypto markets, the majority of users will go long or short in unison. This creates imbalanced markets which limit trading volume.

While this won’t inhibit growth over the first 6-12 months initially, it will become a key tool to keep markets balanced, fees low, enable massive growth and act as an additional revenue stream for the Neutron DAO.

Levana intends to publish and open source an automated balancer which will earn from funding rates on the NTRN market.

At this point additional capital will be requested in an upcoming proposal to act as liquidity to fund this balancer.

Step 3: Scaling liquidity will be accomplished by providing the highest real yield offering for the NTRN token.

Trading will be incentivized through fee rebates to large traders. Levana intends to be the most attractive dapp for Neutron offering

As Neutron continues to focus on liquid staked tokens, Levana will offer additional yield and utility for Neutron native LSTs through the launch of leverage markets collateralized by liquid staked tokens.

1 Like

Implementing highly leveraged perpetuals with settlement using the traded token itself is a high-risk approach, effectively increasing the volatility risk. Our concern is that allocating community funds into such protocols may result in significant losses. LP depositors could bear the brunt of excessive volatility-related damages. However, we are open to accepting reasonable deposits into the protocol, such as the proposed 100K NTRN community funds allocation. However, we will strongly oppose higher funding requests in the future.

pro-delegators-sign

1 Like

The leverage is limited to 10x, which is relatively low.

Community funds are designed to help enable new use cases for the token and the network, both of which are accomplished through this modest use of funds.

Compare this type of capital deployment vs a grant to a small team to potentially launch a product. In that case the risk/reward to the community pool is significantly higher:

  • will the team deliver
  • will the product work as intended
  • will the product have product market fit
  • will there be any chance for the community pool to get an ROI

Levana is not asking for a grant, Levana is not asking to provide capital on a product that might come to market in 6 months. Levana is live today, on Neutron, Levana has been used by over 20K people, Levana has had over 2.7 billion dollars in trading volume. Levana pools have shown to generally be profitable.

Perps is well established popular product. Levana comes to offer a way to earn from NTRN, a way to leverage trade NTRN, and all with the low risk to the community pool that Levana has a huge amount of history to demonstrate the pros and cons.

Compared to most opportunities to the community pool, this Risk Reward is highly favorable to the community.

1 Like

I’m not advocating for or against this proposal; I’m just providing some background on the risks since this was mentioned within the Covalent DAO.

Osmosis deployed a similar spend to bootstrap the OSMO markets (worth a similar amount at time of deployment)

This position saw high losses due to suspected manipulation, and is currently sitting at around 270k of the original 350k OSMO. Because of this OSMO leverage was restricted and is currently capped at 6x. NTRN is a less liquid asset than OSMO with around 10m of liquidity onchain compared to ~20m, but this position would be exposed to 10x leverage.

The current position can be queried below:

{
  "lp_info": {
    "liquidity_provider": "osmo1qzm2kyesqqpu4d7uaskkf023t4husm6vaan2gkc2xru0xcvzx23qq5f5c7"
  }
}
{
  "available_crank_rewards": "0",
  "available_yield": "54208.849365926409548686",
  "available_yield_lp": "4.386214143445644511",
  "available_yield_xlp": "54204.463151782963904175",
  "history": {
    "deposit": "350072",
    "deposit_usd": "86836.55401336",
    "yield": "0.031992334699962371",
    "yield_usd": "0.008263241583680779"
  },
  "liquidity_cooldown": null,
  "lp_amount": "31.735591131607704144",
  "lp_collateral": "23.229857251789663288",
  "unstaking": {
    "available": "28.050983673306438902",
    "collected": "3.68337656998048769",
    "end": "1700984742133930591",
    "pending": "0",
    "start": "1697096742133930591",
    "xlp_unstaking": "31.734360243286926592",
    "xlp_unstaking_collateral": "23.228956264634075709"
  },
  "xlp_amount": "300008.579945954387810748",
  "xlp_collateral": "219600.651443847695177865"
}
1 Like

Thanks for this insight, Johnny.

Might be better if we start this at a 5x max leverage considering what happened to Osmosis with their deployment. Later on, it could be increased after the deployment is more mature.

1 Like

The OSMO pool on Levana is profitable. Look at the last 7 or 30 day performance. http s://trade.levana.finance/osmosis/earn/OSMO_USD

4.52% APR for xLP.
In addition the xLP pool has earned over 3% from trader losses in the past 30 days.

Johnny I believe you are confusing two different events, one was an October 2023 spot price manipulation when Osmosis was trading at roughly $70K ±2% spread. The other was the Pyth Oracle exploit in December of 2023.

You can read more about that here Leverage trading low liquid tokens | by Levana Dragon Rider | Medium

NTRN is currently trading at over $150K ±2% spread far beyond the choke point $OSMO was at during the time of manipulation.

I do not believe the consequential loss on the Osmo pool you mentioned was related to spot price manipulation or the leverage amount or the liquidity but was rather due to the oracle exploit, which was fixed in January.

You can read more about the exploit and fix here Levana Security Incident In-Depth Analysis - Range Security
http s://blog.levana.finance/levana-exploit-postmortem-df89a72cc92b

The problematic candles were mostly in November:


and the liquidity was deployed on October 17th

From that same link of the LP token value chart, the first dip takes place exactly on October 17th and then the second was during the December Oracle issues.

I can’t argue that the pool has not been profitable since then, though. Hopefully the Osmosis deployment led to ironing out the issues and leads to lower risks for other deployments of community pool funds like these.

As long as Leverage multipliers are regularly reviewed and proportionate to the liquidity available rather than being a promotional launch feature, then I don’t have concerns. I was just bringing the additional info to the thread from Osmosis’ experience with a similar proposal.

3 Likes

Good insight and thanks for responding.

The markets are indeed reviewed on an ongoing basis to adjust fees, slippage, max leverage and other configurations. The process has evolved significantly over the past 8 months and will continue to improve.

There is 24 hours left to vote on this proposal and it needs 1.15% more votes to reach quorum.

Please participate.

https://governance.neutron.org/proposals/A/42