AMM Liquidity Improvements

Summary

This research introduces some ideas to improve Idle DAO’s current allocation of protocol-owned liquidity and describes tokenomic improvements that can be applied to increase decentralization of protocol ownership. From the launch of an 80-20 IDLE/stablecoin pool on Balancer to a 25k BAL grant application, this post recaps the state of the art of IDLE-based AMM markets and which activities can be quickly pursued to foster liquidity efficiency.

This proposal aims to increase current protocol-owned liquidity by 2x, diversify AMM venues and pools, and solidify Idle DAO’s treasury.

Points 1), 2), and 3) define a natural evolutive process, adopting the 80-20 model to make it a core infrastructure for IDLE liquidity provision.

Background

Today, IDLE liquidity is concentrated in Sushi ($65k) and Uni v2 ($20k) on Ethereum. Uni v3 holds $20k in ETH and 195k IDLE across different ranges. All these pairs are based on WETH, and Uniswap represents 60% of current volumes.

Source: IDLE DEX metrics on Ethereum (Uni v3 excluded)

The Treasury League multisig currently provides liquidity to two positions in Uni v3, for a total of $50k+, with:

  1. a full-range deployment
  2. a concentrated position


With the goal of analyzing new venues to foster market activities, we listed below a series of possible ideas coming from the latest research.

DEX activities overview

1. Launch a 80-20 Balancer pool

Idle DAO was one of the early adopters of the Smart Treasury, a 90% IDLE - 10% WETH pool based on Balancer v1. With the release of Balancer v2, Idle DAO discussed its composable nature for interest-bearing tokens and decided to launch the Idle Boosted Pool at the beginning of this year.

Meanwhile, other projects launched pools based on their gov tokens paired with blue-chip assets. Notable examples are RDNT/ETH and Y2K/ETH. Both pools represent a large share of DEXs volume for the respective tokens (Radiant, Y2K). Other projects like Paladin launched a USDC Balancer pool and recently a 80-20 PAL/OHM.

The launch of an 80-20 IDLE/stablecoin pool would help foster volumes even without direct trades, as the use of a stablecoin pair would provide an alternative venue for arbitrage opportunity (with ETH price changes).

The target stablecoin can be chosen according to the following criteria:

  • single-side assets like USDC or DAI;
  • 3pool (DAI/USDC/USDT), which is almost unused on Balancer;
  • Balancer Boosted Aave V3 USD (bb-a-usd), which benefits from boosted APR (2-5%) but increases swap costs;
  • emerging stablecoins like R (or the pair R/DAI), GHO, crvUSD. There are no pools with these last two assets, thus the technical feasibility needs to be explored.

The use of 3pool or bb-a-usd brings limited advantages, considering the stablecoin part represents only 20% of the pool’s share. The use of R would represent a potential risk for liquidity providers due to the short longevity compared to USDC/DAI, but it could expand LPs audience with a new ecosystem.

Idle DAO can deploy a size equivalent to the liquidity locked in the Uni v3 concentrated pool (~40k), considering it would only need $8k in stablecoins.

2. Incentives for veBAL voters as a form of LM

With the launch of an 80-20 Balancer pool, Idle DAO can include ad-hoc incentives for veBAL holders to increase pool rewards. Idle Leagues are already familiar with the incentive mechanism and used it on Warden to raise up to $1.8m on the bb-i-usd.

Considering that the current multiplier is 1.2-1.3x, this means that $1 worth of rewards would bring a higher value of AURA+BAL incentives. Idle DAO can allocate protocol-owned liquidity (POL) in the pool, swap accrued rewards into IDLE and reallocate the tokens in future incentives, generating a positive-sum return from an ecosystem perspective.

This flywheel has two potential outcomes:

  1. The DAO increases POL thanks to the incentive multiplier
  2. Other users deposit liquidity in the pool. DAO’s rewards are diluted, so lower bids are placed in the next rounds. If LPs maintain liquidity, the acquisition cost is lower. If they remove funds, we come back to the previous scenario

The use of an 80-20 pool would reduce liquidity provision’s barriers for IDLE token holders, given the limited pool share of non-IDLE assets, and incentivize its decentralized nature. This activity does not generate volume directly, but could help create deeper liquidity in a more efficient way. This approach can be used on Convex too.

