RFC: Protocol Owned Liquidity proposed changes

The Threshold Treasury Guild has researched, discussed and planned several changes to the DAO’s Protocol Owned Liquidity. We outline these changes in this Request for Comments so that the whole DAO can know and discuss them, ask questions or add ideas. They will be implemented over the next few weeks.

Summary

  • POL on Curve Pool accounts for roughly 2700 ETH + 130M T (~$8.5M in aggregate) and all is staked on Convex, accruing CRV and CVX reward tokens.

  • This includes the outstanding ETH Loan for 2589 ETH

  • TTG proposes to take ~$2M (~635 ETH + 30.5M T) out of Convex/Curve and:

    • Return 200 ETH to the Lender
    • Seed a 80/20 Balancer Pool with 135 ETH + 24.2M T (~$1M)
    • Stake on StakeDao $1M (300 ETH + 15M T). This liquidity will still be on Curve, and staked on StakeDao instead of Convex.
  • TTG also proposes to seed an Uni V3 T/USDC pool with Arrakis as a liquidity manager. We would be launch partners for their upcoming V2 and this would be for about $ 100k initially.

Motivation

  • Reduce the outstanding ETH loan. As fees have diminished, we believe it prudent to pay back the lender expeditiously.
  • Create new pools on Balancer and UniV3. Having two additional liquidity pools will increase the volume generated by arbitrage, directly increasing fees generated by both pools. Additionally, Balancer and UniV3 pools are preferred price feeds (relative to Curve) by data providers like Coingecko.
  • Explore StakeDAO as an alternative to Convex for existing Curve Pool liquidity seeking better CRV rewards.

Return to Lender

  • The POL was seeded with an ETH loan with favorable terms to the DAO on 1/17/22. This was matched with T from the treasury to seed the POL in the curve T-ETH pool with 78.3M T and 3,075 ETH. This was then topped up with six single sided deposits of 5M T into the pool when the pool was ETH heavy.

  • The DAO has since paid down ~486 ETH of its original 3,075 ETH loan.

  • As Ethereum leads into the merge, we want to accelerate the repayment of the outstanding loan in accordance with the diversification plan. We’ll be using 200 ETH to do this.

Balancer

  • Set up a Balancer Pool for additional T liquidity
  • 80% T + 20% ETH. Total POL worth of 650ETH
  • With few incentives the DAO would be able to:
    • Offer more liquidity on the T-ETH pair with little slippage and outside investment by putting idle governance tokens to work.
    • More arbitrage opportunities, which will attract MEV seekers, increasing price stability and making seekers aware of Threshold (which will be beneficial for thUSD and tBTC).
    • Get additional revenue for the DAO from fees and rewards relating to this pool.
    • Popular market information and price trackers (Coingecko e.g) accurately expose data about T

It’s a good opportunity to capitalize on arbitrage fees as well as mine some balancer incentives, which can help diversify. The idea would be to relocate 135ETH from the Curve POL to Balancer and pair that with 24.2M T governance tokens to set up an 80-20 pool, which can help us make use of more of the treasury and hopefully increase returns on the yield for the pool.

Other DAOs interested in token swaps with Threshold have trouble to run nodes and stake T token. 80/20 low slippage feature makes it an appealing place for these DAOs to invest their T tokens as well.

Coingecko expressed the need for more exchanges like Balancer to offer T pairs. Our Curve pair is not enough for them to accurately show market cap and liquidity information about T.

Balancer’s Flywheel

Balancer implemented a new veBAL governance and tokenomics architecture.

Similar to iCurve’s system, veBAL holders can stake BAL rewards to different gauges.

Vote rewarding platforms like Hidden Hands and Paladin’s Warden Quest can be used to incentivize veBAL holders for voting for our pool. The liquidity providers of that pool, mainly Threshold DAO, would then accrue BAL and AURA rewards (if staked on Aura, a Convex-style vote aggregator platform for Balancer).

For the DAO this would increase diversification and voting power. Current calculations point towards a breakeven or even positive outcome in the incentives paid vs rewards collected equation.

