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| ## Preamble | ||
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| ``` | ||
| ZEIP: 31 | ||
| Title: Stake-based Liquidity Incentives | ||
| Author: 0x Core Team | ||
| Type: Standard Track | ||
| Category: Core | ||
| Status: Final | ||
| Created: 2019-10-29 | ||
| ``` | ||
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| Discussion: #31 | ||
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| ## Summary | ||
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| ZEIP-31 introduces a stake-based liquidity incentive to the 0x protocol. This proposal outlines the design principles and constraints of the incentive mechanism, along with guidelines for its implementation. See the official [0x Staking Specification](https://github.com/0xProject/0x-protocol-specification/blob/3.0/staking/staking-specification.md) for a comprehensive explanation of architecture, implementation and usage. | ||
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| ## 1 Overview | ||
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| ### 1.1 Motivation | ||
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| 1. Encourage ownership over the protocol among market makers | ||
| 2. Reward market makers that stake ZRX tokens | ||
| 3. Align all market participants with the long-term mission and objectives of 0x | ||
| 4. Redirect proceeds from arbitrage-driven gas auctions back to market makers | ||
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| ### 1.2 Principles | ||
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| 1. Incentivize liquidity providers to invest in the long-term success of the protocol | ||
| 2. Create a level playing field across all types of assets and classes of market makers | ||
| 3. Minimize overhead and cost, both in terms of gas and effort to participate | ||
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| ### 1.3 Specification | ||
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| 1. Participate in governance and liquidity incentives by staking ZRX (section 2.1) | ||
| 2. Delegate stake to market makers (section 2.2) | ||
| 3. Funding self-sustaining development with protocol fees (section 2.3) | ||
| 4. Earn liquidity rewards on trading (section 2.4) | ||
| 5. Vote on 0x protocol proposals (section 2.5) | ||
| 6. Scheduling process for claiming rewards (section 2.6) | ||
| 7. Setting up liquidity rewards for market makers (section 2.7) | ||
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| ## 2 Specification | ||
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| ### 2.1 Staking ZRX | ||
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| #### 2.1.1 Utility | ||
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| * Vote on proposals and the allocation of community funds | ||
| * Market makers earn liquidity rewards proportional to their trade volume and amount of stake | ||
| * Anyone can delegate stake to a market maker to earn a portion of their liquidity reward | ||
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| #### 2.1.2 Depositing Stake | ||
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| * Anyone can stake by depositing ZRX into the 0x staking contract | ||
| * Stake can be deposited at any time | ||
| * ZRX remains staked until withdrawn by the staker | ||
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| #### 2.1.3 Withdrawing Stake | ||
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| * Stake can be withdrawn at any time so long as it is not delegated (section 2.2) | ||
| * A timelock on withdrawals may be introduced in the future to handle edge cases in on-chain governance | ||
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| ### 2.2 Delegating Stake | ||
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| #### 2.2.1 Overview | ||
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| * Market makers can contribute stake on their own behalf | ||
| * Third parties can delegate stake to market makers | ||
| * Delegated stake has the same utility as regular stake | ||
| * Stake contributed by market makers receives additional weight when computing rewards | ||
| * A delegator transfers a portion of his voting rights to the market maker (section 2.5) | ||
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| #### 2.2.2 Incentives | ||
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| * Market makers can incentivize delegation by sharing a fixed percentage of their liquidity reward with their delegators | ||
| * Via delegation market makers can obtain liquidity rewards and voting power without locking up capital in ZRX | ||
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| #### 2.2.3 Weight of Stake | ||
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| * Regular stake is always weighted more heavily than delegated stake | ||
| * Market makers obtain rewards more cost effectively when staking their own ZRX | ||
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| #### 2.2.4 Delegating Stake | ||
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| * ZRX must be staked before it can be delegated | ||
| * Anyone can delegate their stake to a market maker at anytime | ||
| * Delegating stake comes into affect on the next epoch | ||
| * Stake remains delegated until withdrawn by the delegator | ||
| * The portion of a market maker's liquidity reward reserved for delegators is held in a reward pool | ||
| * Each delegator owns a percentage of the reward pool that is proportional to their stake in the pool | ||
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| #### 2.2.5 Undelegating Stake | ||
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| * Stake can be undelegated at any time via a smart contract call; however, stake will remain delegated until the epoch ends | ||
| * The delegator continues to earn rewards through to the end of the epoch | ||
