Liquidity Flywheel
Last updated
Last updated
Arcana introduces a strategic approach to managing liquidity across Liquidity Pools on ve(3,3) DEXs. Through the Liquidity Flywheel, Arcana redefines how yield from arcUSD is utilized within liquidity pools to enhance liquidity and incentivize participation within the DeFi ecosystem.
When arcUSD is deployed in a liquidity pool on a ve(3,3) DEX, paired with any other token, the yield generated is no longer distributed to token holders through daily rebases. Instead it is skimmed by the protocol and used as liquidity incentives to increase the rewards (emissions) for providing liquidity to the pool.
This process is beneficial for both arcUSD holders and the Arcana protocol:
arcUSD holders get a greater yield through LP rewards than just through arcUSD rebases.
Arcana is able to quickly grow arcUSD paired Liquidity Pool since the integrated liquidity incentives lead to higher rewards, which attract more liquidity providers, kickstarting the flywheel. As the amount of arcUSD in the pool grows, so do the liquidity incentives.
This strategy opens the door to Liquidity-as-a-Service (LaaS) where any protocol can pair their token with arcUSD (on compatible DEXs) to collect free liquidity incentives that scale with the size of the pool.
ve(3,3) DEXs use the ve(3,3) model firstly introduced by Solidly to optimize liquidity provision and trading efficiency with a self-sustaining incentives structure. The model is based on the concepts of vote-escrowed tokens, where users lock up DEX governance tokens to receive veTokens, which typically grant holders governance rights and other incentives (bribes), aligning long-term holder interests with the platform's success.
Holders of veTokens vote on how to allocate reward emissions across liquidity pools. By voting, they can direct rewards to specific pools, effectively increasing the incentive for liquidity providers to commit their assets to those pools. This voting mechanism allows veToken holders to boosting the rewards of selected pools, thereby steering the liquidity to where it can be most beneficial for the DEX’s ecosystem or certain protocols. Protocols often “bribe” veToken voters to vote for their pools to deepen liquidity for that protocol’s token.
The concept of dynamic incentives takes this dynamic a step further. In some ve(3,3) DEXs, when yield-bearing tokens like arcUSD or USDC are added to a liquidity pool, the inherent yield from these tokens is used to incentivize veToken holders vote to send emissions to the rebasing token’s pool, increasing the pool's attractiveness by offering higher returns and incentivizing additional liquidity provision. Essentially, dynamic incentives use the native yield of tokens within the pool to continuously fund the pool’s own rewards, creating a self-sustaining cycle of liquidity growth.
