After the execution of “Phase 1” described in the 3-phase proposal to foster liquidity provision, this post is aimed to help Idle DAO explore the next opportunities on LPing side.
Today LP token holders have the following $IDLE use cases available:
- [ETHEREUM] Sushi Pool: The IDLE/WETH pool provides 90% APY at the time of writing, thanks to the SUSHI accrued with the Onsen program. This represents an ancillary program for Sushi LPs that want to keep their liquidity there and still get rewards. Users that joined the previous LP staking with Idle would only have to redeem funds & rewards from Idle interface and deposit LP tokens on Sushi.
- [ETHEREUM] UNI v3 pool: the pool has been seeded with $120k from Idle DAO, covering the whole range (from 0 to infinity). The protocol provides a capital-efficient mechanism thanks to concentrated liquidity. According to how narrow the price range is, a multiplier increases the virtual liquidity available and decreases the slippage (see below for more details). This is an alternative to Sushi, it is a non-incentivized pool but potentially with good trading volume thanks to better market efficiency.
- [POLYGON] Sushi pool (upcoming): LP stakers can join LP staking program on Polygon, which uses the same time-weighted Ampleforth Geyser model to distribute rewards (used for the previous LP staking program). The contract will distribute 20,000 IDLE over 3 months. Addresses, documentation, and dashboard access will be available as soon as this program starts (exp next week).
Our community already has several places where token holders can deposit $IDLE. At the same time, the Treasury League has been researching new opportunities for incremental use cases and increasing overall liquidity. The following are the most interesting initiatives that our DAO can take:
Balancer pool still holds $1.1m in liquidity. An option would be to route $100k in ETH + $100k in IDLE to UNI v3 pool. We’d be able to change the concentration of liquidity and exponentially decrease the slippage by monitoring the price range (manually or using third-party protocols like Visor Finance). According to Defi Lab simulator, we can set a narrow range (e.g. 700-800) or a bit wider range (e.g. 640-840), getting x40 and x15 multipliers.
This means that the deployment of $200k would respectively represent $8m and $3m TVL of the old Uni v2 model. Using Mechanism Capital simulation tool, we can observe that slippage would be 0.25%-0.66% for a $10k swap, up to 1.25%-3.3% with a $50k trade.
With this setup, the benefits for Idle DAO would clearly come from a more liquid and efficient market, while adding a revenue stream coming from LP fees. Nonetheless, further analysis about the optimal ranges and the eventual use of other protocols to automatically manage the allocation is surely needed.
The $120k deployment already made (from 0 to infinity) would be maintained. This will ensure full coverage of the price spectrum.
With this initiative, $800k in $IDLE tokens would come back to the DAO for other applications.
The Treasury League got in touch with Ondo Finance to explore potential new use cases. The platform allows LPs to get single-sided exposure, choosing between fixed-rate tranche (ETH/stablecoin) or variable-rate one (governance tokens). The variable APY tranche get all the upside and downside of impermanent loss. Users leverage volatility, accruing positive or negative interest.
At the time of writing, we have been suggested to commit between $500k-$1m in IDLE to launch an IDLE-based pool. Fei community would also be able to seed FEI/IDLE pair on the FEI side, immediately doubling liquidity provided via Ondo. While increasing liquidity is a core objective for this post, volatility related to a stablecoin pair is usually much bigger than ETH pairs, and previous pools paired with stablecoins experienced up to -11% APY in one month.
Thanks to Fei Labs analysis regarding capital-efficient liquidity via Olympus Pro, Tokemak, and Fei x Ondo LaaS, we can immediately grasp the differences between these possible tools:
LPs like DAOs can benefit greatly from Tokemak’s impermanent loss coverage due to the risks associated with market instability.
Tokemak’s approach is similar to Ondo, where LPs provide a single token to a reactor, which is then paired with a base asset (ETH/stablecoin). The protocol earns trading fees and distributes TOKE rewards. In this case, TOKE holders decide how to allocate the Protocol-Controlled-Liquidity (ETH and USDC) and which reactors receive such liquidity.
Token whitelisting is currently closed, but TOKE holders vote for the next set of reactors.
This post outlines how LPs can currently interact with dexes on Ethereum and Polygon, benefiting from capital-efficient markets or incentivization programs.
As a short recap below are the current possibilities for LPs
Provide liquidity on UNI v3 pool and get trading fees. Even if incentives are not present in this pool, the current market efficiency would potentially lead to good trading volumes and fees for liquidity providers.
LP staking program on Sushi Polygon expected to start ~early next week (same mechanism as previous LP staking program for 3 months)
As shown in this post Ondo and Tokemak are intriguing opportunities to allow our DAO to become liquidity provider with a single-side exposure. Both mechanisms need and will be under further examination by Leagues. We acknowledge that Olympus could be an interesting way for further treasury diversification, but it would require an higher emission to reach a comparable result in terms of market liquidity.
As a next step the UNI v3 pool can be increased after further analysis and collection of community feedback on this initiative. This would allow to increase the DAO-owned liquidity in UNI v3 pool and foster the concentration of liquidity and exponentially decrease the slippage by monitoring and actively adjusting the price range.
The Treasury League is looking forward to listening to any feedback from the community, and we’re open to chatting about the betterment of the market liquidity across IDLE pools!