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Pathway is a pricing algorithm used by GC DAO that conducts liquidity operations on AMM DEXs with GTON liquidity that belongs to the DAO (also called protocol-owned liquidity, POL).
In the traditional, passive approach to DAO-operated liquidity, the market value and the intrinsic value of a DAO token are correlated weakly. The market value stability is disrupted by external noise, intricacies of traders’ behavior, as well as incomplete or asymmetric information.
Algorithmic governance tokens, on the other hand, can use proactive liquidity management strategies in order to smooth and stabilize the price of the token by linking it to an intrinsic value peg. We believe that the implementation of such mechanics can increase market efficiency and prosperity of DAO systems and their token holders through establishing positive feedback loops that correlate with the fundamental growth factors of a token.
Pathway protocol is a tool that DAOs can use to 1. formalize a set of fundamental factors that influence the pricing of a token and 2. establish a market making system that amplifies and sustains the correlation between intrinsic and market values.
GC is, first and foremost, a DAO that aims to generate value for the holders of $GTON governance token. Pathway protocol is used to algorithmically peg $GTON to a weighted sum of tracked performance parameters of the DAO. Through Pathway, $GTON becomes an algorithmic governance token (AGT), and thereby, GTON’s price will tend to stay within a specific corridor, while being dependent on the fundamentals voted by the DAO. We see Pathway as one of the key features of GC which will distinguish it from other DeFi projects.
POL (protocol owned liquidity) describes an approach to liquidity management where LP-tokens are owned and managed collectively by a DAO. It is used to bypass a common problem in DeFi which is the constant need of attracting and retaining liquidity for the token. The POL concept was pioneered by Olympus DAO. One of the difficulties in the practical implementation of Pathway is related to liquidity ownership. For the protocol to perform successful interventions, the DAO should own most of the liquidity for its token. The proportion of POL determines the level of control that the DAO has when attempting to achieve a peg. The exact way of structuring the DAO to ensure liquidity accumulation in the form of POL can be implemented in various ways: one of such ways is bonding, that is, a sale of staked governance token allocations which become an integral part of the governance token liquidity.
Intrinsic value is a measure of what an asset is worth. This measure is arrived at by means of an objective calculation or complex financial model, rather than using the currently trading market price of that asset. In GC documentation, the intrinsic value will usually be referred to as “peg price” or simply peg.
GC DAO uses DAO governance to determine a set of fundamental metrics that should influence the pricing of GTON. GC DAO’s revenue model is not limited to managing and balancing a portfolio of assets, but is oriented towards achieving development goals. Therefore, a more flexible model based on a set of factors can be applied.
GC DAO will convene regularly to collectively determine: a list of numerical factors that reflect the success of the DAO, for instance: liquidity, active users, integrations, transactions, revenue, assets under management. impact coefficients (weights) of these factors.
Intervention is a liquidity operation procedure initiated by a DAO MM, which is aimed at adjusting the market price towards the peg (intrinsic value) price by conducting operations with POL. There are two types of Intervention: Up-Intervention which moves the market price up towards the peg, and Down-Intervention which moves the price down (both cases are symmetrical due to the nature of constant product market making AMM).
To conduct an intervention that changes the price, the DAO should algorithmically remove a calculated amount of the governance token, while the quantity of the market token (quote) should remain the same, and do a token swap.
In the perfect scenario, all assets contained in the AMM pool are owned by the DAO. This can also mean that no extra funds in the governance token can be made available to change the market price. If there are no extra funds at DAO’s disposal (e.g. from the treasury), the amount of the market token must remain the same after Up-Intervention. Therefore, an approach is needed that avoids using any extra funds to conduct the swap, extracting the necessary amount from liquidity instead.
In pools on AMM DEXs, the total amount of liquidity the user is able to remove is equal to their share represented as an LP token. LP tokens essentially represent a pair of the tokens in the pool.
In order to execute an Up-Intervention, the MM must withdraw (“burn”) a certain amount of LP tokens (calculated by the Pathway algorithm) from the pool and swap tokens through the same pool to adjust the price. As a result, such Up-Intervention will increase the market price of the governance token, occurring due to the removal of some G tokens from the pool, while the total liquidity will remain the same.
Perhaps the most important issue we see that can influence Pathway’s deployment is the probability of front-running transactions that can undermine DAO interventions. In this case, we envision two practical strategies for protection.
With the first strategy, a threshold for the price difference from the oracle and the AMM pool is established at the time of execution. This is analogous to slippage tolerance in AMM DEXs. However, we consider this kind of protection strategy comparatively weak.
The need for time randomization stems from potentially occurring frontrunning transactions. In a fully deterministic system, an external actor can execute a transaction to front-run the intervention and make guaranteed profit.
In order for the protection to be sufficiently strong, a VRF (verifiable random function) randomizer should be employed at the time of intervention execution, which makes it known whether the transaction will be executed or rejected only at the time of execution. With this strategy implemented, front-running will be more risky for the frontrunner, as it does not guarantee any yield but forces the frontrunner to enter a token position.
To sum up, randomization makes this process uncertain for attackers, as it is impossible to know when an intervention transaction will happen and how much random noise is added to the peg, i.e. small fluctuations around peg price in both directions. Therefore, no guaranteed profit exists + there’s an added risk of entering a position.
Pathway is already in production: v0 (testing version) was launched in December 2021, v1 (stage 1 with a minimum of tracking metrics) will be launched in Q2. For more information on the next steps for GC DAO, please see the GC 2022 roadmap.