One of PrimeDAO’s first plugins is the ability to govern Balancer Pools, or Smart Pools. This plugin is called the Prime Liquidity Pool Manager.
The Prime Liquidity Pool Manager is its ecosystem’s first collective, co-governed decentralized liquidity instrument. This necessary financial primitive will help the Prime community achieve sustainable and aligned monetary policy at the ecosystem level and help bootstrap initial liquidity for the DAO’s token, PRIME.
Balancer Smart Pools
Balancer liquidity pools are a form of automated market maker protocol, or AMM. Unlike traditional order books, AMMs structure cryptocurrency exchange through permissionless algorithms. In liquidity pools, parties may deposit — or “stake” — liquidity in order to earn fees. They earn these fees because the liquidity they stake facilitates the algorithmic exchange of cryptocurrencies by traders who use the pool.
In short, Balancer allows anyone to create liquidity pools of three main elements:
- Multiple tokens — the pool may have up to eight tokens, similar to an index fund.
- Customizable weights — each token is assigned a weight vis-à-vis the others. Smart pools are a sort of “smart” portfolio that automatically rebalance when traders swap tokens in order to maintain these given weights.
- A trading fee — liquidity providers who deposit liquidity receive a fee anytime a trader utilizes the pool, earning passive income.
The tripartite advantage of portfolio-like exposure to a weighted basket of tokens, automated readjustment, and fee generation distinguishes Balancer as a novel platform and powerful Open Finance (DeFi) primitive. By integrating governance functionalities to Smart Pools, we can achieve automated and adaptive economic management for Prime’s ecosystem.
Towards A Liquidity Commons
DAO Governed Smart Pools
DAOs are emerging as the predominant organizational layer in DeFi and other Web3 value systems. Through DAOs, communities empower their members with ownership and authority over the organization’s structure, treasury, and on-chain protocols or interfaces.
Prime is expanding on this by bringing liquidity instruments like smart pools under DAO governance. With this, the DAO’s decision-makers — in PrimeDAO’s case, its Reputation holders — may enact policies and set economic parameters that are equitable, aligned, and representative of the community’s preferences.
For smart pools, the DAO’s membership is empowered to set fees, whitelist new tokens for liquidity provision, and modify the weights of the underlying pool tokens, permitting flexible adaptation to fluctuating market conditions. The whole list of DAO capabilities includes:
- Pausing or unpausing the pool.
- Setting the pool’s swap fee.
- Adding, removing, and updating the weight of individual pool tokens.
- Transforming all pool token weights linearly to new weights, as well as setting the start and end times for this transformation.
- Adding or removing addresses from pools, like a whitelist
- Adding and withdrawing liquidity from the pool.
These governable features are being implemented into PrimeDAO as a plugin — also referred to as a “scheme” — using DAOstack’s Arc framework. At the close of its Initial Decentralized Offering, PrimeDAO will be deployed to the Ethereum mainnet, and begin governance of its smart pools.
Prime’s Long-Term Liquidity Strategy
DAO governed liquidity pools are a good place to start, but not the endgame for which Prime imagines for DeFi. This integration is the first step along a longer trajectory for crafting and synergistically combining instruments that can enact effective distributed monetary policy. An exemplary use-case would be leveraging the smart pool to improve on the services of the Prime Aggregator — a decentralized exchange (DEX) aggregator.
Aggregators have an essential role as gluing disparate parts of the liquidity ecosystem. The main strategy driving DEX aggregators has been to achieve the best exchange price by surveying all DEXs and executing exchanges that cause the least slippage to their users. However, certain assets may not possess enough network-level liquidity to be exchanged in this way. Using smart pools and even more exotic primitives like incentive contracts, Prime can incentivize its community — or even intervene as a DAO — to stake into high traffic, high slippage token highways, improving systemic fluidity.
The true potential in smart pools is the promise of liquidity bridges between allied DAO communities.
The most revolutionary aspect of smart pools, however, is their potential to cement political-ecosystem alliances between DAOs by establishing a Liquidity Commons. DAOs can configure the weights of co-governed smart pools to align interests amongst themselves. By co-providing liquidity to a smart pool consisting of their respective tokens, a family of DAOs establishes mutual skin in the game. This integrates and aligns their ecosystems under shared incentives and a common monetary policy.
In an ecosystem with so many interoperable, co-dependent, and intersecting communities, we need bridges that guarantee sustainable alignment between different protocols and steer them towards shared goals. Smart pools are promising economic tools in this direction, further opening up and exploring the uncharted design space of DAO to DAO interactions.
🍰 We want to acknowledge and thank PieDAO for doing the pioneering work badly needed in this area and the Balancer team for providing extensive support.
Refrain: Call For Contributors
💱 Prime is hosting an Initial Decentralized Offering on November 16. Learn more.
While PrimeDAO’s first iteration revolves around its first products — the Prime Aggregator and Prime LP Manager — its product horizon is near-endless for its formative builder collective. We need you to move Open Finance forward in a safe and inclusive fashion. To learn more about joining PrimeDAO, see this handy guide.