StakeDAO

  • Threshold’s Curve LP tokens are staked on Convex
  • StakeDAO introduced their Liquid Lockers offering a benefits for :
    • Stake Threshold DAO’s Curve LP tokens
    • Use Threshold DAO’s CRV tokens
  • TG proposes to stake on StakeDao $1M (300 ETH + 15M T). This liquidity will still be on Curve, and staked on StakeDao rather than Convex.

Stake Threshold DAO’s Curve LP tokens

By staking 10% of the pool on Stake DAO (around $1m), this would increase our boost on Convex and we would benefit from a boosted position on Stake DAO too.

The DAO would farm CRV and SDT from our POL.

Put Threshold DAO’s CRV tokens to work

All our farmed CRV tokens can be staked on StakeDAO’s Liquid Lockers:

  • The CRV Liquid Locker allows DAOs to participate in Curve vote-locking, via the liquid sdCRV wrapper, without the need for whitelisting.
  • Liquid Lockers allow protocols to own their vote-locked tokens with no trade-off (although we should pay attention to their CRV peg). They maintain yield, voting power and flexibility, while veSDT amplifies all these benefits.

With the SDT, once locked you can boost your SDT yield on both your POL and your deposited CRV. And more importantly, you can boost your CRV voting power, allowing you to have an even higher vote for your Curve pools.

Uniswap V3 pool

  • Set up a Uniswap V3 Pool for additional T liquidity.
  • 90% T + 10% USDC. Total POL worth of $100k.
  • POL will be managed by Arrakis as part of their Launch Partner program for their V2.
  • Arrakis’ strategy allows our POL accumulate USDC and turn into a 50/50 pool.

Uniswap is an automated market maker that in its simplest model (V2) allows distributing liquidity from 0 to infinity along the price curve, resulting in liquidity being available on the whole possible price spectrum. This is simple and the most adopted framework, but is highly capital inefficient since the majority of liquidity will not be used.

In Uniswap V3 instead of liquidity being distributed evenly from price 0 to infinity, liquidity can be distributed in arbitrary ways along the constant product price curve, meaning one needs less capital to achieve the same liquidity depth in a given price range.

However, managing liquidity with custom strategies on Uniswap V3 is complex and risky. It requires :

  • In-depth understanding of risks and rewards.
  • Knowledge to develop market-making strategies for sustainable long-term liquidity.
  • Costly and time-consuming operational overhead.

Arrakis

Arrakis is a liquidity management protocol built on top of Uniswap V3.

Arrakis vaults leverage the concentrated liquidity feature of Uniswap V3 to help project tokens achieve deep liquidity more cost-effectively, especially compared to the existing liquidity bootstrapping approaches on other AMMs, by enabling the execution of automated strategies.

Arrakis and Threshold’s TG discussed and agreed on participating in Arrakis V2 Launch Partner program. With their V2 Arrakis developed a Concentrated Liquidity Bootstrapping strategy, which will help us with two goals for a successful liquidity strategy on Uni V3:

  1. Acquire an adequate asset inventory
  2. Manage this inventory

High level strategy explanation of this strategy for a successful T/USDC pool on Uni V3:

  1. Threshold deposits almost all T tokens with a minimum amount of USDC (>=5%).
  2. Small portions of T are used to create bids above the current market price. Once these bids have been filled from buyers, the vault ejects USDC out of Uniswap and redeposits a portion back on the buy side.
  3. This process of letting Uniswap V3 fill small bids and accumulating USDC inventory gets rinsed and repeated until the target 50/50 inventory ratio is achieved within the vault.
  4. After the target is achieved, we can redefine the desired liquidity ratio, and the vault will automatically readjust.
  5. As the liquidity needs rise we will be required to deposit more assets into the pool.

Arrakis V2 Vaults Launch Partner program essentials are:

  • Minimum $100k seeding liquidity
  • If there is no existing Uni V3 pool already, the base asset (e.g. ETH, USDC, etc.) shall account for at least 5% of the seeding liquidity
  • Launch partners’ vaults will be managed for free for a year (as opposed to 1% of the seeding liquidity as management fee and 20% of trading fees as performance fee in our V2 vault fee structure).

TTG proposes to participate in this program with $12k USDC and $88k in T tokens.

