Understanding Mosaic’s Active Management
Composable Finance announced the imminent launch of Mosaic Phase 2 in Q1 2022, providing the community with in-depth information regarding the dynamic fee model and its passive rebalancing of liquidity. This article gives more insight into Mosaic’s Active Management Module; how it gives an extra layer of assurance that the cross-chain transfers go through and what opportunities there are for the savvy liquidity providers.
Recap of Mosaic
Mosaic tackles the cross-chain liquidity challenge. Despite recent developments in bridges and bridge aggregators, it is still common for large transfers to get stuck or incur a high fee, which severely limits the adoption of cross-chain applications.
Mosaic isn’t a bridge or bridge aggregator; instead, it is a transfer availability layer that manages its LP vaults on different chains through liquidity forecasting and rebalancing. As discussed in previous posts, Mosaic monitors activities on the networks supported and forecasts which LP vaults will fall short (detailed four-part explanation starts here). To move sufficient funds onto the destination chain for users’ transfer requests, it uses bridges and DEXes on the market to rebalance its LP vaults; as announced in our the posts about Hop, Crocswap.
If the passive rebalancing takes too long or fails, Mosaic allows for just-in-time liquidity bots to provide the funding on the destination chain and issues the bots IOUs for them to withdraw liquidity on any of the chains Mosaic supports; this is the active management we will be delving into.
Active management provides extra assurance for transfers to go through
Despite liquidity forecasting and passive rebalancing, for large transfers,it is still possible for Mosaic to struggle to get enough funds on the destination chain, either due to long processing time on bridges, or just not enough funds in the vaults. Composable SDK allows bots to monitor transaction mempool and Mosaic vaults to spot larger transfers or transfers likely to get stuck. If the wallet the bots are connected to has the needed amount on the destination chain, bots can provide that liquidity to the user; in return, bot operators get an IOU from Mosaic to withdraw liquidity on any chain Mosaic supports as well as transaction fee for its active liquidity provisioning.
Mosaic is thus equipped with three layers of assurance for transfers to go through: firstly, the liquidity vaults where LPs are encouraged to deposit into where funds are most needed with higher returns; secondly, the passive rebalancing of the liquidity vaults; and finally, if the first two fails or take too long, liquidity bots, which Mosaic plans to propagate among the community (see section below), can frontrun Mosaic’s rebalancing process and provide liquidity just to fulfill the transfer requests.
It is worth noting that the usual dynamics of frontrunning related to the MEV is not in play here: bots aren’t manipulating the orders of transactions simply with higher gas fees; instead, at Mosaic, they’re providing much needed liquidity and adding value when the Mosaic passive rebalancing mechanism cannot meet transfer requests fast enough.
High-level view of how bots work to provide just-in-time liquidity
Transfer availability-EV, the new DeFi frontier
Active liquidity provisioning on Mosaic is for anyone with technical expertise with a keen interest to bet on the cross-chain future without committing to a particular chain. Bridging has reached $30bn in TVL as of early Feb, but still less than 2% of the total crypto market cap while L2s and alt-L1s continue to ramp up. As the transfer availability layer, Mosaic taps into all the leading bridges in the market, and we expect it to gain traction based on a superior user experience. Even with conservative assumptions, it is hard to overlook the lucrative potential of running those bots. All for a good cause — providing transfer availability for a cross-chain and interoperable future.
A vital feature of the active management module is the bots that can withdraw liquidity on any chain, in any token. This feature enables many new strategies for active liquidity provisioning. Anyone can configure to withdraw to the same network you provided liquidity on, withdraw to where the fee is the lowest, or set a certain network you want to withdraw into — if you want to transfer funds to a certain network, this strategy allows you to do so while earning transfer fees. You can also set up several bots to monitor different networks and loop the liquidity provisioning/withdrawal strategies on different networks to compound the returns, e.g. providing liquidity on network A, withdrawing on B, then providing liquidity on network B, withdrawing on A, and repeat. Similar to MEV, you can also convert part of the liquidity withdrawn to native gas tokens to get a discount on the gas fees next time you provide liquidity on a network.
To tackle the cross-chain liquidity challenge, we need to galvanise as much siloed liquidity as we can securely get, which is why we will make setting up your own bots an intuitive process. We will share an updated Composable SDK, steps needed, and code examples on our Github page so that community members just need to download, configure, and run.
The active management module allows community members to provide just-in-time liquidity to ensure that larger cross-chain transfers can go through promptly. This module gives Mosaic an extra layer of assurance for transfer availability and creates a new category of DeFi opportunities for advanced community members, with the possibility of providing and withdrawing liquidity on different networks, unlocking a plethora of new just-in-time liquidity provisioning strategies.
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