A Proposal: Rethinking Boost

With Bitcoin on the rise and more folks flocking to Boost for its yield, we’ve noticed something interesting: swappers seem less sensitive to fees than we expected, and yields have remained consistently high since launch.  Maybe it’s because the fees on decentralised platforms like ours are lower than on centralised exchanges, or any other exchanges for that matter. 

Either way, Boost liquidity has ballooned to over 66 BTC (or about $6 million at the time of writing). That’s awesome and really shows Boost’s product-market fit, but it actually presents an issue for Chainflip — a lot of that liquidity is just sitting there, not doing much.

In this post we’d like to propose a change to the way Boost works to account for all this idle BTC sitting around, and get a temperature check of the community.

Why Is Too Much Liquidity a Problem?

Right now, Boost liquidity is quickly catching up to the active liquidity used in the Chainflip AMM, and already significantly outweighs the amount of actual BTC liquidity available to swappers. Even if volume and liquidity increase significantly as we expect, the current boost pools contain more capital than the protocol will likely ever really need to supply all swappers, which means economic security is being stretched without any real benefit to the protocol. 

When we look at recent numbers, even on our busiest day, only $8 million in BTC was swapped through Boost. That’s solid volume, but we definitely don’t need as much liquidity as we have right now to make it happen. 

This leaves us with a pool of underutilised liquidity just sitting around, which the network is not being paid to secure. We are only seeing more and more Boost liquidity added, and at the current trajectory, all of the current security budget will be consumed by this type of liquidity if we don't do something to stop it.

The Options: How We Could Tweak Boost to Keep Things Efficient

Here are some of the ideas that came up when discussing this issue and what we could do about it:

• Cap the Boost Pool: We could lock the current amount of liquidity, which would benefit the LPs already in Boost but might limit new participants looking to boost or use this as a springboard to other LP efforts (see LPing on Chainflip Blog). This doesn't address the economic security costs of the problem, though.
• FLIP Holding Requirement: Another idea is requiring LPs to hold a certain amount of FLIP tokens to participate in Boost. A lot of people in the Boost pool already hold FLIP, though, so it wouldn’t have a huge impact. This would also discourage people who aren't already using the LP features of Chainflip to try them out.

However, the one that stood out the most and offers the most market-efficient way to account for the security costs of storing Boost liquidity is:

A Boost Fee Split

Instead of restricting the number of people or absolute liquidity in Boost, we could split the boost fee so that a portion goes towards the FLIP buy-and-burn. This way: FLIP holders benefit from the burn, the network actually sees some benefit for the cost of securing all this BTC lying around, and we keep the door open for new LPs. 

Yields should also come down, mitigating a scenario where runaway yields cause the entire economic security budget of the protocol being consumed by boost liquidity. 

We estimate that giving an even split, or in real terms, 2.5bps paid to the boost pool, 2.5bps paid to the network, when the 5bps boost pool is used. This would account for the security costs, boosting the economic security budget and keeping a lid on the demand for Boost yield before it becomes more problematic.

In the future, we could extend this feature by making the fee split dynamic, so that the share of fees paid to the protocol increases with the relative amount of liquidity in the Boost pools compared to the BTC liquidity actually available, introducing a market dynamic which should correct for this issue at any scale.

Swappers are clearly willing to pay for Boost. The fee split doesn’t put Chainflip at a disadvantage — swappers will get exactly the same pricing and we will remain one of the most competitive BTC markets in the space.

What Do You Think? Let’s Hear Your Thoughts

If the idea has good support, we can implement it in the next release. Let us know what you think about the fee split idea by discussing in the regular channels, whether it’s something you’d support, or if you have any other ideas.

We will handle all community discussions on Discord in our community proposal discussions channel here, however feel free to mull it over in Telegram too, if you want.