VNP-026 Reward more competitive liquidity provision more

  • VNP-026 Reward more competitive liquidity provision more*

Summary: Change market.liquidity.probabilityOfTrading.tau.scaling from 10 to 1.

Rationale: The parameter sets the variance of the lognormal distribution used for evaluation of probability of trading which is used as a weighting curve when calculating the liquidity rewards the LPs receive (from price takers and from on chain rewards). Setting the value to 1 means the same distribution as that used for margin calculation is used. The specific impact will vary from market to market (depending the market tau and sigma) values. More specifically below are various weighting curves for BTC/USD-PERP :

We see that currently (green line) the weighting curve is safely away from zero even at 2% from the reference price (best bid / best ask) meaning that even volume between 1.5% and 2% from reference price contributes to LPs rewards substantially.

With the proposed change (yellow line) anything beyond 0.75% (ie 75bps) will not contribute meaningfully and in fact most of the rewards will come from volume that’s within 50bps (0.5%).

For other markets see GitHub - cdummett/vegavis if you want to run the calculation.

What it means for LP fee income is of course highly variable and depends on how they react and a number of other factors. But we can see below that the difference between the rewards received by two LPs, first quoting in 0-50bps range and 2nd quoting in 0-200bps range (uniformly) changes noticeably.

With the current tau scaling of 10 there is little difference in incomes (bottom plot). With the proposed change to 1 the LP quoting the wider spread will get less than 1/2 rewards of the LP quoting the tighter rewards.

Full Proposal JSON:

  "rationale": {
    "title": "VNP-026 Reward more competitive liquidity provision more",
    "description": "Change `market.liquidity.probabilityOfTrading.tau.scaling` from `10` to `1` to reduce liquidity rewards for volume far from best bid / ask and increase rewards for well priced liquidity."
  "terms": {
    "updateNetworkParameter": {
      "changes": {
        "key": "market.liquidity.probabilityOfTrading.tau.scaling",
        "value": "1"
    "closingTimestamp": 1704276000,
    "enactmentTimestamp": 1704279600

This proposal makes a lot of sense. I think it will create more competition between LPs and encourage more top of the book liquidity.

Commodum supports this proposal.

How do you feel about enactment on the 29th Jan? It’s 5 days minimum for a network param change but it may make sense to wait till new year :thinking: on the other hand the sooner we have better placed liquidity the better.

Well a lot of token holders might not be available to vote over the Christmas period. Maybe best to make the proposal just after the new year. I think it will still take some time for LPs to react to the change so it might be good to do it sooner rather than later to drum up some competition.