Current issues with WBTC <> cbBTC DEX pool

Proposals
1

Context:

Approximately 1.5 months ago, we launched the cbBTC/WBTC DEX pool on Fluid. Initially, the pool gained significant traction. However, in recent weeks, it has faced challenges due to limited swap routing and excessive rebalancing due to lack of CEX <> DEX arbitraging on Fluid.

Issues Identified

  • Excessive Rebalancing: Despite Fluid’s broad DeFi adoption and integration with major DEX aggregators, Fluid DEX has not been supported by key CEX-DEX arbitrageurs (e.g., Wintermute). This gap has caused a significant share of transaction volume to be routed to other platforms. Even as the deepest liquidity source, the pool has captured less than 20% of potential transaction volume. This lack of routing has worsened rebalancing inefficiencies.
  • Tight Limits: The initial range order for the pool was set at a narrow 0.1%, modeled on Uniswap’s LP distribution at the time. However, as cbBTC gained traction and the ecosystem evolved, this range became too restrictive, leading to excessive rebalancing losses and inefficiencies.

Quick Fixes

  • Expanding the Range: The range order has been increased to 0.2% and the rebalancing range has been changed from 0.5% to 0.3%. This adjustment has already helped with excessive rebalancing.
  • User Compensation:
    • Distribute $100k in FLUID tokens to compensate LPs who suffered losses.
    • Distribute an additional $100k in FLUID tokens to sustain the pool for the next 30 days while integration with CEX-DEX arbitrageurs is pursued.

Perfect Solution

Integration with CeFi-DEX Arbitrageurs: To address the lack of arbitrage activity, we aim to onboard major CEX-DEX arbitrageurs within the next month. This integration will:

  • Ensure more trading volume flows through the pool.
  • Boost APY for LPs while minimizing rebalancing losses.
  • Increase the pool’s share of total volume from 20% to 50-70%, making it up to 3x more profitable.

Detailed Issue Explanation:

The cbBTC/WBTC pool on Fluid is facing challenges in capturing the natural trading demand of WBTC due to a pricing lag caused by the absence of CEX-DEX arbitrageurs.

Step-by-Step Impact on trades:

Let’s say currently there’s higher WBTC selling demand in DeFi then most of these trades ends up routing through Uniswap as shown in below image:

  1. Initial Trade Routing: When trades occur, they are split between Uniswap and Fluid. Making the final price of both the pools the same.
  2. Price Discrepancy: Due to CEX-DEX arbitrageurs only operating on Uniswap, any price imbalance is corrected there first, leaving Fluid’s pool price lagging behind.
  3. Subsequent Trade Routing: As a result, new trades prefer Uniswap due to better pricing, causing Fluid’s pool to miss out on potential volume.
  4. Rebalancing Loop: This leads to a continuous cycle where Fluid’s pool remains out of sync, failing to capture the natural DeFi trades it should, thus exacerbating the rebalancing problem.

A similar scenario happens in other directions when DeFi has more cbBTC selling pressure.

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Final Comments

  • cbBTC/WBTC trading volumes in DeFi are relatively low, with over 50% of pool trades being executed by CEX-DEX arbitrageurs.
  • Fluid’s rebalancing mechanism relies on natural trading activity to maintain balance. However, with limited trade routing to Fluid, excessive rebalancing increases losses, lowers trading fees, and hampers the pool’s performance.
  • Both of these issues—low trading volume and excessive rebalancing—will be addressed once CEX-DEX arbitrageurs are integrated. Resolving this is a top priority for the team. Note: excessive rebalancing has already been addressed from the governance side by expanding the range & limiting the rebalancing limits.

Conclusion

The cbBTC/WBTC pool is losing money due to the absence of CEX-DEX arbitrageurs, which is leading to missed trading volume and excessive rebalancing.

We propose:

  1. Distribute $100k in FLUID tokens to compensate LPs over the last 30 days.
  2. Allocate an additional $100k in FLUID tokens to support the pool over the next 30 days until CEX-DEX arbitrageurs are onboarded.

Once integrated, the pool will see increased volumes, reduced inefficiencies, and higher profitability.

8 Likes
3

Well drafted proposal and great that the range expansion has been actioned. That should mitigate part of the issue.

#1 Allocate USD 100k to compensate for realised poor performance
Not supportive of compensating LPs for poor historical performance. LPs take an informed decision to take risk in pursuit of risk adjusted returns. Part of the downside risk has materialised here. No need to make any of the market participants whole.

#2 Allocate USD 100k to offset expected poor performance
More information needed:

  1. You expect the pool to perform poorly until arbitrageurs are onboarded. Why spend money now instead of waiting until the problem is resolved in 30 days when arbitrageurs are onboarded?
  2. Providing an incentive implies there is an ‘appropriate’ level of pool performance. What is the level of performance you are targeting with these incentives?
  3. Why do you think $100k in FLUID tokens will be sufficient to bring the performance to that target level? (i.e. why not more or less?)
2 Likes