Boundary -pushing innovations tend to generate buzz before being fully adopted by the broader DeFi community. The Monetary Trade Policy Protocol is the latest on the horizon. This has been regarded by some as an evolution of liquidity mining, although relatively new in the space.
Proponents of the policy say it will greatly benefit the DeFi ecosystem, but it is necessary to examine exactly what the Protocol Monetary Trade Policy is, how it compares to traditional DeFi economies, and whether it really has the potential to revolutionize the crypto-economy space.
What is the Monetary Trade Policy Protocol?
The Monetary Trading Policy Protocol (PMTP) is a set of monetary policies that use the influence of cryptocurrency protocols on currency trading or transfers to support the health of core protocols and tokens. In theory, it could eventually eliminate the need for inflation. The policy was created by a team of crypto economists at Sifchain.
One of the main objectives of the Monetary Trade Policy Protocol is to help attract external liquidity while increasing the total locked -in value (TVL). This is done by offering cryptocurrency token incentives such as ROWAN, making it an attractive option to earn rewards. Then, this helps drive external demand to accumulate assets and encourages buying and staking / holding of those tokens.
“Sifchain sees the Monetary Trade Policy Protocol as an innovative tool that can provide flexible & powerful tools along with other features, such as margin trading. The policy will allow the DAO government to decide how to move these various monetary policy levers, which will provide great value to its customers. traders and liquidity providers.
To date, Sifchain has introduced one of these policies in the Shifting Ratio pool. In the future, others may 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.
Said Sifchain’s Head of Business Development, Casey Arrington. But how does the Monetary Trade Policy Protocol differentiate itself from other economic models?
How the Protocol Monetary Policy differs from traditional DeFi economics
A typical decentralized exchange (DEX) has at least one pool of liquidity that allows users to exchange crypto assets. It uses an automated market maker (AMM) algorithm to maintain the same market value for token pair exchanges.
Let’s take a pool of liquidity with tokens A and B. The pool starts with a 50-50 ratio in value for both assets. This ratio must be maintained at all times. Thus, when a trade occurs and the proportion of tokens in the pool changes, an arbitrage opportunity is created, allowing traders to capitalize on the price difference.
For example, because more people exchange assets A for B, there will be more A in the pool and less of B. This pushes the value of A down, reducing the purchasing power relative to B. On the other hand, the value of AB increases, increasing the purchasing power relative to A .
Monetary Trade Policy The Protocol uses a real economic fiscal policy model at the token protocol level to help reduce pool imbalances that inevitably arise when users exchange tokens. These policies can be used as a tool to provide incentives and encourage user behavior to help protect the health and price action of liquidity.
One of the common policies in most DeFi protocols is to use inflation, where the protocol assigns new tokens to users based on specific activities. With changes in pool ratios (and other monetary policy mechanisms), rather than printing new tokens, protocols make alternative adjustments in other economic parameters to encourage certain behaviors.
The arrangements are decided by DAO members. For example, governments track various metrics, such as external liquidity, before making decisions. If external liquidity is low, they will propose policies with the aim of attracting external liquidity. The DAO then voted to approve the policy. Once implemented, purchasing power adjustments will take effect.
Using the USDT ROWAN trading pair (Sifchain token) as an example, if the changing pool ratio of the Protocol Monetary Trade Policy is set to increase purchasing power by 2% per day:
- One ROWAN bought 1 USDT in block 1
- One ROWAN bought 1.00005787037 USDT in block 2
- One ROWAN bought 1.00011574074 USDT in block 3
This example shows how the pool ratio change tool from the Monetary Trade Policy Protocol makes very subtle adjustments to the purchasing power of tokens over a period of time. Because you can use fewer assets to buy more, managed assets become more useful than without the Protocol Monetary Trading Policy.
Sifchain noted that, unlike traditional liquidity pools where cryptocurrencies influence monetary policy primarily through inflation rewards, the Monetary Trade Policy Protocol aims to influence the number of opportunities a token holder must trade a certain amount in a certain ratio.
It is important to mention that the Protocol Monetary Trade Policy will not fix the token price to a certain extent. The price will still change depending on the balance of the liquidity pool. In addition, the purpose of the policy is not to restrict token trade; who have the freedom to trade tokens anywhere, on any exchange.
What kind of advantages are offered to the protocol?
One of the biggest advantages of the Monetary Trade Policy Protocol is that it helps reduce inflation. By increasing the value of tokens on the exchange, the policy can help fewer tokens to have the same purchasing power.
The Monetary Trade Policy Protocol can also be a useful tool for attracting liquidity. Subtle additions to the purchasing power of tokens make them more expensive to collect. Furthermore, there is an increase in rewards received from providing liquidity and staking / delegation. This encourages people to accumulate external liquidity with these particular tokens.
Because these policies in the DAO must be selected by community members before they can be implemented, users can directly influence returns. In addition, he got the opportunity to be a part of the evolution of microeconomics. Thus, new users and projects have other reasons to increase liquidity in the protocol.
The Monetary Trade Policy Protocol also has the potential to initiate a TVL snowball reaction. When the token price increases, TVL increases, the price increases, which then increases TVL, and so on. This cycle attracts liquidity providers, creating more liquidity in the protocol.
Note that DEX or DAO members do not have to do anything to benefit from the Protocol Monetary Trade Policy, even if they are encouraged to participate in governance. The policy is automatic. So, as long as you have assets in the pool, you will still benefit.
Sifchain recently incorporated the pool ratio change tool from the Monetary Trade Policy Protocol after the DAO voted to pass the policy, becoming the first protocol to bring this real-world monetary policy tool to the protocol level. Members of the public were impressed with the potential benefits and excited to be a pioneer of this new monetary policy.
Sifchain sees a vision of that policy and one SifDAO member noted that, “The Monetary Trade Policy Protocol is like early nuclear research. It can be incredibly strong; we’re just freaking out over the fallout. But this thing can really win the market for us.
However, things did not turn out as expected. To protect value gains in Rowan and liquidity in Sifchain, Ratio Shifting is intended to eventually be paired with DEX Liquidity Protection, another key feature in PMTP. Unfortunately, Sifchain did not expect a major sale before DEX Liquidity Protection was deployed. After experiencing some problems during the bear market, DAO members chose to return to their original balanced pool policy.
You also see that these policies work well in addition to other features. For example, purchasing power adjustments can be very attractive when coupled with the ability to take margin positions. Margin traders looking for any signal to help their position will be happy with purchasing power adjustments as an additional helpful lever.
Still, Sifchain believes the policy has the potential to change DeFi’s economy for the better. These policies are particularly effective when viewed holistically in a way that can complement and address any market. So with some small finetuning, the policy may be useful in the future.
A growing movement
The Monetary Trade Policy Protocol is an exciting innovation in the crypto-economic space. Now, Sifchain spends a lot of time on community education initiatives. In order for anything to be successful, including any monetary policy, society needs to know its strengths and limitations. Sifchain has learned about this by launching its Monetary Trade Policy Protocol earlier. The team now ensures that this lesson is continued with core features that are a top priority for the roadmap, such as margin trading and Omni-EVM.