Allocate DOT Loan for Use Amongst Cross-Ecosystem DeFi within the Cosmos Ecosystem

Proponent: Composable 15YLDvV6Q2NUVEFBN26kRgHyyeH1Bu91NKTwBg3xW3hEVfoj

Date: Aug, 9 2023 (Average price of DOT in the last 30 days is $5.134)

Requested allocation: 194,779.899 DOT (approx. $1m) structured as an indefinite loan which will initially last over the duration of 1 year and re-evaluated on a 6 month basis thereafter.

Short description: The purpose of this proposal is to broaden the reach of DOT in cross-chain DeFi by allocating DOT to be used within the Cosmos ecosystem by first supplying liquidity to leading DEX platforms (Osmosis + Astroport)

Context of the proposal:

Background: Composable has been developing a full tech stack for cross-chain infrastructure based around its substrate native parachain Picasso. Composable’s tech stack is comprised of the following components:

Picasso: Composable’s Kusama Parachain

Pablo DEX: where users may swap assets native to the DotSama ecosystem

Centauri: a trustless, IBC-based cross-chain bridge

Cross-Chain Virtual Machine (XCVM): to communicate smart contract instruction sets between chains

Cumulatively, these components focus on the goal of extending the reach of assets native to the DotSama ecosystem by enabling seamless movement and orchestration of assets between external chains.

Objectives:

Encourage cross-chain adoption of DOT by first providing liquidity to Osmosis DEX within the Cosmos ecosystem and achieving $50,000 of average daily trading volume within the first 3 months
Extend DOT accessibility by collaborating with Neutron to supply liquidity to Astroport DEX and integrate DOT to applications deployed via its platform
Promote Polkadot visibility by acquiring 1,000 new DOT holders within the first 6 months of loan deployment
Integrate DOT with Cosmos applications outside of pure DEX platforms

Problem Statement:

Polkadot network’s native token, DOT, holds a current market capitalization of roughly $6.9b. Despite the proliferation of cross-chain DeFi, the DOT token has remained largely isolated within its own ecosystem which has become a point of obstruction for visibility to onboard non-native users. Cross-chain DEX listings act as an entranceway for new users to interact with and utilize a new token across DeFi platforms, but the two largest sources of liquidity for DOT that exist outside of its own ecosystem come from listings on PancakeSwap (BSC) and Osmosis (in the form of axlDOT) which account for just ~$605k of active liquidity with roughly 53% of that TVL residing in PancakeSwap alone.

Although Polkadot has experienced strong growth within its own ecosystems across 40+ parachains operating on the network, DOT has been less than notable amongst its usage in cross-chain applications. As the cross-chain narrative within crypto networks has continued to evolve, DOT has been bottlenecked by the following:

Lack of Decentralized Bridging Solutions to the Polkadot Ecosystem: HRMP channels exist within the Polkadot ecosystem which allow DOT to be transferred amongst existing parachains. HRMP lacks the ability to connect directly to external chains, thus leaving DOT isolated within the Polkadot eco and failing to capitalize on market opportunities throughout additional base layer networks such as Cosmos and Ethereum. Composable has built an IBC (Inter Blockchain Communication) based bridge allowing the transfer of DOT outside of its native chain.
Segregated Liquidity and Shortage of Accessible DEX Listings: Polkadot has amassed one of the largest market capitalizations amongst crypto networks (currently #13 by mcap), but has notably been one of the least used tokens throughout cross-chain applications. At the moment, one of the only existing cross-chain uses of DOT is via Axelar’s axlDOT pool on Osmosis, which lacks significant liquidity to be used past the pool itself (currently ~ $280k total pool liquidity + $3.5k 24hr volume)
Cross-Chain Interaction Beyond Polkadot: DOT allocated towards this proposal will have the ability to move outside of the DotSama ecosystem over Composable’s Centauri bridge to access a new DeFi user base, initially via Osmosis. This opens an entirely new opportunity set for DOT to be used within additional platforms and users through dApps and the ability to offer liquidity incentives outside of its native chain.

