Proposal for the creation of a new SNS for the CYCLES-TRANSFER-STATION

Key words from your paragraph: “having flooded the market with CYCLES that aren’t getting burned propotionately fast”.

In my original post I specify that the stability and therefore the usability of the CYCLES as a stablecoin (in this case the ability to take profits by trading/minting into CYCLES for it’s stable-value) is tied to the CYCLES burn-rate on the ICP network as a whole.

Here is a quote from the original post:

The stability of the CYCLES as a stablecoin is tied to the ICP network’s CYCLES burn-rate. If the burn-rate is too low, then people will not convert profits into CYCLES, the market balances itself.

The CTS is a positive creation. There is a goal, and a platform that fulfills that goal. The goal is for the creation of a platform where mainstream people (without knowing how to code) can make good use of the CYCLES for it’s qualities of being a stable currency that is backed by the value that the internet-computer creates for the world, and at the same time for canister-maintainers to come and buy CYCLES using many different tokens besides ICP.

Yes, for the stable compute and storage costs of canisters, making it stable (predictable, reliable) for people to pay for the hosting of systems and services on the internet-computer without depending on the current price of ICP.

Thanks for continuing to accommodate my playing devils advocate.

the market balances itself

There are plenty of examples where markets don’t do this effectively. I think it would be more accurate to say - the market is inclined to balance itself, eventually. I think the inclination and eventually aspects here depend partly on the availability of information (market signals). Do you plan to provide a means of tracking the amount of CYCLES that are in circulation vs burn rate (one which is made clearly visible on CTS)?

I think another component to this is the incentives that are involved in driving the behaviours of market participates, and CTS itself. I think it’s worth noting that CTS would stand to make more profit from more CYCLES being in circulation (which also then creates a need for itself to exist). In terms of individual market participants, if they’re taking the long view, they may be happy to hold significantly more CYCLES than canister-maintainers currently need. However if their priorities change, another opportunity presents itself, or for whatever reason they want to exist their CYCLES position quickly, they may be happy to accept selling CYCLES at a significant discount (particularly if there are multiple market participants engaging in the same behaviour). Assuming ICP price volatility, I think it’s reasonable to expect that market participants could engage in this behaviour and still turn a profit. If ICP spikes (fed by lots of unnecessary burning) and then eventually crashes, those who have hoarded a load of CYCLES may wish to jump back into their ICP position when the price is at a low (they could sell CYCLES at a discount, still make a profit, and the cycle repeats).

In terms of the problem statement, unless I’m mistaken it doesn’t sound like there is one. Presumably you’re not saying that it’s problematic that mainstream people (who do not intend to burn CYCLES) have little incentive to hold CYCLES (I would expect this to be by design - wouldn’t you?).

Similarly, is it problematic that canister-maintainers typically need to use ICP to acquire CYCLES? Note that they can aquire this ICP from the market in the same way you would intend for them to acquire CYCLES from the market (the difference is that in your scenario, the resulting CYCLES may not be strongly tied to the current XDR rate).

Given that the pitch for CTS keeps referring back to research conducted by @bjoernek, I’d be interested to see if he has any concerns, and/or if he thinks my concerns are unfounded. @bjoernek do you have any thoughts on whether or not CTS (Cycles Trading Station) presents a danger to the stability of CYCLES (and/or weakens the design intentions regarding the relationship between ICP and CYCLES)?

Just to add a constructive note, if CTS would impose a transaction fee that grows exponentially the further the CYCLES rate deviates from that set by XDR, then I think this would be a positive change. This would encourage market participants to act more responsibly, while also allowing CTS to profit from safeguarding the stability of CYCLES.

The problem statement would then be something like - there’s nothing stopping individuals from minting CYCLES and selling them in the future at a rate that deviates from that set by XDR. It’s not unrealistic to expect a market emerging around this behaviour as the IC matures. CTS plans to be a first mover in this space, but importantly it will do so responsibly (by incentivising trades that do not deviate too heavily from the rate set by XDR). By forming an SNS, CTS should become a popular market that discourages other (less responsible CYCLES markets) from forming in the first place.

^ Just an idea. Is this something you could go along with @levi?

Showing stats is a good idea in general, I think it’ll be good to show the users as much data as possible about the current market of the CYCLES. There is at this time no way to track the amount of CYCLES that are in circulation in all canisters on the ICP network. Showing only the amount of CYCLES in the CTS is possible but might give a false sense of how many CYCLES are in circulation so if we do that it must be with this clarification.

Not sure how many different ways I can say it, my previous comments show how the market balances itself.

I don’t believe this is true. You’ve highlighted that a certain level of demand exists for CYCLES. This isn’t the same as explaining the market forces that would ensure that supply and demand for CYCLES will remain in steady equilibrium over time, providing the stablecoin you expect (I don’t expect they will).

Why do you think XTC has been so volatile over time? Why do you think this clear volatility will be improved by facilitating non-devs to burn ICP (for the sake of trading the CYCLES at a later date via CTS)?

At the time of the writing of this post, there are two major orders on the order-book by people who are buying CYCLES, one for trading CHAT tokens for CYCLES, and one for trading KINIC tokens for CYCLES. These orders are placed by people who need CYCLES to fuel their canisters. You can look at these orders and know that there is now this amount of buying pressure on the CYCLES at the rates chosen by each order-placer. If the available liquidity of the current orders are good for you by your own calculations, then you can choose to trade your own tokens for CYCLES at the CTS market and then trade those CYCLES back for CHAT and/or KINIC tokens, thereby making good use of the CTS and the CYCLES. It is as simple as that.

The biggest mistake XTC made was trying to trade it on the Sonic platform which is an AMM automated-market-maker. In AMM platforms, the user does not set the rate of the user’s trades. In AMM platforms, the rate of the trades (price of the tokens) is based on how many tokens the liquidity providers put into both sides of the trading pool. So in order to make the XTC trade at the baseline CYCLES rate, they had to mint a bunch of XTC (I think it was $50k worth) just for the purpose of adding it to the liquidity pool on Sonic to try and get the AMM algorithm close to the baseline rate. Then they had a bunch of unneeded XTC at the same time leaving the ecosystem and not maintaining their liquidity pool and that led to the crash of XTC.

The CTS creates a space where CYCLES will (only) be minted when users want to do something with the CYCLES, making payments for services, trading, holding, or fueling canisters.

@levi As I am catching up on this thread: Would it be correct to say that the main differences of trading at the cycles transfer station compared to existing DeFi exchanges are

  • the use of an order book for trading cycles instead of an automated market maker (AMM), and
  • the ability to trade cycles directly with many other ICRC1 tokens, rather than exclusively swapping against ICP

Hi @bjoernek,

Correct, those are two of the main differences for trading.

There are some more differences such as infinite on-chain storage of every order and every trade, and zero off-chain dependencies.