Serum Trading Subsidies

tl;dr we would like to create utility tokens that eliminate or reduce trading fees. Serum DAO can grant these utility tokens alongside or instead of Serum.

Several recent Serum proposals have requested grants for temporary trading rewards. For example, a Zeta Markets proposal claimed that “a boost to the PnL of products on the Zeta DEX for a period of around 36 weeks” will “create long term value for Serum token holders by increasing volume and fees for Serum.” Another proposal by 01 requested Serum to provide LP emissions that would “attract increased active liquidity through arbitrage opportunities.”

Increasing trading rewards undoubtedly provides a temporary boost to Serum trading volume originating from the protocol providing the reward. However, further research is needed to determine the long term return on investment of these reward payments for Serum token holders. There are two unresolved questions. First, how much of the boost to one protocol’s volume comes at the expense of another protocol? Second, how much of the boost is temporary versus permanent? If grants for increasing trading rewards attract new traders to Serum, and if those traders continue to trade on Serum following the expiration of the trading rewards program, then the grants may generate positive economic value for Serum token holders. On the other hand, if those grants result in traders shifting the same trading volume from one Serum integration to another, or if the grants have a transitory impact on Serum volume, the grants are unlikely to provide long term positive economic value.

Besides the uncertain long term economic value, there are several logistical problems associated with these trading subsidies. First, it is difficult for Serum DAO to monitor Serum grants to ensure that funds are used appropriately. To our knowledge, the Serum DAO does not systematically account for expected versus actual reward disbursements. Even when funds are trusted to be allocated to trading rewards, it is difficult to prevent wash trading, which does not generate long term economic value for Serum. Second, unlocked Serum emissions may generate downward pressure on Serum price as recipients liquidate the rewards. Locking Serum rewards requires either careful integration and coordination with Serum DAO to allocate token rewards to specific users on an appropriate vesting schedule, or providing the grantee protocol with unlocked Serum and asking the protocol to implement appropriate locking mechanisms themselves.

In summary, there are three drawbacks to the existing reward allocations:

  1. Unclear long term economic benefits for Serum token holders.
  2. Difficulty in monitoring and/or enforcing grant usage.
  3. Downward pressure on Serum price from reward liquidation and/or difficulty in monitoring and enforcing reward unlock schedules.

To address these concerns, we propose introducing the SerumTradeCredit utility token. Token holders may spend one token to eliminate trading fees for one order, debited from the trader’s account if that order would otherwise incur a trading fee.

To provide flexibility, we propose introducing an additional SerumTradeSubsidy utility token. Token holders may spend one token to eliminate half of the trading fees for one order, debited from the trader’s account if that order would otherwise incur a trading fee.

At most one of a SerumTradeCredit or SerumTradeSubsidy account may be specified for an order. A typical grant could be: Serum DAO provides one million SerumTradeCredit tokens to protocol XYZ to incentivize trading. At the conclusion of an evaluation period, Serum DAO may elect to provide one million SerumTradeSubsidy tokens to protocol XYZ to incentivize continued engagement with Serum.

The SerumTradeCredit and SerumTradeSubsidy tokens provide a subsidy mechanism that incentivizes trading, minimizes cost to the Serum DAO treasury, enforces usage of the granted amount as a trading subsidy without concerns around wash trading for rewards, and avoids the downward price pressure and distribution logistics of Serum token distribution.

Discussion

We recognize that there are positive externalities of giving Serum grants that aren’t generated by foregoing fees:

  1. Creating a broader, decentralized Serum token holder base.
  2. Diversifying the Serum treasury by providing Serum tokens to protocols and generating non-Serum fee income in return.
  3. Attracting reward-seeking traders motivated by gross trading revenue instead of net trading revenue.

We believe that these additional trading subsidies proposed here provide value to Serum token holders with minimal implementation cost and do not prevent Serum DAO from continuing to provide Serum grants.

Implementing the proposed utility tokens will allow Serum DAO to provide grants tailored to the risk-reward of each deal on a case-by-case basis. New protocols that may not qualify for Serum grants may nevertheless be provided with low-risk utility tokens to help bootstrap the protocol. Established partners implementing new Serum integrations may receive a mix of Serum tokens and utility tokens. Community members seeking funding for Serum-related projects may receive Serum tokens only. In particular, we are not suggesting that Serum DAO should replace all Serum token grants with utility token grants.

Implementation

  1. Create new mints representing SerumTradeCredit and SerumTradeSubsidy.
  2. Modify the NewOrder instruction to accept an optional utility token account.
  3. Modify the matching logic to compute fees based on the presence of a SerumTradeCredit account or a SerumTradeSubsidy account.
    • If the account contains a positive balance of SerumTradeCredit and the fee is positive, debit the account and reduce fees to zero.
    • If the account contains a positive balance of SerumTradeSubsidy and the fee is positive, debit the account and reduce fees to half.

I like this idea a lot. better than giving out SRM

Does it have any use to Mango who bypass all fee tiers? I guess yes when there is a credit to get to 0.

All these ideas are great, but does it solve the issue of…making DEMAND for Serum that outweights SUPPLY? I guess the veSRM distributing rewards is a way to increase demand, bubt only a portion of fees will go to veSRM stakers, so…I doubt its meaningful. but initiatives like the above reduce the weekly fee take even further, diminshing the DEMAND vector from veSRM.

another thing that is annoying me increasingly, projects that have raised vs rounds and or IDOs, now coming to use to subsidise activity, without using any of their own resources at the same time. I think its a better look if both sides contribute to their LM project.