# Sifchain Validator and Liquidity Provider Subsystem Overview ## Executive Summary Sifchain is a decentralized cryptocurrency exchange (DEX) that aims to support the exchange of all cryptocurrencies. It employs a hybrid order matching model that allows cost effective order execution through continuous liquidity pools (CLPs). Sifchain's economic system comprises two subsystems - the Validator Subsystem (V), and the Liquidity Provider Subsystem (LP). Agents in both systems are able to earn rewards by means of staking in the Validator Subsystem and by providing liquidity in the Liquidity Provider Subsystem. ## Problem In order to maintain system stability and ensure reasonable function of the V subsystem and the LP subsystem, the return on investment incurred by agents in either system must not significantly outweigh the other. In the case where rewards in the LP subsystem are more attractive, validator agents would choose to deploy their capital towards providing liquidity instead of towards staking. The result is a Validator Subsystem with dangerously low staked capital, thus leaving the network cryptoeconomically insecure. On the other hand, if validator rewards are substantially higher than liquidity provider rewards then the liquidity pools will be undercapitalized. The cannibalization of either subsystem function can be prevented by dynamically rebalacing the ROI across each subsystem such that in any given block, the agent's ROI in either subsystem is roughly equivalent. ## Solution ### Validator Subsystem The Validator Subsystem is described and characterized here: [Validator Subsystem Mathematical Specification](https://hackmd.io/bxAh8RTwSFGfnoB4m2-sOg) ### Liquidity Provider Subsystem The Liquidity Provider Subsystem is described and characterized here: [Liquidity Provider Subsystem Mathematical Specification](https://hackmd.io/prZn7o4FRhCQX5hMQ1eqYQ) ### Rebalancing Policy ![](https://i.imgur.com/vQcGoXF.png) This policy ensures that the revenue earned by participants in the validator system and the liquidity system are balanced and equivalent. This is to prevent validators from jumping over to the liquidity system so as to earn higher rewards, setting off a positive feedback loop that brings in even more validators into the liquidity system, eventually driving the validator system empty and the Sifchain proof-of-stake system insecure. And vice versa on from the liquidity system to the validator system.