Yield Farming with LTX
Yield farming is the perfect method for the community to engage directly with Lattice Exchange, allowing users to utilize the project token ($LTX) while being rewarded. To help you get started, we’ve put together a short guide explaining the concept in further detail, as well as the specifics in regards to staking and liquidity providing.
Disclosure: The information we provide is for users to conduct their own research. It is not investment advice. Users should be sensible in their participation and be aware of financial risks.
While liquidity providers in our pool(s) have more risk involved based on Impermanent Loss (IL), they also have the possibility of a higher yield because of the liquidity pool fees. KuCoin Stakers have less to no risk (using a CEX/KuCoin to stake might be considered a risk), but a fixed APY.
As an AMM (Automated Market Making) based DEX, where liquidity is one of the most important factors for the long term growth of the project, Lattice has put the focus on liquidity providers. This means the incentive to provide liquidity should be highest.
There is an interesting dynamic between liquidity providers, traders, volume and fees:
1. Higher liquidity attracts traders
2. Traders create volume, which increases fees
3. Increased fees attracts liquidity providers who add liquidity
4. That higher liquidity attracts more traders (start at 1)
This is a positive feedback cycle which will help the project and overall Lattice ecosystem to grow exponentially and thus we need to balance out the APY between LP and staking rewards.
Another important point is inflation. While rewards make everyone happy, inflation could be an unwanted guest in the end. For this reason, one of the major goals is to have self-sustaining yield farming strategies which do not rely on inflation but other means of sources for the rewards.
Staking
Single asset staking for rewards is the embodiment of passive rewards (returns) and the first iteration of yield farming. Because of this, staking is a very prominent feature in the DeFi ecosystem and if it happens on-chain it also enables other DeFi yield farming protocols to actively invest and stake the asset.
There are multiple methods of staking possible depending on the chosen method: from flexible (unlock anytime) to fixed duration (locked for certain time), minimum and maximum amounts.
In our case, we are offering a CeFi product, which will be the basis for our future on-chain staking. As a small comparison, we are discussing flexible staking with a maximum amount on a CEX.
Below you can see a list of similar projects offering staking and their APR on KuCoin and Binance:
Because the barrier to entry and risk is very low, the flexible staking APY is usually not high, which could be increased by compounding and a higher pool size though.
This is why we decided to create a 2nd flexible staking pool in collaboration with KuCoin/Pool-X with a maximum amount of 5.000.000 LTX and 6.5% APY. The maximum amount to be staked is 50.000 LTX per account — but it could be changed depending on the community feedback.
The rewards are 80,137 LTX over 90 days.
Liquidity providing
Liquidity providing is the process of adding assets in a liquidity pool on an AMM (Automatic Market Maker) based DEX to earn on the trading fees — instead of a classic orderbook, the AMM algorithm maximises liquidity in a small price range.
While it involves a possible risk to the total value of user assets, you could also yield a far higher return vs a fixed staking APY depending on the trading volume, the liquidity pool size, and the LP rewards.
LTX is a 50/50 liquidity pool, which means a Liquidity Provider (LP) has to add an equal amount of LTX and ETH.
Above is a graphic illustrating the Impermanent Loss (IL) a liquidity provider takes on his total asset value when the asset price moves away from her/his point of entry — in simpler words: the difference in asset value if the LP would just have held her/his assets instead of providing liquidity.
The Loss is impermanent because if the asset price moves back to the entry point of the LP the “Impermanent Loss” will disappear and the LP will benefit from fees and rewards with no downside.
Here’s an example for the LTX Liquidity Pool:
Assume 500 ETH in the Pool and a price of 2280 LTX per 1 ETH (~1$ per LTX) — this means to get 1% of rewards you will need to put in 5 ETH and the equivalent of LTX (11400 LTX). It would net you 1% of the 100k rewards = 1000 LTX and result in an APY of 52.6%.
If the LTX/ETH price increases by 100%, the LP will lose 5.72% (IL) of her/his total asset value vs holding.
In USD terms, it would be a decrease of $1304.16 and lower the APY to 46.91%.
In the case the price moves back to the initial entry point of the LP, the “Impermanent Loss” will disappear and the LP will have his original amount of assets plus additional trading fees and LTX rewards.
For this reason, we are planning to triple our LP rewards from 100,000 LTX to 300,000 LTX per month to make sure the incentive stays high for liquidity providers and attract them to add liquidity into our pool(s).
With this amount of rewards we expect to have a safety-net for our earliest supporters who are providing the needed liquidity to bootstrap the Lattice ecosystem.
Conclusion
We need to have the right balance between LP and staking.
If Staking is too profitable there is not much incentive to support our liquidity pool(s) which is one of our major focuses. Based on this, we will increase the LP rewards going forward while creating a new staking pool on KuCoin:
- Increase the Uniswap LP token rewards to 600,000 LTX for the next 60 days
( don’t forget to whitelist your address: https://docs.google.com/forms/d/e/1FAIpQLSd7YdaMBN_cf2Iu6e-Hk25ZWGXSmxrhNKulG2nts1qKyIzYuw/viewform) - Create a 2nd flexible staking pool with a size of 5,000,000 LTX and a total of 80,137 LTX in rewards over 90 days.
KuCoin Announcement: https://www.kucoin.com/news/en-ltx-staking-now-live-on-pool-x
Reward distribution:
Uniswap LTX liquidity Pool
The LP rewards from April will be distributed in the 2nd week of June and the LP rewards from May will be distributed in the 2nd week of July.
KuCoin/Pool-X rewards
Staking rewards will be distributed daily.
Increasing the APY rewards by three times would give liquidity providers a huge incentive and, even at an 100% price increase, result in an APY of around 140.73% (as of April 13th, 2021).
Inflation is of course a big factor, but looking at the other three leading AMM DEXes (Uniswap, Sushiswap, Pancakeswap) and how they distributed their tokens, there is good evidence that it supports the growth of the ecosystem by a big margin.
Therefore our aim is to create a well balanced incentive for liquidity providers (re: positive feedback cycle) for a thriving ecosystem.
