JIP-19: Improving the Liquidity of JTO LRTs

JIP - Drafts
1

  1. Title and Category
    Improving the Liquidity of JTO LRTs
    Category: Treasury

  2. Abstract
    This proposal details the proposed use of part of the DAO Treasury’s JTO holdings to improve the liquidity in DeFi protocols for trading pairs involving both JTO and restaked JTO. Currently, the Treasury holds [300] million JTO tokens, worth approximately $[600] million. This proposal would allocate 10 million JTO tokens to be used to provide liquidity in DeFi protocols for the JTO:wfragJTO, JTO:kyJTO and JTO:ezJTO trading pairs. This proposal would support the continued growth of the restaking platform by giving JTO holders greater confidence that the LRTs are, as the name implies, liquid – in the sense there is meaningful liquidity available for swapping the LRTs for JTO at reasonable rates. The main risk associated with this proposal is arbitrage loss – i.e., that the Liquidity Pools will lose value over time (relative to simply holding JTO) as a result of arbitrage trades from mispricing of the trading pair. The risk of arbitrage loss is substantially mitigated in situations where there is a high degree of confidence in the relative value of the assets, which should be the case here given the nature of JTO vis a vis liquid restaked JTO tokens.

  3. Motivation
    This proposal seeks to improve the liquidity for trading JTO against its LRTs (fragJTO, kyJTO and ezJTO) via DeFi protocols (Raydium and Orca).
    This proposal would support the increased growth of JTO LRTs by providing greater confidence to JTO holders that the LRTs are, as the name implies, liquid - in the sense of being exchangeable for JTO at reasonable rates if and when needed via DeFi protocols.
    Improving the liquidity of the LRTs could also improve the broader adoption of the LRTs in DeFi, as meaningful liquidity is needed before the LRTs would be accepted as collateral by DeFi protocols.

  4. Key Terms
    Liquidity Pools: Pools of assets available for Automated Market Makers to facilitate trading in a given asset pair; in this case, the relevant asset pairs are JTO:wfragJTO, JTO:kyJTO, and JTO:ezJTO.
    LRTs: JTO liquid restaking tokens, specifically fragJTO, kyJTO and ezJTO.
    DAO Treasury: assets controlled by the Jito DAO.

  5. Specification
    This proposal would allocate 10 million of the DAO Treasury’s [300] million JTO tokens to be used for providing liquidity in DeFi protocols for the JTO:wfragJTO, JTO:kyJTO and JTO:ezJTO trading pairs.
    The relevant DeFi protocols used would be Raydium and Orca, which currently have the most TVL for the relevant trading pairs, though not nearly enough for trades of any meaningful size.
    Implementing this proposal would involve swapping some of the DAO Treasury’s JTO for the LRTs, and then contributing both the newly received LRTs and JTO to the Liquidity Pools. The relevant contributions to each Liquidity Pool should roughly approximate the current relative market caps of the LRTs (i.e., 50% fragJTO, 30% kyJTO, 20% ezJTO). The relative amount of liquidity provided to each Liquidity Pool may be reevaluated on a quarterly or biannual basis, and may be subject to rebalancing if the relative market caps of the LRTs shifts significantly over time.
    Any fees or other rewards earned with respect to the Liquidity Pool positions will converted into JTO and burned.

  6. Benefits/Risks
    Benefits
    The contributions to Liquidity Pools for trading pairs of JTO against its LRTs should significantly increase the liquidity availability for holders of the LRTs. Currently, the liquidity available for holders of the LRTs is very limited, and trades of even a few thousand dollars can be difficult or impossible.
    Improving liquidity would also strengthen the value of LRTs as collateral, which could lead to broader adoption of LRTs as collateral in DeFi, such as for lending and/or leveraged trading protocols. If those lending or trading protocols don’t have confidence an asset can be easily liquidated, they can’t accept the asset as collateral.
    Using the fees and rewards that accrue on the Liquidity Pool positions to burn JTO should have a slightly positive impact on the strength of JTO the asset, as it would decrease the total supply of JTO over time.
    Risks
    Providing liquidity in DeFi protocols always presents the risk of arbitrage loss, which results from trades being executed at slightly imprecise values of the two assets in the pool. Arbitrage loss is less of a concern when the relative value of the two assets is known with greater confidence, which should be the case for JTO and its LRTs – i.e., because the value of one (LRTs) is a function of the other (JTO), plus a fairly consistent rate of return over time (the yield on the LRTs).
    Providing liquidity in DeFi protocols also presents the risk of loss of assets due to smart contract exploits or failures in execution (i.e., assets being sent to the wrong addresses, or signing of improper transactions resulting from spoofing, etc). The DeFi protocols being used (Raydium and Orca) have been in existence for a fairly long time, giving greater confidence the risk of a smart contract exploit is relatively low. The LRTs themselves also present some smart contract risk, though this is also fairly low. The execution risk associated with converting JTO to an LRT, and contributing tokens to DeFi protocols is fairly limited and can be managed with reasonable best practices.

  7. Outcomes
    The liquidity available for trading JTO against its LRTs will be increased significantly by this proposal.

  8. Cost Summary
    The gas fees associated with converting JTO to LRTs should be minimal, as would be the fees associated with contributing liquidity to the relevant DeFi protocols.

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