Liquidity Note

What is an Exchequer Liquidity Note?

On-chain projects will issue and sell a liquidity note (a short term bond) to their users/investors. This will result in an LP position that is created in an AMM, increasing dex liquidity for a project’s tokens.

For on-chain projects, dex liquidity is important because a project's potential users are on-chain.

The project will contribute one half of the LP position by depositing their TOKEN as collateral underwriting the liquidity note.

Note buyers(aka users/investors) will contribute the other half of the LP position by depositing ETH. In return, they are issued a liquidity note as an erc20 token.

This creates an LP position of TOKEN/ETH that is exactly double the size of the liquidity note that has been issued. The LP position is collateral underwriting the liquidity note’s three unique payoffs.

1. Downside protection

The note buyer is able to enjoy downside protection of up to a maximum of 75% permissionlessly. This is underwritten by the LP position collateral which starts at double that of the value of the liquidity note.

1. Fee Boost

The note buyer is able to enjoy a fee boost of up to 2x what they would normally receive if they LPed with the ETH used to buy the liquidity note. This is underwritten by the LP position collateral which starts at double the value of the ETH the note buyer contributed.

1. Upside Participation

The note buyer is able to enjoy upside participation of up to 200% what they would normally receive if they LPed with the ETH used to buy the liquidity note. This is underwritten by the LP position collateral which starts at double the value of the ETH the note buyer contributed.

Why Liquidity Note?

Note buyers are incentivised by the unique payoffs of the liquidity note instead of token incentives as is currently the norm.

It eliminates selling pressure and the downward price spirals that tokens experience when using token incentives.