Overview
The Morpho community has been actively discussing the liquidity provision for MORPHO on decentralized exchanges. Key discussions include Supporting MORPHO token liquidity on DEXs to Gauntlet’s POL strategy management strategy MORPHO-ETH Protocol-Owned Liquidity (POL) Strategy.
Especially through current DAO proposal MIP 85 - Whitelist Aerodrome in Aera Vault Strategy, the importance of using smaller capital input to achieve trading volume on DEXs was highlighted again.
As Native is designed to support a cost effective on-chain liquidity building, this is exactly where Native can contribute to the cost effective MORPHO on-chain liquidity building and market responsive pricing for MORPHO. This post outlines a proposal for using Native to improve the liquidity provision for MORPHO.
Proposal for Morpho DAO
We have a proposal for Morpho DAO regarding the liquidity deployment on Native:
What Benefits Morpho DAO can get
We will get back to these benefits at the end of this proposal after analyzing on-chain liquidity of MORPHO. Let’s deep dive into specific numbers later on “MORPHO-ETH On-chain Liquidity Analysis” section.
- Market-Responsive Pricing from Native PMM Network via CEX-DEX Relay: Native’s network of PMMs will price MORPHO based on market price discovery where MORPHO is currently traded. Pricing and liquidity from CEXs will be used by PMMs as part of market price discovery to ensure reliable and accurate pricing of MORPHO on DEXs.
- Enjoy Lower Capital Cost for On-Chain Liquidity Building: Native supports Single-Sided Liquidity Provision option that eliminates impermanent loss which inevitably occurs on Uniswap pools. In addition, Morpho DAO can achieve total available liquidity over $1M with $1M deposit, compared to Uniswap V3 which achieves total available liquidity of $0.23M with $5.9M deposit in the pool.
- Incentivize Retail LPs using 50% Less Cost: Native’s liquidity pairing mechanism with single-sided LP provision can save half of the AMM LP incentives that was used on traditional AMM pools.
- Get Sustainable LP Yield from Native: Enjoy sustainable APY up to 31.68% with professional market makers’ interests and swap fees.
Action Proposals
- Capital Deployment: Deposit $1M worth MORPHO into Native Credit Pool.
- Retail LP Incentive Strategy Implementation: After the capital deployment, Morpho DAO can consult Native to choose pairing asset for MORPHO and incentivize retail LPs. Morpho DAO can cooperate with Native to use Native’s Liquidity Pairing Mechanism which minimizes incentive costs by focusing solely on the retail-contributed liquidity.
About Native
Native is an on-chain platform to build token liquidity that is openly accessible and cost effective. It serves as an alternative to traditional AMMs through integration of two innovative designs: the Native Swap Engine and Native Credit Pool.
The vision of Native is to transform on-chain liquidity from inventory-based to credit-based. Native is designed to address the limitations of current on chain marketplaces, including liquidity fragmentation and capital inefficiency, by decoupling the pricing capability and inventory provision, paving the way for a new era in decentralized finance.
How Native works
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Deposit Tokens into the Credit Pool: Deposit your token into Native’s on-chain credit pool. Now professional market maker network make a quote based on PMM pricing, total different mechanism being used by AMMs. And these deposits serve as a liquidity base that PMMs can make margin lending against and make a quote.
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PMMs Borrow Liquidity: Professional Market Makers do the pricing dynamically using Native credit swap engine. Think of Native giving prime brokerage services to PMMs which liberate PMMs from confining to their inventory when they make quotes. PMMs are required to have only liquid assets (like USDT/USDC) as credits to cover the gap between their long and short positions USD value. When the gap exceeds or getting close to their collateral, liquidation will kick in to liquidate their positions by the whitelisted liquidators on Native.
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Market-Responsive Pricing: Instead of static AMM pricing, they ensure dynamic, responsive PMM pricing to reduce spreads and slippage. It is simply market-driven pricing with CEX order book depth with zero slippage as quoted price is the final execution price. For the price impact, it would be the similar price impact from CEX as PMM pricing ensures liquidity depth equivalent to CEX orderbook depth of MORPHO, far exceeding what traditional AMMs can achieve.
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Earn Sustainable Yield: As PMMs borrow and utilize funds, token issuers earn yield through interest payments. Liquidity provision becomes both capital-efficient and profitable. Let’s calculate the estimated APY at the end of this proposal.
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Onchain Verification: All trades are on chain-verified to ensure that liquidity usage matches expectations, providing transparency and trust. This is the very same reason that stone ETH could actually become a collateral of lending protocols including Morpho.
