Thread by @AriannaSimpson

1/ ICYMI, @0xProject released ZEIP-31 last week, which is a proposal for a new set of stake-based liquidity incentives. It's a very comprehensive plan designed to incentivize market makers to provide liquidity, ensure broad participation from the community & more.

2/ You should go read the whole thing here, but I'll put out a few important takeaways in this thread, specifically starting with the liquidity function: blog.0xproject.com/0x-roadmap-201…

3/ The math behind the liquidity function in particular is, to use a strictly technical term, really fucking cool. Why, you wonder? So glad you asked!

4(a)/ They use a thing called a Cobb-Douglas production function to calculate liquidity rewards, which has a number of nifty attributes, including the following: If you provide zero liquidity, you earn zero reward. If you stake zero ZRX tokens, you earn zero reward.

4(b)/ If you stake ZRX, your reward will increase as you supply more liquidity. If you supply liquidity, your reward will increase as you stake more ZRX. Wash trading and faking volume becomes very expensive.

4(c)/ Last but not least, you benefit as a MM whether you are big or small. MMs don’t benefit from forming a coalition or multiple identities. Conversely, small MMs aren’t at a disadvantage, unlike on most exchanges which only extend discounts or subsidies to high-volume traders.

5/All of the above aligns incentives so that MMs both stake *and* provide liquidity, which should help reconcile the issue of tokenholders being distinct from traders, as they mostly are now.

6/ I am still digging into the nitty gritty of ZEIP-31, but so far it looks like a very strong proposal to solve for some of the issues the protocol has encountered thus far. Huge props to Peter Zeitz, @abandeali1, @willwarren89 & team.

Disclosure: My fund holds ZRX.