Summary
Build on the recent FOX liquidity mining extension and implement a bond program for the DAO to own its own liquidity. Protocol-owned-liquidity is the future of liquidity incentive programs.
Motivation
Incentivizing liquidity provision is a balancing act for protocols seeking to distribute their governance token, between high inflation and low liquidity depth. The extension of liquidity mining incentives will be an excellent tool to distribute FOX to community members providing liquidity. However, the emissions rate may continue to have a negative impact on token price as farmers compound their rewards. By implementing a bond program for FOX-ETH liquidity, ShapeShift can distribute its governance tokens to more users while also accumulating its own liquidity.
Abstract
As of the time of writing, FOX has $23M in liquidity on Uniswap in the FOX-ETH pool. The recent liquidity mining extension will have the following impact, assuming constant liquidity at $23M:
- Original reward rate: 175,200 FOX per day (~125% APR)
- New reward rate: 117,384 FOX per day (~85% APR)
- Reward savings: 57,816 FOX per day (~$26k)
One of the risks mentioned in the reward rate reduction proposal is a reduction in total liquidity, as mercenary capital rotates into higher-earning farms. A bond program may help offset this loss of liquidity, as users rotate out of their LP positions via bonding for FOX instead of withdrawing liquidity. Additionally, the bond program may attract new capital and provide fresh liquidity.
The proposed bond program would sell FOX at a discount in exchange for FOX/ETH LP tokens. Current liquidity mining programs essentially reward liquidity providers with FOX in exchange for temporary liquidity, which exposes those providers to impermanent loss from fluctuations in the underlying assets. Bonds allow active users to stack FOX tokens at a discount while removing the exposure to IL. The discount rate on bonds is achieved by a novel pricing mechanism that allows the market to set the discount. Basically, bond prices are decreased until a bond is purchased which then pushes up the price of the next bond. For reference, here is the average discount of Olympus’ bonds with their extremely high APY.
Proposed Bond Program:
FOX bonds would be offered with a week-long vesting period, which helps prevent immediate price impact from discounted tokens. This aligns the goals of the protocol with those of bond participants. Typically, higher bond volume is seen when users expect the price of the token to increase during the vesting period.
Proposal
Allocate half of reward savings (28,908 FOX per day) to target $1.5M of liquidity over the new reward program duration, end of February 2022.
Total FOX Budget for Bond Program: 3,902,580 FOX
Success criteria
- Discount rate < 10% on bonded FOX
- Minimal impact on FOX price
Benefits
- Permanent liquidity source
- Increased treasury value from liquidity that also earns trading fees
- Exposure to paired asset in liquidity pool (ETH)
- ShapeShift can stake its LP tokens to provide additional runway for incentive programs
Risks
- Additional FOX emissions via bonds may increase sell pressure, but should be reduced in comparison to current reward rate (prior to October 13th)
- Protocol-owned-liquidity can be seen as diluting existing LP holders