Risks

  • Smart contracts risk with all the protocols involved.
    • Balancer and StakeDAO are audited.
    • Arrakis V2 is peer-reviewed, but not audited yet. As a Launch Partner, we’re part of a pre-launch phase, a reason to start small and grow when successfully audited and fully launched.
  • Market conditions and asset prices change, making investments less attractive.
  • Impermanent Loss, which occurs when you deposit assets into a pool and suffer a loss when you withdraw them at a later date compared to just holding these assets throughout this period.
  • Balancer, StakeDAO, and UniV3 are new initiatives for Threshold DAO and the TTG, there is no experience with managing assets on those platforms, which is why the TTG will start with relatively smaller amounts.

References

Balancer
Weekly Gauge #4: Oversaturation of Gauge Incentives
veBAL Is Live!. BAL holders and Balancer Liquidity… | by Fernando Martinelli | Balancer Protocol | Medium
Unlocking the veModel. The veModel is the holy grail of… | by Balancer Labs | Balancer Protocol | Medium

StakeDAO:
https://stakedao.org/
https://lockers.stakedao.org/
Build up long term voting power with Liquid Lockers | by Stake DAO | Medium
Introducing Liquid Lockers & veSDT | by Stake DAO | Medium

Arrakis
https://www.arrakis.finance/
How to Earn More Trading Fees on Uniswap
https://docs.arrakis.fi/

11 Likes

I think this is a very good proposal. I was wondering why CoinGecko didn’t show appropriate info for T, now I know…
Also, I like the idea of incentivizing arbitrage and fees by having multiple pools, that is a good point and not very obvious to the casual observer.

4 Likes

Really well thought out proposal. Thank you @Eastban

2 Likes

This is a great proposal!
Just wanted to highlight one point that might have been missed in our discussions regarding Stake DAO: the flywheel mechanism that is in place for Curve (ability to stake the farmed CRV and vote for the TETH gauge on Curve) is also existing for BAL.
Given the new liquidity pair on Balancer, it would make a lot of sense to 1) get a gauge on balancer to receive BAL incentive, 2) stake the LP accross Aura and Stake DAO strategies to maximize the boost and 3) stake the farmed BAL in the sdBAL locker to vote for the 80T-20ETH pool to receive even more BAL and AURA rewards.

4 Likes

Will the LP be staked in Aura?

Do we have some detail around the sdCRV<>CRV peg (how deep that liquidity is, slippage at various amounts, both now and historically)? We may want to modulate the amount we put in based on the slippage levels we are comfortable with.

Is the 1% management fee per annum or one time?

Are there links to the StakeDAO and Aura (assuming that’s where the Balancer LP will be staked) audits?

1 Like

Thanks @HubertX13.

I’d also be interested in details around the sdBAL<>BAL peg (liquidity depth, slippage, etc.) if we go that route.

This hasn’t been discussed yet in the TTG.
Alternatives to stake the Balancer LP tokens are:

  • Balancer
  • Aura
  • StakeDAO

Peg data is shown here :
Defi Wars on Curve
Some information extracted from there and the sdCRV-CRV pool on Curve:



Worth mentioning that right now the DAO doesn’t own any CRV, but this may be an ideal alternative for building a good amount CRV voting power.

Good question, we’ll address it to Arrakis to have a clear panorama on the future beyond the first year we’re getting for free.

Yep, here:

https://lockers.stakedao.org/audits

I think that Ben and/or David wanted to have a look into these protocols and audits and get back to the TTG with their findings.

1 Like

Hey, you can find historical track record for liquidity on Curve Wars. It is around 3m deep (15% of the total supply), and has been very stable historically.

1 Like

The sdbal peg is not good yet. We just launched a 10 week investment program to increase our liquidity and stabilise our peg. Then it should increase organically proportionately to the total supply.

Is the LP in that pool StakeDAO POL? Or 3rd party? Is the gauge weight on the pool from StakeDAO’s veCRV POL or being incentivized by StakeDAO? If the latter, how long are those incentives planned to remain?

Trying to get a sense for how stable the pool is expected to be. Thanks!

1 Like

Sorry, forgot to answer you…
It’s all close to 100% PoL. Also, the votes are all coming from DAO owned sdCRV and sdBAL.