Through Composable’s cross-chain bridging solution, Centauri, DOT may be extended past its native network. Centauri currently allows DOT to be transferred between Polkadot and Kusama, and the Cosmos ecosystem. This proposal seeks to move 188679.245283 DOT (apprx. $1m) from the Polkadot Treasury to Cosmos using Composable’s Centauri bridge in order to enable accessible DOT liquidity within the Cosmos ecosystem through DEX liquidity pools on Osmosis.

Benefits and Goals:

Create widespread visibility and use of DOT through cross-chain applications, beginning with Osmosis within Cosmos
Cosmos’ three most active zones consist of Osmosis, Stride, and the Cosmos Hub which account for ~30,000 daily active users that may be onboarded as new DOT holders and users
Build a tighter relationship in cross-chain DeFi between Polkadot and Cosmos users to encourage assets to be brought back into the Polkadot ecosystem for use amongst parachain applications

The goal of this proposal is to achieve cross-chain liquidity for DOT within the Cosmos ecosystem through liquidity pools hosted by Osmosis and Astroport as well as onboard new DOT token holders outside of the ecosystem. Additionally, this initiative is focused not only on moving DOT outside of its native chain, but also garnering attention in order to bring new assets back into DotSama.

Ongoing Initiatives for DOT within Cosmos

The following links and mentions highlight initiatives currently underway by the Composable team to integrate DOT across the Cosmos ecosystem, to provide a vision for possibilities of integrating DOT amongst existing dApps:

Canonical DOT Bridge + Asset on Osmosis
DOT/OSMO pool on Osmosis (created; pending visibility via front end update)
UMEE ibc-DOT Lending
Agoric - DOT Vault Collateral for IST
Astroport DOT/USDC Pool
Mars Protocol - DOT Collateral for Lending (pending discussion post)
Cosmos Assets accessible within the DotSama ecosystem via Pablo DEX – ATOM, stATOM, OSMO, STRD, STARS, SCRT, UMEE, BLD, CRE, NTRN

Marketing

Composable will promote and market this proposal over the course of discussion, voting, and deployment to raise awareness around the benefits to both ecosystems and attract users. The following marketing channels will be used in order to achieve maximum visibility around the proposal and its end goals:

i) Twitter Threads – The proposal will be promoted to both Polkadot and Cosmos community over explanatory Twitter threads explaining the ultimate purpose of the funding and how it will be effectively deployed

ii) Twitter Spaces – Joint discussion between Composable, Osmosis, and members of Web3 Community

iii) Blog Posts – Upon completion of the proposal, Composable will release a blog post to its medium encompassing an explanation of the funding, how it is being deployed, what goals it seeks to achieve, how the liquidity in Cosmos can benefit DotSama, and what opportunities this creates for the future New Holder Growth

Within the first year of Osmosis launch, ATOM holders within the Cosmos ecosystem increased by roughly 800,000 new holders (pictured above). ATOM’s launch within Osmosis DEX heavily contributed to the ability to onboard new ATOM holder, which we expect a similar effect on a DOT listing with ample liquidity. We will be targeting an initial milestone of 10,000 new DOT holders within the Cosmos ecosystem.

New Holder Growth

ROI and Risks

Impermanent Loss

The main risk to any liquidity provider within an AMM is depreciation of total value due to impermanent loss. Impermanent loss impacts an LP most significantly if the price of one asset in the pool increases while the paired asset’s price remains stable. To outline a simple version of the expected result in these scenarios, a simple table is included below based on a total LP position of $1000 ($500 of asset A + $500 of asset B). Our expectation is that the ROI on swap fee + incentives will outpace losses due to IL in the pool.