The MORPHO-ETH On-chain Liquidity Analysis
Current MORPHO-ETH pools status
Let’s check the current MORPHO token’s liquidity on DEX. $5.9M on MORPHO/WETH on Uniswap V3(Ethereum) and $3.14M on MORPHO/WETH on Uniswap V3(BASE) under the management of Gauntlet (Reference: MORPHO-ETH Protocol-Owned Liquidity (POL) Strategy)
Uniswap V3 (0.3%) MORPHO/ETH (Ethereum)
Let’s take a look at Uniswap V3 pool’s actual available liquidity within certain price range. Here is a screenshot from Coingecko and you can check the “+2% Depth” and “-2% Depth” here. This means the actual liquidity that could be utilized when users make a trade within 2% price range, meaning that only a fraction of a total locked value is being used.
Let’s take a closer look at MORPHO/WETH Uniswap V3 pool and do calculation here.
- MORPHO/WETH Uniswap V3 pool (Ethereum, 0.3% fee): 0xc8219b876753A85025156b22176c2eDEA17aAC53
TVL of this pool is $5.89M. However, the average available liquidity (+/- 2% depth) here is $118,134. This means that achieving $118,134 of available liquidity within 2% price slippage requires $5.89M capital which is massive resulting in high capital inefficiency. Currently, available liquidity divided by TVL number of Uniswap Pool is 2.0057%, meaning that less than 2% of the capital is being used.
You can check MORPHO liquidity within 1% price range, using TAL calculator which is $23,178. This is related to the fundamental limitation of CPMM model, linking the inventory with pricing thus only the partial liquidity (1~2%) in a pool could be used. This is what we call “Heavy Liquidity Input” into AMM pools.
How Native can benefit MORPHO
1. Get Market-Responsive Pricing from Native PMM Network
Native’s PMM network will price MORPHO based on market price discovery where MORPHO is currently traded. After combining DEX liquidity, CEX liquidity and Intent-based liquidity sources of Morpho, Native ensures accurate and reliable on-chain pricing with minimal slippage for trades due to consistent price alignment with the Market Price. Pricing and liquidity from CEXs(including OKX), and from other DEXs(including Uniswap), will be used by PMMs as part of market price discovery to provide reliable and accurate pricing of MORPHO.
2. Lower capital cost for on-chain liquidity building
If Morpho DAO deposits a fraction of the capital required by platforms like Uniswap V3, it is possible to build equivalent on-chain liquidity. Native devised the concept of TAL, Total Available Liquidity, to emphasize the “Maximum quote-able amount” to sell into your token without slippage. Below is the screenshot of TAL calculator (Please check https://www.talcal.org).
If Morpho DAO deposits $5.89M worth asset into Uniswap pool, you get $0.23M worth available liquidity. If Morpho DAO deposits $1M worth asset into Native Credit Pool, team immediately gets over $1M available liquidity that could actually be used for MORPHO swap. All the pairable liquid assets here on Native credit pool are built by professional market makers and will be 100% used when the swap is being made.
3. Incentivize Retail LPs using 50% Less Cost
Native’s liquidity pairing mechanism with single-sided LP provision can save half of the AMM LP incentives that was used on traditional AMM pools. Native supports single-sided LP, leveraging over $1M worth of liquid assets from the bootstrapping liquidity of PMMs. If Morpho DAO decides to support retail LP deposit, only half of the usual incentives is needed.
Model | Liquidity | Incentive Scope | Incentive Cost (Example Rate: 5%) |
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Uniswap V3 | $2M ($1M MORPHO + $1M USDC) | Full Liquidity Pair | $100,000 |
Native V2 | $2M ($1M MORPHO + $1M USDC) | Retail LP Capital Only ($1M USDC) | $50,000 |
4. Get Sustainable LP Yield from Native
Native made the assumptions using the numbers and calculation method below. The daily trading volume data is from Uniswap V3 MORPHO/ETH pool (0.3%, Ethereum).
- Average Weekly Revenue: 6803.95$ (assuming 20% from the current trading volume of the pool with 0.3% trading fees)
- Total deposit amount: 1,120,000 (token price 2.8, amount 400,000)
- APY: 31.68%
Next Steps
Native can collaborate with Morpho DAO to conduct a test deposit to evaluate whether Native can support the on-chain trading volume desired by Morpho DAO. $1M asset deposit into the Native Credit Pool will provide insight into how Native is different to traditional AMMs.
If the focus shifts towards building retail-based liquidity, Native can work with Morpho DAO to implement targeted incentives, enabling retail users to provide liquidity on the platform.
We hope to determine the liquidity targets of MORPHO through a productive discussion with Morpho DAO’s governance members.