TAIKO/TD Liquidity Bootstrap & TWAP Transition Strategy - Leveraging arbitrage for price discovery

TWAP-Liquidity-Bootstrap-Strategy.md

TWAP Bootstrap Strategy for Taikodrome

What is TWAP?

TWAP (Time-Weighted Average Price) is a price calculation that averages the price of an asset over a specific time period, making it resistant to manipulation.

How TWAP Works in Aerodrome

Aerodrome pools store price observations at regular intervals (every 30 minutes by default):

• Each observation records: timestamp, cumulative price
• TWAP calculation: (Price_end - Price_start) / (Time_end - Time_start)
• Longer time windows = more manipulation resistance

TWAP vs Spot Price

Spot Price: Current instantaneous price in the AMM

• Can be manipulated with a single large trade
• Reflects immediate supply/demand

TWAP Price: Average price over time window (e.g., 4 hours)

• Requires sustained capital to manipulate
• Lags behind spot price during volatility

Why TWAP Isn't Available Initially

TWAP requires historical data to calculate:

1. New Pool = No History: When a pool launches, there are zero observations
2. Minimum Observations: Need at least 2 observations to calculate TWAP
3. Reliable TWAP: Requires ~8-12 observations (4-6 hours) for manipulation resistance

// Example: Pool with 0 observations
pool.observe([uint32(3600)]) // Reverts - no data for 1 hour ago

// After 4 hours (8 observations)
pool.observe([uint32(3600)]) // Returns valid TWAP for last hour

High-Level Strategy

Phase 1: Fixed Price Bootstrap (0-6 hours)

Objective: Launch bonding with predictable pricing while accumulating TWAP data

// In BondingCurve.sol
function getCurrentPrice() public view returns (uint256) {
    if (isBootstrapPhase) {
        return FIXED_BOOTSTRAP_PRICE; // e.g., 1 TAIKO = 1 TD
    }
    // ... TWAP logic
}

Actions:

1. Deploy TAIKO/TD pool via Aerodrome PoolFactory
2. Seed initial liquidity using POL
3. Enable bonding at fixed rate
4. Pool accumulates observations every 30 minutes

Phase 2: TWAP Data Collection (6-24 hours)

Objective: Ensure sufficient price history exists

Required Aerodrome Integration:

// Read from Aerodrome Pool contract
interface IAerodromePool {
    function observe(uint32[] calldata secondsAgos) 
        external view 
        returns (
            int56[] memory tickCumulatives,
            uint160[] memory secondsPerLiquidityCumulativeX128s
        );
    
    function slot0() external view returns (
        uint160 sqrtPriceX96,
        int24 tick,
        uint16 observationIndex,
        uint16 observationCardinality,
        uint16 observationCardinalityNext,
        uint8 feeProtocol,
        bool unlocked
    );
}

// In BondingCurve.sol
function canUseTWAP() public view returns (bool) {
    (, , , uint16 cardinality, , , ) = aerodromePool.slot0();
    return cardinality >= MIN_OBSERVATIONS; // e.g., 8
}

Phase 3: Transition to TWAP Pricing (24+ hours)

Objective: Switch bonding curve to use market-based pricing

// Admin function to end bootstrap
function endBootstrapPhase() external onlyAdmin {
    require(canUseTWAP(), "Insufficient TWAP data");
    isBootstrapPhase = false;
    emit BootstrapEnded(block.timestamp);
}

// Price calculation after bootstrap
function getCurrentPrice() public view returns (uint256) {
    if (isBootstrapPhase) {
        return FIXED_BOOTSTRAP_PRICE;
    }
    
    // Use Aerodrome's built-in TWAP
    uint32 twapWindow = 14400; // 4 hours
    (int56[] memory tickCumulatives, ) = aerodromePool.observe(
        [twapWindow, 0] // Compare now vs 4 hours ago
    );
    
    int56 tickDelta = tickCumulatives[1] - tickCumulatives[0];
    int24 arithmeticMeanTick = int24(tickDelta / int56(uint56(twapWindow)));
    
    return OracleLibrary.getQuoteAtTick(
        arithmeticMeanTick,
        uint128(1e18), // 1 TD
        address(tdToken),
        address(taikoToken)
    );
}

