Pathway: a protocol for algorithmic pricing of a DAO governance token

TL;DR

This paper proposes a protocol for algorithmic pricing of a DAO governance token by managing liquidity on AMM DEXs to maintain a price peg through strategic interventions and optimal peg functions.

Contribution

It introduces a novel algorithmic approach for DAO token pricing involving liquidity operations and optimal peg function design, including invariants and substitution with PMM protocols.

Findings

Develops a peg function as a weighted sum of normalized factors.

Analyzes invariants of liquidity intervention to maintain price peg.

Shows how interventions can be replaced by PMM protocols.

Abstract

In this paper, we will consider a governance token pricing algorithm that conducts liquidity operations on AMM (CPMM) DEXs (automated market maker decentralized exchanges) with liquidity that belongs to a decentralized autonomous organization (DAO), also called protocol-owned liquidity (POL). The primary aim of the protocol is maintaining a price peg by determining algorithmically when and how to carry out interventions that consist of two steps: extracting liquidity from an AMM liquidity pool and conducting "token swap" operations. We will cover setting up an optimal peg function as a weighted sum of certain normalized factors, which are to be determined collectively by the DAO. In particular, we will review various arithmetic invariants of liquidity intervention, which brings the price to a peg while leaving total liquidity intact, and show how such interventions can be substituted in practice by so-called PMM (proactive market maker) protocols.