X7 Arbitor Sanity Check

This proposal is for the DAO to perform a sanity check on the X7 Arbitor concept within the next 30 days and if appropriate submit a proposed way forward.

X7 Arbitor Objectives

• Bring more users to X7
• Make the user experience both more sticky and more profitable for users
• Burn X7DAO tokens to improve its relative performance compared to other X7 tokens
• Reduce pricing discrepancies between exchanges
• Increase both the number and geographic spread of X7DAO token holders to further the DAO's decentralization objectives
• Increase the volume of trading that takes place on X7
• not to delay the launch of X7

Background

Bancor (who claims to have invented AMMs) estimated they have about $450 million worth of Arbitrage transactions taking place on their exchange each year. Bancor liquidity pools are in deficit as a result of the events that followed the Terra Luna collapse last year. Bancor's objective was to capture the profits from some of that arbitrage activity and use those profits to reduce the deficit in their liquidity pools. It was not to improve the experience and profitability for users.

So Bancor created an open source product called Arb Fast Lane which Bancor describes as:

"Fast Lane, an open-source arbitrage protocol, allows any user to perform arbitrage between Bancor ecosystem protocols and external exchanges and redirect arbitrage profits back to the protocol."

Basically it consists of 2 parts:

• a smart contract that performs the arbitrage transactions
• an arbot that acts as a "shot caller" to find arbitrage opportunities and call on the smart contract to execute them. Bancor's implementation is technically challenging for average users to use.

You can find more info about Arb Fast Lane at:

https://blog.bancor.network/the-bancor-arb-fast-lane-protocol-is-live-fe1300036ccf https://www.youtube.com/watch?v=gsVp7U4lyic The Arb Fast Lane project is also on Github

Arb Fast Lane has been live less then 2 months, has only 9 "Shot Callers" and is already burning an average of $221 worth of tokens per day.

You can see the individual transactions here

While $221 token burnt is nice, it could be a lot higher if:

• there were more then 9 shot callers (there is minimal profit incentive for them),
• the "Shot Caller" was easier to use - it requires some technical knowledge and most users would not bother especially if there is little money to be made, and
• more language pairs were targeted (when you check the transactions, you will see only a few token pairs have been arbitraged so far).

The X7 Arbitor Concept

• Learn from Arb Fast Lane and apply lessons to X7
• Make every user of the X7 DAPP a shot caller
• have a banner across the top of the X7 DAPP saying searching for arbitrage opportunities
• when an arbitrage opportunity is found, the banner says Arbitrage Opportunity Found - Estimated Profit $XX - Click here to review
• if the user clicks to review, it populates the transactions on X7 DAPP for review. If the user clicks execute, the arbitrage opportunity is executed and the user gets a share of the profits.
• if the user does not click review and execute within say 5 mins, the DAPP checks to make sure the opportunity is still profitable and if so, executes it on the DAOs behalf and the user does not get a share of the profits.
• upon execution being completed a tweet is generated using the token symbols of the token pair that says something like "An X7 Arbitor user just made $X profit by improving the pricing efficiency of the $TOKA and $TOKB, find out more here."

Who funds the arbitrage trade?

Bancor uses Flash Loans to fund the trades. I suggest we give the user an option:

• fund the trade themselves, or
• fund it using a Flash loan from X7 Lending Pool and get a smaller share of the profits.

Profit Calculation

• Only opportunities should be displayed if the profit before gas fees is at least twice the estimated Gas cost (we do not want users losing money because of gas costs)
• The estimated profit shown to the user should be the users profit share (see below) multiplied by (the arbitrage profit less the estimated gas fee)

Profit Share Calculations

• Must be profitable for both user and X7 after taking all transaction costs into account e.g. gas fees, buy/sell taxes, etc
• If the users funds the trade, the user gets 50% of the profits and 50% is used to burn X7DAO tokens
• If the users opts to use a flash loan to fund the trade, user gets 40% of the profits, 10% go to the X7 Lending Pool, (for the Flash Loan) and 50% is used to burn X7 DAO tokens
• If the user does not execute the transaction and after say 5 minutes the X7 DAPP instead sends it to be executed on the DAOs behalf, 80% of the profits are used to burn X7 DAO tokens and 20% of the profits go to the Lending Pool for the Flash Loan.
• These percentages are just examples and would be set by the DAO.

How are the profits paid?

Gas fees may impact which option is viable, but here are 3 options:

• X7DAO tokens (preferred option as it increases the number and spread of X7DAO token holders and helps decentralization objectives)
• Tokens donated by Projects using Initial Liquidity Loans. Lots of projects do airdrops, but if we use X7 Arbitor to distribute these donated tokens, the project is getting token holders who are active on the X7 xChange where there liquidity pool is and many would check out the project if they received the project's tokens as profits.
• in the token the profit is generated in from the execution of the arbitrage transactions.

It may be by order of priority e.g:

• if the profits equal at least twice the gas fees required for the profits to be distributed in X7DAO tokens, then X7DAO tokens
• if not but the profits equal at least twice the gas fees required for the profits to be distributed in the tokens donated by Initial Liquidity Loan Projects, then those donated tokens
• if not but the profits equal at least twice the gas fees required for the profits required to be distributed in the token from the Arbitrage transaction the profit was generated in, then the arbitrage token.

Development

• I believe arbitrage execution part could be built as a stand alone smart contract that would not interfere with the other X7 Smart contracts
• The Shot Caller part could be built into the X7Dapp (preferably) or a standalone X7 Arbitor DAPP could be built. Having DAPPs as shot callers makes this decentralized.
• We may be able to leverage the open source code from Bancors Arb Fast Lane project to reduce development effort.

Increasing the geographic spread of X7DAO token holders

Crypto is undergoing more rapid adoption in developing countries that lack an established financial system. In many of those same countries, citizens may only earn a couple of hundred dollars a month. In many of those countries, people play games that earn them tokens as a way to make a living e.g. Philippines. People in these countries may find the arbitrage profits very attractive compared to their normal income and spend a lot of time on X7. If they are spending time on X7, they would be more likely to use it to exchange tokens they use in their local economy.

In established countries, it would be a pleasant surprise when I go to buy or sell tokens to be presented with the opportunity to make $50 on an arbitrage transaction. All other things being equal, they may choose to use X7 over other exchanges just for that reason

Conclusion

I hope you can visualize the X7 Arbitor concept from the above description. Remember Bancor said arbitrage transactions on their exchange amount to $450 million a year - so there is big potential here. We hope X7 will be as or more successful then Bancor and if so may see a similar volume of arbitrage transactions. Just collecting a small percentage of those transactions and using it to burn X7DAO may have a big impact on the long term value of an X7DAO token.

Even burning $221 X7DAO tokens a day like Bancor's Arb Fast Lane has been doing over the past 2 months would make a difference to the value of X7DAO tokens.

X7 Arbitor is a name I made up for the proposal - but it could be called whatever the DAO decides.

Please feel free to ask any questions and post suggestions for improvement on Telegram

This proposal is simply for DAO to perform a sanity check on the X7 Arbitor concept within the next 30 days and if appropriate submit a proposed way forward.