Innovations that push boundaries tend to generate buzz before they’re fully adopted by the broader DeFi community. Protocol Monetary Trade Policy (PMTP) is the latest on the horizon. It’s already considered by some as the evolution of liquidity mining, despite being relatively new in the space.
The policy’s proponents say it will greatly benefit the DeFi ecosystem, but it’s worth examining exactly what Protocol Monetary Trade Policy is, how it compares to traditional DeFi economics, and whether it truly has the potential to revolutionize the crypto-economic space.
What does Protocol Monetary Trade Policy mean?
Protocol Monetary Trade Policy (PMTP) is a set of monetary policies that use a cryptocurrency protocol’s influence over currency trade or transfers to support the health of the protocol and its core token(s). It may eliminate inflation in the end, according to theory. Sifchain’s team of crypto-economists devised the policy.
Protocol Monetary Trade Policies has two main objectives: to increase total value locked and attract external liquidity. This is done by rewarding ROWAN users with rewards. This helps drive demand externally for assets to be pooled and incentivizes purchase, staking, or holding of the token.
“Sifchain sees Protocol Monetary Trade Policy as an innovative suite of tools that can provide flexible & powerful utility alongside other features, like margin trading. This policy would enable DAO Governance to determine how these various monetary policies levers should be moved. It would also provide tremendous value for liquidity providers and traders.
Sifchain is the only one to have introduced this policy in pool Ratio shifting. In the future, others can be introduced, but ultimately, the future of the protocol and how these various levers are enabled/disabled/used is in the hands of our community through the DAO voting structure.”
Says Sifchain’s Head of Business Development, Casey Arrington. What makes Protocol Monetary Trade Policy different from other economic models, you ask?
What Protocol Monetary Trade Policy is different from DeFi Economics
An average decentralized exchange (DEX), has at most one liquidity pool, which allows users to trade crypto assets. The exchange uses an algorithm called the Automated Market Maker (AMM), which maintains fair market value when exchanging token pairs.
Let’s take a liquidity pool with tokens A and B. Let’s say that the pool has a 50-50 value ratio for each asset. The pool must maintain this ratio at all times. As trading takes place and the token pool’s proportion changes, arbitrage opportunities arise that allow traders to profit from price differences.
This is because more people will swap assets A for B. The value of A falls, which decreases its buying power in comparison to B. The other side, however, sees B rise in value, increasing its purchasing power relative A.
Protocol Monetary Trade Policy is based on real-world economic fiscal models at token protocol levels to mitigate pool imbalances caused by token swaps. These policies are used to motivate and support user behavior in order to protect the price and health of liquidity pools.
Inflation is a common DeFi protocol policy. This means that the protocol creates tokens based on specific activities and mints them to be given to users. Instead of creating new tokens through pool ratio shifting or other monetary policies mechanisms, protocol makers adjust economic parameters to encourage specific behaviors.
Members of the DAO make adjustments. Governance, for example, tracks several metrics such as external liquidity before taking any decisions. They will then propose policies to increase external liquidity if it is not high enough. The DAO will then vote to approve the policy. After the purchase power adjustment has been applied, it goes into effect.
Using a ROWAN (Sifchain’s token) USDT trading pair as an example, if pool ratio shifting from Protocol Monetary Trade Policy is set for a 2% purchasing power increase per day:
- A ROWAN can buy 1 USDT per block
- In block 2, one ROWAN purchases 1.00005787037 UST
- A ROWAN can buy 1.00011574074 USDT for block 3.
This illustration shows that the Protocol Monetary Trade Policy pool ratio shifting instrument makes subtle adjustments in the token’s purchasing power over a time period. The Protocol Monetary Trade Policy allows you to use less assets to purchase more. This makes the modified assets more valuable than before.
Sifchain says that Protocol Monetary Trade Policy is intended to change the amount of trading opportunities available to token holders, rather than traditional liquidity pools which influence monetary policies primarily through inflationary incentives.
Important to note that Protocol Monetary Trade Policy won’t fix the price for a token at any given level. The balance in the liquidity pool will determine the price. These policies are not intended to limit the trading of tokens; token holders can trade tokens on all exchanges.
Which protocols do they have the most to gain from it?
Protocol Monetary Trade Policies have one of the greatest advantages: it makes it possible to lower inflation. The policy allows tokens with lower purchasing power to be able to increase their value on exchanges.
Protocol Monetary Trade Policy is another useful tool to attract liquidity. It is more attractive to accumulate tokens because of subtle increases in its purchasing power. Additionally, the reward for liquidity provision and delegation is greater. It encourages users to pool their external liquidity using that token.
These policies must be voted on by the community before they are implemented. Users have direct control over their returns. Users also get to take part in the evolution of microeconomics. This gives new projects and users even more reason to contribute their liquidity to this protocol.
Protocol Monetary Trade Policy has also the potential for a TVL snowball effect. When a token’s price rises, the TVL will also increase, causing the TVL to go up. This is a cycle that draws liquidity providers and creates liquidity within the protocol.
Note that members of a DEX or DAO don’t have to do anything to benefit from Protocol Monetary Trade Policy, even though they are encouraged to participate in governance. They are automatically applied. So, as long as you have assets in the pool, you’ll still enjoy the benefits.
Sifchain example
Sifchain has recently integrated the Protocol Monetary trade Policy pool ratio shifting tool after their DAO votes passed the policy. They are now the first protocol to introduce these real-world monetary policies tools to protocol level. Its potential benefits were well received by the community and they were thrilled to pioneer this new monetary policy.
Sifchain saw the vision of the policy and one SifDAO member noted that, “Protocol Monetary Trade Policy is like early nuclear research. It can be incredibly strong; we’re just freaking out over the fallout. But this thing can absolutely win the market for us.”
However, things didn’t go exactly as expected. Ratio Shifting, which is another important feature of PMTP, was to be combined with DEX Liquidity Protection in order to protect Rowan’s value and Sifchain liquidity. Unfortunately, Sifchain didn’t expect a major sell-off to occur before DEX Liquidity Protection was deployed. DAO members voted to restore their balance pool policy after they had some difficulties in a bear market.
Also, it was discovered that policies like these could be best added-on features. Combining purchasing power adjustments with the possibility to open margin positions can make them very attractive. Margin traders would welcome any signal that could help them manage their positions, such as purchasing power adjustments.
Sifchain is positive that the policies could change DeFi’s economics in a positive way. When these policies can be viewed holistically, they are particularly effective and will work together to handle every type of market. With some fine tuning, these policies will likely be successful in the future.
An increasing movement
Protocol Monetary Trade Policy (PMTP) is an innovative innovation in crypto-economics. Sifchain currently spends much of its time supporting community education. The community must fully grasp its limitations and power before any policy can be effective. This is what Sifchain learned with its previous launch of Protocol Monetary Trade Policy. The team is now ensuring that this lesson is carried forward with core features that are top priorities for its’ roadmap, such as margin trading and Omni-EVM.