In both scenarios, Warden represents the most suitable venue to place incentives. The platform allows protocols to pay incentives only if the target pool receives votes, avoiding a blind allocation of rewards. The team has been very responsive, and they assist us in identifying the right cost/reward ratio.

3. Use 80-20 Launchpad to apply for a 25k BAL grant

Balancer Launchpad got media coverage after a series of tweets from protocols supporting the 80-20 model. The 8020 Launchpad page states that “this program is intended to support all systems which involve the staking/locking of 8020 BPT. ve8020 is one such system and it’s a convenient shorthand to use, but this program is not limited to “ve” systems only.”

Protocols that implement this model or equivalent on Balancer are eligible for an initial grant of 25k BAL (~$125k at the time of writing). All BAL granted through this program must be locked in veBAL, and the beneficiary will provide the 20% share of ETH (~$31k) to pair tokens and form ~$156k liquidity in 80-20 BAL/ETH pool.

After launching a 80-20 pool, using POL to seed the pool, and placing incentives to foster liquidity provision, this grant would represent an important addition to the flywheel.

By staking $156k in BAL/ETH liquidity for the max duration, Idle DAO will unlock 12.5k veBAL votes. Users that deposit liquidity in 80-20 IDLE/stablecoin can be entitled to choose veBAL allocation and get rewarded by other protocols interested in acquiring their votes.

As a result, more IDLE holders are incentivized to deposit liquidity in the 80-20 IDLE/stablecoin pool and be part of this decisional process.

4. Launch a pool on Convex (paired with FRAXBP)

There are 25 pairs on Convex combined with FRAXBP (FRAX+USDC), for a total of $100m in liquidity. This approach is adopted by Stargate, Alchemix, Angle, Inverse, and others. In some cases, the Frax booster provides a substantial yield increase in comparison to the Convex booster. FRAXBP pairs are available here.

At the time of writing, Convex multiplier is 1.34x according to Votium. There is not an incentivization market for FXS allocations to Convex pool, as the process here is different: Frax DAO determines the earnings from POL, and distributes them across different pairs (FRAX3CRV/FRAXBP/FRAXUSDP…). Then, each pool paired with a specific pair (e.g. IDLE/FRAXBP) receives a stream proportional to its FRAXBP liquidity share.

Despite this mechanism unlocks two boosters (Convex and Frax), we are not able today to determine how much the latter would improve the final yield. Furthermore, Curve requires a 50-50 pool and this means a deeper Idle DAO’s treasury exposure than an 80-20 pool - subtracting resources for DAO operations.

Alternatively, we can pair IDLE with recently released crvUSD, but no other governance tokens have been paired with it yet.

5. Use Arrakis PALM

Arrakis PALM - Protocol Automated Liquidity Management, is a product built on the Arrakis V2 Infrastructure and aims to solve the existing problems that web3 protocols & DAOs have in regards to creating deep liquidity for their token.

According to “A Comparison of Active Management on UniV3 and Bribing a XY=K AMM”, PALM liquidity management is 10 times more efficient than a constant product AMM such as Velodrome.

Based on conversations with the team, the minimum liquidity able to let PALM operate efficiently is $200k. This amount can be initially composed of IDLE (e.g. 95-5), but the app would decrease the IDLE exposure to reach the 50-50 balance. As a result, this mechanism might trigger a forced market downturn.

Even if PALM’s features represent an interesting alternative solution to AMM liquidity provision, current requirements are not fitting the current goals and available treasury resources, so this proposal can be re-evaluated in the future.

6. Launch a bond on Bond protocol

References

At the moment, there are 8 protocols with active bond campaigns, out of 26 whitelisted projects. All of them are acquiring single-side assets (stablecoins, WETH).

In relation to paid premiums, Bond protocol implemented Sequential Dutch Auctions. This system allows protocols to issue tokens over time while controlling the price and discount speed. It provides flexibility and is suitable for gauging demand.

Below there is an example of a dutch auction, where the discount increases over time (passing from negative to positive). Traders are not encouraged to purchase bonds when the discount is negative, and they are incentivized only with positive discounts.

