This is the 4th Part of my vision for YAM. Click to read Part 1 , Part 2 , and Part 3.
Introduction
Olympus DAO has popularized the idea of protocol owned/controlled liquidity as a new way for DeFi projects to provide liquidity for their native token. Olympus have built their DAO around this idea and now sell their bonding model as a service. The Olympus model is one way among many in which a project can incentivize users to lock their token liquidity permanently so that it does not need to be rented indefinitely using token issuance or revenue diversion.
Liquidity Mining rewards were pioneered by the Synthetix team to promote liquidity in their sUSD tokens and it was quickly picked up as a key component in DeFi token launches. Upon initial distribution of tokens, a liquid market in those tokens was required to further distribute the token supply and facilitate price discovery. Providing liquidity for low float tokens on AMMs is a risky proposition and heavy incentives are often given out to promote deep liquidity. In the short term this model works well, but its sustainability over longer periods is untested.
Projects using liquidity mining incentives are faced with a dilemma. Deep liquidity is important for the health of a decentralized project, but high token issuance to promote this liquidity leads to mercenary liquidity providers who sell rewards and move on after maximizing profitability. This creates downward pressure on the token price and points to a future with less liquidity and lower prices. Without external incentives, liquidity providers rely on high transaction volumes in the AMM to be profitable. For smaller projects that are not traded heavily but still may have high price volatility (ie YAM) this makes liquidity provision a potentially losing proposition without the incentives (and sometimes even with them).
Many DAOs need liquidity for their native token if they want to assure that anyone can join or use their product. This is true of YAM as much as any DAO. Our “membership” and governance processes are open to anyone who has YAM tokens and the DAO was founded on an open ethos where all are welcome. To assure this remains true, we should strive to make sure that contributors, investors, and any other interested parties are capable of both buying and selling YAM tokens easily and permissionlessly.
Because of the risks involved in liquidity provision, it makes sense to move from a model where casual token holders are responsible for providing the liquidity to one where the organization itself provides a minimum amount of liquidity. But what is the best way to do this? Olympus DAO’s bonding model has been very successful for their use case, but is it optimal for all projects?
YAM’s Specific Needs
YamDAO and the YAM token have not been designed around protocol owned liquidity and have unique needs to be aware of when designing a system to buy liquidity. The YAM token is intended to be used as a voting token to govern the DAO. The hype and demand for the token has cooled off significantly since the inception of the project over a year ago and token price and volumes are currently at all time lows. While those of us close to the project see great potential in the future, we must be aware of the current conditions and what impact they may have when designing a liquidity purchasing program. Another key difference is that we also do not have a mechanism like Olympus’s high rewards rate to strongly incentivize users to hold their tokens, and adding it would be politically and technically difficult. This mechanism is a key part that allows short term bonds to work so well for Olympus. The mechanism as proposed in Part 3 of this series could be a start to create demand for YAM tokens, but it may not be enough to prevent opportunistic dumping of short term bonds.
Ideally, In designing a program like this we want to create a model that both incentivizes long term holders to show their dedication to the project while being rewarded for that dedication. If we can also build up a store of Protocol owned liquidity then this is a Win Win.
Protocol Owned Liquidity Options
Lets take a look at 2 different models for Protocol owned liquidity.
Olympus Pro
The Protocol owned liquidity (POL) as a service model that Olympus pro offers is modeled after their own system. It allows a protocol to offer short term (5-7 day) bonds where protocol tokens are sold at a discount for LP tokens. These tokens unlock after the bonding period ends and the user can do as they please with them.
This model focuses on incentivizing selling bonds and the vesting duration is calibrated to prevent manipulation but not long term incentive alignment among bond buyers.
UMA KPI Option Tokens
UMA’s KPI option model provides another model to do the same thing. KPI options are contracts that pay out a specific amount of tokens to holders of the option if certain conditions have been met at expiry. This is equivalent to an escrow contract with a set of payout parameters. Any tokens can be used as collateral for this contract and almost any payout parameters can be set. The length of the contract can be arbitrarily long.
You could create the same bond structure offered by an Olympus pro bond with a KPI option contract. You would set the price of the KPI option to the desired discount below market price and set the expiry date for the same amount of time that the bond would be set for (i.e. 7 days).
But we could also create many other different payout options and vesting periods to optimally align the incentives of our community. The design space is large, so it would make sense to reach out to large liquidity providers to get their input on what kind of parameters they would like to see in a program like this. Parameters could include:
- Discount %
- Vesting Period
- KPI option choice and upside parameters
Here are a few potential options to give a sense of the possibilities.
Option 1: Treasury Growth KPI
Incentivize LPs to sell their tokens to the DAO for a long term option that grows as the treasury grows.
The treasury offers to buy LP tokens for a KPI option that has a minimum payout of YAM (qty. determined by the 1 week TWAP price) plus all remaining incentives earmarked for the pool (~1M YAM). On top of this, we offer an additional 1M YAM that would be paid out based on the size of the treasury at expiry.
Lets imagine what this would look like if we deployed something like this right now.
Current YAM/ETH LP pool size = ~2.4M YAM, 192 WETH.
Priced in YAM this is 4.8M YAMKPI option Expiry - Jan 15th 2023 (~1 year)
KPI Option Collateralization = [~4.8M YAM + ~1M YAM (the remaining incentives)] + [1M YAM dependent on treasury size (bonus)]
@ 100% current treasury size, bonus payout = 0
@ 150% current treasury size, bonus payout = 25% or 250K YAM
@ 200% current treasury size, bonus payout = 50% or 500K YAM
@ 300% current treasury size, bonus payout = 75% or 750K YAM
@ 500% current treasury size, bonus payout = 100% or 1M YAMThis KPI option would have a guaranteed 20.83% return (this should be roughly equivalent to the APR from LPing plus an additional upside of 20% based on the growth of the treasury. If we are able to implement some of the ideas from Part 3 and allow these KPI options to be locked in governance to vote and earn treasury farming rewards, then this becomes even more attractive.
Option 2: YAM Price KPI
A similar model could be implemented that pays out a bonus based on the YAM token price at expiry, similar to how UMA’s Success Tokens work. The parameters would be equivalent but the bonus funds would be paid out based on a different metric (price)
Or a combination of the token price and the treasury value could be used. The length of the bond could also be adjusted to maximize demand and alignment. It is fair to say that the different options available are numerous and it is up to us to find the most beneficial and incentive aligned option.
Concerns
The above models would require YAM token issuance. It would result in a net increase in the circulating YAM supply of between 2.4M and 3.4M YAM, depending on the treasury size at expiry. None of this new supply would be able to reach the market (and affect price) until Jan. 2023. And if we design our governance and treasury farming well, it is reasonable to think that much of it will be re-locked at expiry. I will talk more about Token issuance in a future section of this roadmap so stay tuned.
While the contracts for UMA’s tokens are all battle tested and available, we would need to create a website to interact with them. Luckily this infrastructure should overlap nicely with the work that we are already doing with YAM Synths.
Conclusion
The above examples are just a few option for how this could be done, and there are no “right” answers here. But a program like the one above would wean us off liquidity mining incentives and guarantee that anyone who wants to become a member of YAM, or leave YAM, could do so in a permissionless way. YAM liquidity would become a public good and the DAO itself would take on the risk of impermanent loss. The DAO would also be able to experiment with new ways to provide liquidity, including using concentrated liquidity AMMs like uniswap V3 without having to manage multiple different liquidity mining programs and user migration.
This is a key step in building a foundation for the YAM DAO with a commitment to long term growth, open participation, and sustainable economics and incentives.