VNP029 - Further adjust liquidity parameters for capital efficiency

🗳️ Governance Proposals Network Parameter Proposals
1

VNP-029 Further adjust liquidity parameters for capital efficiency

Summary:
Change market.liquidityProvision.minLpStakeQuantumMultiple
from 500 to 50 and market.liquidity.stakeToCcyVolume from 20 to 100.

The overall effect is to reduce the 20% the bond capital required by an LP to provide the same volume of notional on the book as now.

Rationale:

The parameter market.liquidityProvision.minLpStakeQuantumMultiple governs what is the minimum LP bond. It is currently set to 500 which on USDT markets translates to 500 USDT as the USDT quantum is 1. The new value lowers this to 50 USDT this increases LP capital efficiency. See also the earlier - successful - proposal to lower this to the current value of 500.

The purpose of a minimum LP bond is to avoid a spam vector where too many tiny LPs submit liquidity provision and SLA needs to be evaluated. The team believe that the vega core can handle this due to architectural changes (originally, liquidity provision meant automatic deployment of volume for the LP, but this has been superseded by SLA which is less resource intensive.

The network parameter market.liquidity.stakeToCcyVolume determines the ratio between liquidity commitment amount and bond. For example, when this parameter is configured to 1 a liquidity commitment of 100,000 USDT on a given market will require 100,000 USDT to be held in the party’s bond account. This capital is idle and cannot be used as margin for trading without suffering penalties (described in detail here Rewards and penalties | Vega Protocol Documentation). This is an extremely inefficient use of capital and currently serves as a significant barrier to attracting more liquidity providers.

The main purpose of the bond is to reserve some capital that can be used to penalise LPs who abandon a market. However, given that this is the sole purpose of the bond it is unnecessary to reserve 100% of the commitment amount and therefore this proposal increases the capital efficiency on liquidity commitments by a factor of 5.

If approved, a liquidity commitment of 100,000 USDT will require only 1,000 USDT to be held in the party’s bond account.

See also previous - sucessful - proposal to increase this the the current value.

Full Proposal JSON:

{
    "batchProposalSubmission": {
        "rationale": {
            "title": "VNP-029 Further lower parameter market.liquidityProvision.minLpStakeQuantumMultiple",
            "description": "Change `market.liquidityProvision.minLpStakeQuantumMultiple` from `500` to `50` as discussed in [VNP-029](https://community.vega.xyz/t/vnp029-further-adjust-liquidity-parameters/4488)."
        },
        "terms":{
            "changes": [
            {
                "updateNetworkParameter":{
                "changes":{
                    "key":"market.liquidityProvision.minLpStakeQuantumMultiple",
                    "value":"50"
                },
                "enactmentTimestamp": 1716973200
                }
            },
            {
                "updateNetworkParameter": {
                "changes": {
                    "key": "market.liquidity.stakeToCcyVolume",
                    "value": "100"
                },
                "enactmentTimestamp": 1716973200
            }
            }]
        }
    },  
    "closingTimestamp": 1716973200
}