$1000 LP position used as example

Table to outline potential losses incurred by IL based on movement of both assets within an Osmosis pool

Loan Repayment

Despite potential for IL within an AMM liquidity pool, we believe the earning potential of participating in this pool will be able to mitigate any negative returns of participating in the pool. Based on current swap fees and incentive matching program on Osmosis, providing liquidity to a DOT/OSMO pool has the potential returns as follows:

In total, using a reasonable estimate of $25,000 Daily Volume + 1yr of Incentives at $500k total liquidity provided, the total amount of return expected should be approximately $68,500 which can be used to offset IL and repurchase DOT to return to treasury. This would be split between liquidity providers (ie, in the case of DOT/OSMO -> 1/2 to be sold back for loan coverage, 1/2 to Osmosis)

Rewards received in the form of OSMO liquidity incentives can be sold on a bi-weekly cadence, as to reduce risk that may be assumed by holding additional assets.

Milestones for Deployment

Funds will be received from the treasury and deployed according to milestones outlined in the table below. Success would be achieved through the steps outlined as follows:

Implementation

Multisig

The DOT received through this proposal will be handled by four multisig addresses across the (i) Polkadot relay chain, (ii) Composable parachain, (iii) Picasso parachain, and (iv) Osmosis chain. The collection of multisigs will be used to handle DOT securely across each cross-chain transfer as funds are moved from Polkadot → Composable → Picasso → Osmosis. Multisig accounts on the DotSama side will be handled via 3-of-5 signature scheme comprised of Henry Love (Fundamental Labs), James Wo (DFG Capital), Notional DAO, Joe DeTommaso (Head of Strategy, Composable), and 0xBrainjar (Head of Research, Composable) Once assets have been moved to Osmosis from the DotSama eco, DOT will be transferred to the Osmosis multisig to be handled as directed only as outlined here via Polkadot governance.

Once successful deployment and milestones have been achieved with Osmosis, a similar multisig outline will be constructed to handle funds moving from Polkadot → Neutron.

One additional solution is a new suite of secure smart contracts being developed by Timewave. Timewave functions as an Interchain Allocator which can facilitate protocol to protocol deal making and spending. In the event that Timewave is utilized, it would reside on the Cosmos side of the needed asset transfers, and would handle the deposit and withdrawal of liquidity to the protocols designated within this proposal.

Liquidity Provision

This proposal will outline explicit instructions for the movement and deployment of DOT received from the Polkadot Treasury as outlined below:

Movement of Funds:

Polkadot Treasury will release initial funds to multisig address (i) where the DOT will then be transferred to multisig address (ii) on the Composable parachain via Centauri.

Two subsequent transfers will then occur. First, Centauri will again be used to move funds from the Composable parachin to multisig address (iii) on the Picasso parachain. Finally, another Centauri transfer will be used to move the DOT from Picasso outside of the ecosystem to multisig (iv) residing on Osmosis (within the Cosmos ecosystem).

Deployment of Funds:

Once funds have been received by the Osmosis multisig, the multisig will add liquidity to the DOT/OSMO pool which has been previously created by the Composable team. OSMO incentive matching will be requested via governance, and through a successful vote, the DOT/OSMO liquidity pool will begin to receive OSMO incentives provided to LP’s.

Audits:

Audits for the Composable stack can be found here

Appendix

[DailyDefi IL Calc](https://dailydefi.org/tools/impermanent-loss-calculator/ )

Coingecko IL Calc

AtomScan

Update — Multisig:
The multsig Polkadot address set to handle this proposal will be :

1ngtfgu1dYwXBTQGzWkaDfgBFeqjzSsYzdLpzNzVENh7kNA

This is comprised of the following signers:
DFG Capital : 12saVkpyC6LJyk1ELETE76eZD3mtDT2LAdKxd4nEEQVAigyu
Notional DAO : 12ZJEbSiYQ3XJXSqX1KwicmeXnuDCH2uXadxU2i8VeyXsAre
Henry Love : 14GFeMR58WfYCXTh4BkZUargD5uaHujneWoYHsTwEceV9rEp
Omar Zaki : 14kxR7CR4XYdRU2fRdWWFbkZXziM4JCQHCtZpirvZssotHGZ
Joe DeTommaso : 15YLDvV6Q2NUVEFBN26kRgHyyeH1Bu91NKTwBg3xW3hEVfoj

Update — Removal of sudo:

https://docs.composable.finance/networks/picasso/governance