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| ### 2.3 Fees | ||
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| #### 2.3.1 Charging Fees | ||
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| * Each fill on the 0x Exchange contract incurs a static fee | ||
| * The fee scales linearly with the gas price of the transaction | ||
| * The fee is denominated in ETH (or WETH) | ||
| * The fee is paid in ETH if msg.value is set, otherwise it is taken in WETH | ||
| * The fee is paid by whoever submits the transaction | ||
| * This is the taker in an open orderbook relayer model | ||
| * This is the relayer in a matching / closed orderbook model | ||
| * This is an arbitrary third-party when using contract-fillable liquidity (meta-transactions) | ||
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| #### 2.3.2 Motivation for Fee Mechanics | ||
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| * Making the fee proportional to the transaction gas price protects market makers from arbitrage-drive gas auctions | ||
| * A portion of fees currently paid to miners are recycled back into the 0x ecosystem | ||
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| #### 2.3.3 Accumulating Fees | ||
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| * The 0x Exchange contract deposits fees into the staking contract | ||
| * The fee is associated with the originating market maker and acts as a measure of their trade volume | ||
| * At the end of each epoch the accumulated fees are distributed as liquidity rewards | ||
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| ### 2.4 Liquidity Rewards | ||
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| #### 2.4.1 Earning Liquidity Rewards | ||
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| * Liquidity rewards are generated by protocol fees | ||
| * Liquidity rewards are paid out at the end of each epoch | ||
| * Liquidity rewards are divided between market makers, delegators, and the 0x Ecosystem Fund | ||
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| #### 2.4.2 Liquidity Rewards for Market Makers | ||
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| * A market maker's liquidity reward is a function of: | ||
| * The total fees collected across all market makers | ||
| * The amount of stake held by the market maker | ||
| * The amount of stake delegated to the market maker | ||
| * The fees attributed to the market maker | ||
| * A variable subsidy that we add or remove to influence liquidity provision | ||
| * 1 Staked ZRX = 1 Reward Credit | ||
| * 1 Delegated ZRX = 0.9 Reward Credits | ||
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| #### 2.4.3 Liquidity Rewards for Delegators | ||
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| * Delegators receive a portion of the reward for each market maker they have delegated to | ||
| * This portion is set once by the market maker when creating the delegation pool | ||
| * Each delegator earns a reward proportional to the amount they delegated | ||
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| #### 2.4.4 Liquidity Rewards for the Ecosystem Fund | ||
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| * The 0x Ecosystem Fund is a pool of ETH collectively managed by ZRX holders | ||
| * A small fixed percentage of the total fees collected are allocated to the fund | ||
| * Until the 0x Ecosystem Fund has been created all fees will be paid to market makers and their delegators | ||
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| ### 2.5 Governance | ||
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| #### 2.5.1 Voting on Proposals | ||
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| * Anyone can vote on a proposal using their stake, the stake they delegate, or using stake delegated to them | ||
| * 1 Staked ZRX = 1 Vote | ||
| * 1 Delegated ZRX = 0.5 Votes for the delegator and 0.5 Votes for the delegate | ||
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| ### 2.6 Epochs | ||
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| #### 2.6.1 Scheduling | ||
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| * All processes are segmented into time intervals called epochs | ||
| * Fees accumulate over an epoch and are paid out at the end of the epoch | ||
| * Time-locks for withdrawing stake (and exiting reward pools) are measured in epochs | ||
| * All epochs last a fixed minimum time | ||
| * ~The duration of an epoch is to be determined, but will likely be 2-4 weeks~ | ||
| * The duration of an epoch is 10 days | ||
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| #### 2.6.2 Epoch Finalization | ||
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| * Epoch T must be finalized before Epoch T+1 can start | ||
| * Anyone can finalize an epoch by calling a function in the staking contract that: | ||
| * Computes liquidity reward allocations across market makers | ||
| * Pays market makers and escrows the portion allocated to their delegators (section 2.2) | ||
| * Pays a portion of the liquidity rewards to the 0x Ecosystem Fund | ||
| * Increments the epoch | ||
| * Stake and delegated stake automatically carry over to the next epoch | ||
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| ### 2.7 Setting Up Liquidity Rewards for Market Makers | ||
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| #### 2.7.1 Registering as a Market Maker | ||
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| * A market maker first creates a staking pool | ||
| * The maker then registers their trading addresses with the pool (each address must call into the staking contract) | ||
| * Each time a 0x order is filled, the maker address is used to lookup a staking pool | ||
| * If the pool has a non-negligible amount of ZRX staked then the fee is attributed to the pool |