What is SIRIUS/Liquidity Baking?

What is SIRIUS DEX (aka Liquidity Baking) and why is it such a central feature of TEZEX right now?

SIRIUS DEX, also known as Liquidity Baking (usually called 'LB', for short) is one of the most important components of the Tezos liquidity economy. Conceived by Tezos co-founder Arthur Breitman himself, and implemented as part of Tezos native protocol as an act of Tezos blockchain upgrade in 2021.

[Note: The terms "LB" "SIRIUS DEX," "Liquidity Baking," and are often used interchangeably]

What is it?

LB is essentially an exchange contract pairing two currencies — Bitcoin and Tez (Tezos blockchain's native crypto-asset), that gives liquidity providers an extra reward, on top of the earnings they accrue from the transaction fees of trades. This extra reward is issued by the blockchain itself, specifically for this purpose. LB is the largest source of liquidity in Tezos.

Note: Since BTC is, of course, not native to Tezos blockchain, SIRIUS/LB uses tzBTC—a wrapped version of Bitcoin—issued by Bitcoin Association Switzerland. [See More]

What is its purpose to the ecosystem?

LB's purpose to the Tezos blockchain ecosystem is to elevate the status of tez as a store of value.

Contrary to a popular opinion, while LB may be providing a byproduct or secondary effect of bootstrapping liquidity of to the Tezos ecosystem, this is not its purpose.

How does it work?

LB, essentially being a decentralized exchange, borrows ideas from DeFI DEXs for both traders and for liquidity providers, but it also has some unique qualities which make it especially attractive for liquidity providers.

For Traders

LB is an exchange (albeit, between only 2 coins — BTC and XTZ), and so for traders it operates like any decentralized exchange. Traders can trade back and forth between BTC and XTZ, paying a 0.2% fee per transaction (i.e. 20 basis points).

For Liquidity Providers

Those who provide liquidity to LB receive rewards in interesting ways. On one level it operates like any other decentralized exchange—Liquidity Providers deposit equal amounts of liquidity into the pool, and are paid via the transaction fees accrued from traders making trades.

LB further rewards Liquidity Providers by subsidizing an extra reward for them. Literally, the Tezos protocol pays-out an extra reward to liquidity providers—1.25 tez (XTZ) per block—simply for providing their share of liquidity. The tez paid per block is divided amongst all liquidity providers based on the proportion of liquidity they've provided to the overall pool.

To offset (in part, or in full) any inflation to the total supply of tez, by issuing this additional subsidy, half of the (0.20% fees) accumulated from each trade are burned. That is, 0.1% of the each transaction that occurs on LB/SIRIUS DEX is burned. The other half (0.1%) is accrued into the liquidity pool.

What is the SIRIUS (SIRS) Token?

When liquidity providers provide their liquidity to LB/SIRIUS DEX, they receive a liquidity token representing their position. While this is standard for any decentralized exchange, this particular liquidity token is branded 'SIRIUS' with a market symbol SIRS.

SIRIUS (SIRS) therefore represents a unique value structure—a powerful financial instrument in its own right that draws its net present value:

• as a function of combined Tez (XTZ) and Bitcoin (BTC) value

• as a function of expected rewards to its holders via DEX fee accrual

• as a function of expected subsidy rewards from the protocol

What are TEZEX's plans for LB/SIRIUS?

In 2023, TEZEX put its atomic swap bridge on the backburner and instead quietly replaced the website with a basic LB/SIRIUS Dashboard where traders can make trades between XTZ/BTC, and where Liquidity Providers can add and remove liquidity to LB.

TEZEX now plans on re-introducing its atomic swap bridge, with Bitcoin-to-Tezos blockchain capabilities, enabling users to provide (and remove) LB liquidity without the frictions that Liquidity Providers have experienced in acquiring (and redeeming) the tzBTC wrap.