Protocol Mechanics & User/Token Journey

Revenue Sources (Ingress):

The DXG token should serve the primary purpose of capturing value from protocol and product usage. To accomplish this, we will explore the primary sources of value capture from revenue sources that the Dexodus product has in place from a first principles perspective.

The primary sources of ingress for any Perp Dex is generally from funding rates, and primarily from Maker and Taker fees for traders. The DXG token’s primary role should be to capture as much value from these fees and add them to a protocol owned liquidity pool of DXG-USDC. The reason for this is to have a backstop of last resort to prevent bad debt from accruing in the protocol. With leverage and copy trading being factors in Dexodus, it would introduce wild swings on the respective AMM LP of any position that an experienced trader wins against, and can rapidly scale into a bad debt situation, especially early on when liquidity doesn’t have the depth that a protocol with these features might generally require to support trading over an extended period of time.

While there are staking and fee share models available, these can be whittled down to ensure that the balance between AMM LP additions done algorithmically by the DXG-USDC pool owned by the protocol can support trading long-term. Additionally, when an event is triggered for the DXG-USDC pool to supplement the AMM LP, it should trigger a DXG burn so as to balance out the liquidity drain that would occur.

Key Points:

• Perp DEX requires AMM LP to be counterparty for all perpetual trades

  • When a trader loses, the AMM wins, and vice versa

  • This introduces the element of having bad debt on the protocol side

    • ie) 50 traders are directionally long, and all heavily in profit. The first 25 traders close their positions, the AMM loses majority of capital. The remaining 25 traders cannot close their positions or will induce bad debt to the protocol itself.

  • Copy Traders can exacerbate this issue by all being a net negative on the AMM because the traders they are staking to are (presumably) running a higher win rate than the average trader.

• Find tokenomic mechanic that is in line with the existing tokenomic functions, but will mitigate bad debt. This is going to be a holistic process that may introduce some product elements/features that can be used to value capture to the token, and have the token serve as a backstop of last resort to algorithmically fund the AMMs that are losing money on an event trigger basis to ensure that the protocol can have Lindy effects (outside of edge cases which will need to be handled by the Team manually)

Cost Sources (Egress):

All forms of staking and token emissions to stakers are methods of egress on net liquidity to create a perpetual machine for trading where the protocol can be self-sustaining. This is not an undesirable outcome, since staking and rewards are an excellent and effective method of translating those emissions as a form of Customer Acquisition Cost.

The primary form of liquidity egress that the protocol will undergo, as discussed above in this paper, is through trading that can have rapid decline in AMM liquidity. This is, without a doubt, the most important thing that needs to be avoided since it can spell the end of the protocol right away. To mitigate this, all methods of ingress need to be managed appropriately to be greater than all forms of egress under ideal conditions.

Mitigating Plan:

To mitigate the systemic risk of Dexodus accumulating bad debt through AMM LP losses, having an algorithmic fee rake that adds to a protocol-owned DXG-USDC LP that can initiate a burn triggered by an event (ie., an AMM loses 2% of it’s value upon a trade closing). This DXG-USDC LP would accumulate naturally through purpose-built product design that supplements this “liquidity backstop of last resort”, ideally through funding and fee mechanisms that are present in all Perp products.

Additionally, it is important to recognize that edge cases will always exist, and may need to be manually backstopped by the team. While the goal of the token and the product is to create effectively a perpetual motion machine for traders wherein the product can naturally support itself to facilitate trading continuing, if the liquidity ingress is not greater than the rate at which liquidity undergoes egress from leveraged trades and copy traders double-dipping on the respective position AMM LPs, then eventually a treasury top-up will be required until Dexodus team can solve how their trader patterns are so as to adjust the rates at which DXG-USDC adds liquidity and the trigger points at which liquidity is added to the AMM LP.