Weekly Gauge #14 : The Gauge Market Maker

In order to align the behavior of every stakeholder of the ecosystem, Curve finance introduced the veCRV governance framework. This model allows long-term holders to direct emissions to the protocol’s users.

Thanks to the veCRV locking mechanism, the composability of Curve protocol has grown and new actors started to build on top of it, which resulted in more market-making opportunities on the governance layer. We will call them Gauge Market-Makers, a first representation of their roles is highlighted in a scheme below.

Market making in DeFi has been split into the capital coordination layer by AMMs, and the liquidity provisioning layer by individuals or professionals. The DeFi market-makers arbitrage the volume to depth opportunities between pools.

Since a liquidity provider can stake its LP tokens and receive incentives in $CRV, we can include him in the holders node designated by “CRV”. Moreover, due to the creation of liquid lockers, it is now possible to participate in the governance of Curve while retaining the ability to transfer and liquidate your position. This route was initiated by the “vlToken” model from Convex and created two new market-making opportunities. The first being delegated inflation management.

We have determined in a previous article about real yield in the Curve ecosystem that most of the voters’ revenues came from vote incentives. For an early stage project, vote incentives can be part of a bootstrapping campaign for newly created pools and gauges. Later on, it can serve diversification goals with the choice of projects to exchange part of their native currency against CRV.

Thanks to the transferability of the liquid wrapper, the governance power over the incentive parameters of both Curve and the liquid locker protocol can be delegated to a market-making entity, such as the various delegation addresses deployed by all bribes marketplaces.

This opportunity to arbitrage and price the value of bribes leads us to apply the game theory detailed in the Weekly Gauge #13. The outcomes of such management rely on the valuation of every tokens offered as incentives, as well as the alignment of participants to the cooperative game.

Thanks to the charts above, we observe that on the vlCVX layer the number of votes in the gauge is proportional to the amount of bribes, which means that the market is liquid. Furthermore, we see that all the voting power delegated to Votium is allocated to gauges that offer bribes, resulting in an average market price for most bribers. Finally, the value of bribes has a logarithmic tendency to decrease, inversely proportional to the share of the delegation address in the relevant gauge. This shows that the most “illiquid” bribes are the ones who benefit the most from the delegation address. 

In other words, Votium’s delegation address is a Gauge Market Maker.  This is an essential part of the bribe economy as it enables to bootstrap gauge weight.

Having a market maker playing a major role in the gauge means that all bribers have become dependent on a certain market price which isn’t correlated by the profitability of the endeavor but by simple offer and demand. This leads to frequent irrationality potentially making bribers over-pay. 

Paladin can solve this issue through several tools. Quest allows bribers to set up a predictable ($/vote) ratio, preventing the risk of overpaying for bribes. The Paladin team also supports Questors by advising the most efficient rate to fit their project’s needs. Moreover, vlCVX holders can delegate their voting power to Paladin’s convex.palvote.eth address which is able to perform efficient and sustainable market-making activities and arbitrage in not just one, but all marketplaces. 

We will cover the second market-making opportunity in another edition.