The purpose of this post is to encourage discussion amongst the SPS DAO to explore how or if it would like to expand its DeFi presence in ways that should ultimately encourage the community to lock up SPS into long-term positions that could create their own value without needing permanent incentives from the SPS DAO to justify their existence.
The main concept that this post aims to explore is called triangular arbitrage, which leverages pools and positions in ways that can benefit both the liquidity providers and the SPS DAO as a whole by aiming to create an overall healthier SPS token that is better integrated into the wider DeFi ecosystem.
What Could Encouraging Triangular Arbitrage do for SPS?
A triangular arbitrage strategy can be used by leveraging key trading pairs and positions in ways that encourage volume to be routed through the SPS token, even if the end user doesn't know it. The way smart routers work with AMMs (automated market makers) is that they're constantly looking for the most efficient way to get from point A to point B, even if there are a couple of stops to make along the way.
For example, let's say that you want to trade WETH for USDC on PancakeSwap. You would go to PancakeSwap, pick the two tokens you want to trade and on the back end, the smart router is looking through every pair that includes these two tokens to find the most profitable route to get your desired outcome. This could be a direct swap or an indirect swap based on whatever is most efficient. You only need to know the input and output as the rest is ultimately irrelevant to the end user.
Where could SPS come into this equation? We could set up positions where SPS is paired with higher volume or more volatile tokens. When prices fluctuate, they create scenarios where routing through the SPS pools is the most efficient avenue for the smart router to choose, which can end up with more volume passing through the SPS token and more fees generated for the liquidity providers.
We can encourage our community to work together and build many smaller pools with higher volatility that ultimately create more volume on the SPS token or we could explore having the DAO create the pools itself. Either way, the intent is to capture some value from the greater DeFi ecosystem for our community while also making the SPS token more appealing to lenders and traders.
Risks
There are no guarantees and there is risk associated with doing anything in crypto or DeFi, so it's important to understand that first. Is there some potential for success? Sure and I wouldn't bother discussing this if there wasn't. If everything were to work out, we could end up with a healthier SPS token, higher trading volume and more fees generated for liquidity providers.
It's important to note that this strategy is usually used to launch a token. The strategy generally relies on high volatility and low liquidity to be most effective, which could be a bit of a problem with the $750,000 DAO position for SPS:BNB on BSC unless we start seeing volume ramp up considerably.
The concept relies heavily on capturing volume in volatile pools. The more volatile the pools and the lower the pool fees, the more likely tokens are to be routed through those pools. Higher volatility has its own risks and there is also counterparty risk tied to the paired tokens that are not under the influence of the liquidity providers or the DAO.
It's important to consider all of this.
Further Discussions and Examples of the Concept
I've had multiple people tell me the concept seems complicated or convoluted, so in an attempt to help offer different perspectives on this concept I've done multiple DAOn Halls with PJ, an X space with @leveluplifeph and I am attaching some Grok explanations here that may help:
ELI5:
More complex explanation in relation to DeFi:
Gathering Community Feedback
I will create a series of polls starting soon to gather feedback on how or even if the SPS DAO wants to proceed in regards to this information. Do we want to explore setting up smaller pools with higher volatility trading pairs to encourage triangular arbitrage through the SPS token? Do we want to offer LP incentives to encourage community members to create these positions? Do you know better strategies that you'd like to bring to the DAO's attention? Let's discuss!