Nov 25, 2020
Ocean Market Staking Guide
Introduction
Ocean Protocol recently launched V3 which introduced the Ocean Market and the use of Datatokens. Since it’s a pretty new concept, I’ll try to explain how it works so you can be more at ease when navigating the platform. I am part of the community, but not affiliated with the team. I’ll try to write more guides for specific use cases in the coming weeks, as V3 will evolve and we will see more uses to the Datatokens, especially in DAOs.
- First we will have a quick look at what the Ocean Market is about.
- Then we will go through how you can become a liquidity provider.
- Finally we will discuss the strategy of investing in Datatokens.
The Ocean Market:
Is a place where publishers can put their data for sale.
The publisher can be any entity. Either a single person, a company, or a group of people that create a union to publish their data together. To be a publisher on the Ocean Market you only need to have the rights to the data, and a Metamask wallet. The publisher can either decide to sell his data at a fixed price, or create a pool for price discovery (more on this later). The publisher will mint a unique set of Datatokens for his dataset. The Datatoken is used to buy, consume, and trade the data.
Is a place where buyers can purchase datasets.
The buyer can browse the Ocean Market to find datasets that suit his needs. Individuals and companies can access directly, or via an algorithm once compute-to-data is enabled. To access the data, the buyer has to pay for 1 Datatoken with Ocean Tokens. The buyer then sends his Datatoken to the publisher, which grants him access to download the dataset. All these interactions are approved through a series of Metamask prompts.
Is a place where investors can speculate on data.
The investor can look for good datasets to invest in. The investor can only stake in pools, not on fixed priced data. Being a liquidity provider can be profitable in two ways: from the price appreciation of the dataset, and from the swap fees of the pool.
What is staking or liquidity providing, and how can it help to price data ?
In the Ocean Market, staking is referred to as providing liquidity to a pool. Balancer pools are Automatic Market Maker (AMM) — Learn more
It’s important to understand that staking on a dataset, is investing in that dataset. If the dataset has no perceived value, you will likely end up without any profits, or at a loss.
Why a publisher will choose AMM for price discovery ?
- A publisher might not know the value of his dataset, and might want to use a pool as a way of signalling.
- The dataset might have a dynamic price because of added data over time.
The price will be dynamic and affected by the investors.
The investors will put liquidity in the pool if they feel the data is undervalued. — This will raise the price of the Datatoken.
The investors will pull their liquidity from the pool if they feel that the price is overvalued. — This will lower the price of the Datatoken.
Example:
Bob has the rights to a dataset with 300 annotated pictures and created a pool for it. He starts the pool with 1000 Ocean tokens and 100 minted Datatokens. Since the pool is 70/30, the amount of liquidity in the pool is balanced to 700 Ocean, and 100 Datatokens, that are valued at 300 Ocean. Each of the Datatokens are individually worth 3 Ocean Tokens (3*100=300).
Alice thinks that the dataset is worth more than 3 Ocean, and decides to add 100 Ocean Tokens of liquidity to the pool. Of those 100 tokens, 70% will stay as Ocean liquidity and 30% will be converted to Datatokens. Bob owned all 100 Datatokens in the pool as the publisher, but the pool swaps Alice’s 30% of Ocean Tokens for 10 of Bob’s Datatokens (30 Ocean/3 Ocean = 10 DT).
Note: I am leaving out swap fees and slippage for simplicity.
So far the pool liquidity would look like this:
- Bob‘s liquidity: 730 Ocean Tokens and 90 DTs
- Alice’s liquidity: 70 Ocean Tokens and 10 DTs
- Pool’s Liquidity: 800 Ocean and 100 DTs.
- Total Value = 1143 Ocean Tokens.
Each Datatoken is now worth 3.43 Ocean Tokens(1143*0.3/100=3.43)
The strategy of swapping Datatokens
Datatokens are ERC-20, and can be stored in Metamask.
Let’s bring in Charlie, another investor. He sees the potential of the dataset and decides he wants to have full exposure to the Datatoken. He uses the trade function to swap 100 Ocean Tokens for Datatokens. The swap uses 100% of his Ocean in exchange for 29.15 Datatokens (100/3.45=29.15). The Datatokens are taken out of the pool and sent to his wallet. The 100 Ocean Tokens will be divided according to the shares of both holders in the pool: Bob has 91.25 % and Alice has 8.75%. Of the 29.15 DT Charlie buys, 26,6 Datatokens would come from Bob’s share, and 2,55 Datatokens would come from Alice’s share.(Again, leaving slippage and swap fees out).
Charlie’s wallet : 0 Ocean Tokens and 29.15 Datatokens.
The pool would now look like this:
- Bob’s liquidity: 821.25 Ocean and 63,4 Datatokens
- Alice’s liquidity: 78.75 Ocean and 7.45 Datatokens
- Pool’s liquidity: 900 Ocean and 70.85 Datatokens
- Total value = 1286 Ocean Tokens
Each datatoken is now worth 5.45 Ocean (1286*0.3/100=5.45)
Conclusion
You can notice that taking Datatokens out of the pool will drive the price up faster because the pool liquidity has to be divided between less Datatokens. The same is true when swapping back Datatokens in the pool. — The price will drop faster.
Having the Datatoken in your wallet gives you more upside when the price goes up compared to providing liquidity, but you don’t earn swap fees. Instead, you keep 100% of the upside until ready to sell, as you are not selling part of your pool shares to people getting in after you.
Having the Datatoken in your wallet gives you more downside when the price is going down compared to providing liquidity. If the price drops, swapping back the Datatoken in the pool will push the price down further as you are increasing the Datatoken supply.
Notes:
1- You might think that investors would empty the datatokens of the pool quickly, but that’s not exactly the case with pools because slippage plays a big role in AMM. Since the pool always wants to stay balanced, trying to buy too much of an asset will drive the price up exponentially.
2- If a publisher decides to mint more Datatokens and injects them in the pool, or if he pulls liquidity out of the pool in Ocean Tokens, it will penalize all the liquidity providers and the holders or the Datatokens. It’s important to research the publisher and to know of his intentions. Some publishers will have specific withdrawal timeframes, or a maximum percentage they pledge to remove per week.
3- If you want to know more, please check some of the excellent blog posts by Trent McConaghy
Check out theOcean Market here: https://market.oceanprotocol.com/
-Agent K