Looking at the JPEG’d case study, the bond issuer raised almost $1m and paid an 8.3% discount on its token to acquire CVX. 138 users participated in bond issuance. In the Lodestar case study, the protocol paid a 10% discount to collect $50k over 30 days.

Bonds can also be used to acquire AMM LP tokens, but there are no active markets on Bond protocol today.

As an alternative solution, Idle DAO could save discount costs and programmatically ensure the funds’ inflow by market-selling IDLE over a multi-month timeframe.

Bond issuance demonstrated efficiency during bull markets, but doubts arise when this system is applied to a bear market scenario. In addition, no market-selling activities are planned by Idle DAO at the moment.

7. Call option as a reward token

This system is an innovative form of liquidity mining, where the protocol issues token discounts to LPs that receive the call option as an incentive for their liquidity provision. In order to redeem the underlying value, LPs have to commit blue-chip assets (e.g. ETH).

Example: the protocol issues $1 worth of call options with strike price at 50% of market price and the user deposit $0.5 in ETH to redeem it. This mechanism allows DAOs to increase treasury liquidity and potentially place it in AMMs, but the acquisition cost is high (50% discount on tokens). Protocols using call options are Bunni and Popcorn DAO.

Specification

Here are some next steps coming by this analysis:

  • Maintain existing POL positions on Uni v3
  • Identify the target stablecoin to pair with IDLE on Balancer
  • Launch an 80-20 IDLE/stablecoin pool on Balancer with $40k initial liquidity from DAO’s treasury and set minimum swap fees (>0.01%)
  • Place IDLE incentives on Warden to route BAL+AURA rewards to 80-20 pool (amount TBD)
  • Start the Balancer governance process to apply for a 25k BAL grant

Next Steps

All Idle DAO stakeholders and the Ethereum community are invited to weigh in on the proposal. This proposal will be followed by a Temperature Check vote with the published here, when ready.

If positive, Idle Leagues will move forward with IIP launch (if needed) and liquidity deployment.


We’d like to thank Paladin, Alchemix, and Arrakis teams for their dedication and time to brainstorm these opportunities together.

4 Likes

Thanks for the detailed research @Davide.
The flywheel you described with the launch of a Balancer 80-20 + the incentives to veBAL holders is very interesting and seems a good way to increase the protocol owned liquidity with a low cost for the DAO.
The potential Balancer grant would be a cherry on top.

I think we should stick with a relative safe paired asset like USDC for the stablecoin side of the pool (if there are no specific incentives or other reason to use crvUSD/GHO/R)

2 Likes

Agree, we can use USDC in the starting proposal, as this asset is well-known and the crypto community is already familiar with it.
If new opportunities will arise from emerging trends or thanks to collaborations with stablecoin issuers, we will be glad to consider them in the future.

To recap, this proposal will consist of launching an 80-20 IDLE/USDC pool on Balancer, with $40k initial liquidity from DAO’s treasury.

1 Like

Temperature check voting

The voting phase to approve the next IDLE AMM liquidity improvements starts now :ballot_box:

This voting pool will focus on these 3 next steps:

  1. Launch an 80-20 IDLE/USDC pool on Balancer with $40k initial liquidity from DAO’s treasury and set minimum swap fees (>0.01%)
  2. Place IDLE incentives on Warden to route BAL+AURA rewards to 80-20 pool (amount TBD)
  3. Start the Balancer governance process to apply for a 25k BAL grant

  • For - Agree with three actions involving Balancer and Warden to improve the IDLE AMM liquidity
  • Against - Disagree with three actions involving Balancer and Warden to improve the IDLE AMM liquidity
  • Discuss more - Discuss more the improvements to the IDLE AMM liquidity

:arrow_right: Poll for $IDLE holders: HERE
:arrow_right: Poll for $IDLE stakers (stkIDLE holders): HERE

:alarm_clock: Polls will close on 2023-07-14T18:15:00Z

The final $IDLE voting weights will be calculated using the approved calculator.

Looking to delegate your vote on Snapshot? Follow the official Snapshot guide.

Let your vote count! :writing_hand:

2 Likes

Temperature check results

Temperature Check passed :white_check_mark:

Leagues will set up the new 80-20 IDLE/USDC pool on Balancer. The eventual IDLE needed will be transferred to the Leagues’ multisig through the next IIP.

2 Likes