Risk: Permanent Price Divergence

The Problem

If TD and TAIKO permanently diverge in value (e.g., TD becomes worth 5x TAIKO):

• Fixed bonding price becomes extremely attractive
• TWAP-based bonding might become unattractive even with discounts
• Protocol objectives compromised

Solution: Circuit Breakers & Dynamic Adjustments

contract BondingCurve {
    uint256 public constant MAX_PRICE_RATIO = 300; // TD can't exceed 3x TAIKO
    uint256 public constant MIN_PRICE_RATIO = 33;  // TD can't go below 0.33x TAIKO
    
    uint256 public priceAdjustmentFactor = 100; // 100 = no adjustment
    
    function getCurrentPrice() public view returns (uint256) {
        uint256 basePrice = isBootstrapPhase ? 
            FIXED_BOOTSTRAP_PRICE : 
            getTWAPPrice();
            
        // Apply adjustment factor
        uint256 adjustedPrice = (basePrice * priceAdjustmentFactor) / 100;
        
        // Enforce circuit breakers
        if (adjustedPrice > MAX_PRICE_RATIO * 1e16) {
            return MAX_PRICE_RATIO * 1e16; // Cap at 3:1
        }
        if (adjustedPrice < MIN_PRICE_RATIO * 1e16) {
            return MIN_PRICE_RATIO * 1e16; // Floor at 0.33:1
        }
        
        return adjustedPrice;
    }
    
    // Admin can adjust pricing in extreme scenarios
    function setPriceAdjustment(uint256 newFactor) external onlyAdmin {
        require(newFactor >= 50 && newFactor <= 200, "Adjustment too extreme");
        priceAdjustmentFactor = newFactor;
        emit PriceAdjustmentSet(newFactor);
    }
}

POL Management for Liquidity Control

The protocol can actively manage liquidity depth using bonded TAIKO:

contract BondingCurve {
    uint256 public polDeploymentRatio = 50; // Deploy 50% of TAIKO as POL
    
    function deployPOL() external onlyAdmin {
        uint256 taikoBalance = IERC20(TAIKO).balanceOf(address(this));
        uint256 taikoForPOL = (taikoBalance * polDeploymentRatio) / 100;
        
        // Mint matching TD at current market ratio
        uint256 currentPrice = getCurrentPrice(); // TAIKO per TD
        uint256 tdToMint = (taikoForPOL * 1e18) / currentPrice;
        
        // Deploy to Aerodrome pool
        TD.mint(address(this), tdToMint);
        TD.approve(address(aerodromeRouter), tdToMint);
        TAIKO.approve(address(aerodromeRouter), taikoForPOL);
        
        aerodromeRouter.addLiquidity(
            address(TAIKO),
            address(TD),
            stable, // false for volatile pair
            taikoForPOL,
            tdToMint,
            0, // Accept any amounts
            0,
            address(this), // POL owned by protocol
            block.timestamp
        );
    }
    
    // Adjust how much TAIKO goes to POL vs treasury
    function setPOLRatio(uint256 newRatio) external onlyAdmin {
        require(newRatio <= 100, "Invalid ratio");
        polDeploymentRatio = newRatio;
    }
}

Summary

1. Start Fixed: Launch with predictable pricing (e.g., 1:1)
2. Accumulate Data: Let Aerodrome pool build observation history
3. Transition Carefully: Switch to TWAP once sufficient data exists
4. Manage Risks: Implement circuit breakers and adjustment mechanisms
5. Control Liquidity: Use POL deployment to manage market depth

This approach balances simplicity, security, and flexibility while leveraging Aerodrome's existing TWAP infrastructure.