- 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
}
}