A Roadmap For YAM (Part 4 - Protocol Owned Liquidity)

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 YAM

KPI 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 YAM

This 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.

4 Likes

有好的想法就尽快行动起来 不要拖拖拉拉 最近一年做的计划有几个实现了呢

Admin edit: translation
Act as soon as possible if you have a good idea

Olympus Pro is the perceived leader in creating POL for projects today and offers a marketplace for protocols to sell treasury assets for SLP or LP tokens. While this marketplace has proven to be effective in creating POL, it also requires sell pressure in the short term (as well as a 3.3% fee taken up front), as the bond markets on Ethereum mainnet can be difficult to navigate for the typical user. The PoolTogether Treasury Working Group conducted an analysis for the 30-day performance on the Olympus Pro bond sale, which has had lackluster results. Many participants were bots that participated to benefit from the discount offered and subsequently sold POOL. While this is a unique approach to acquiring protocol-owned liquidity, it does not align incentives between participants and the protocol.

KPI options would be a great option but another option that is also from the UMA team would be Success Tokens, which mature at a designated point in the future and don’t require a protocol to sell tokens at a discount in the present. Instead, each Success Token an investor receives would also include an embedded call option. The investor would only receive their bonus if the protocol is successful in achieving growth. Using Success Tokens to acquire liquidity would be an ideal way for Yam to create POL, while giving Success Tokens holders a reason to contribute and ensure Yam continues to steadily increase protocol growth.

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That’s a great write up @ross and I like the direction you are going with this. PCV or POL all comes down to how you want to fund raise for the ETH or stable coins needed to pair with YAM. I agree 5 or 7 day bonds are not optimal and do not attract committed holders who want long term incentives. I think option 1 may be a little too complex and has multiple moving parts. I agree with @TheRealTuna that success tokens (or option 2) seem to make the most sense. It could be as simple as raising ETH for the YAM treasury by selling 1yr maturing success tokens with the specific goal of creating POL. Then the treasury can also have the freedom and flexibility to efficiently deploy that capital to a uni v2 or v3 AMM or to any L2 they deem appropriate at the time.

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Really dig this. I think Option 1 would be a better approach as it encourages broader use of YAM products, over price speculation. This metric is more directly informed by the productivity of the liquidity brought in by the program. It would be harder to game that around rewards, so less defensive strategies around expiration would be needed in gauging the metric.

This is a really great vision, and think it really captures the current direction of the space quite well, while pushing it forward.

You make a great case for a KPI approach to bonds. I would not be opposed to success token if that can cap distribution from way overperformance just to smooth out distribution, but I don’t think it affects the exchange rate.

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Thanks for the response. This is a great find and study on the olympus bonding mechanism in action and… surprise, surprise… it performs just the way you would expect. Free money for bots to take advantage of.

Hey Kevin! Thanks for the reply and input on the style of option. I have to say I’m on the fence regarding success tokens vs a KPI like treasury size and I need to think through the different implications for the DAO and buyers. The Success Token route will probably be the easiest to understand, and if we already have an embedded incentive to grow treasury value (as discussed in part 3) that could make the most sense.

I shied away from proposing simply raising ETH since committed Liquidity providers would be incentivized to remove liquidity and sell YAM for ETH to participate. While this is of course hypothetical, I can imagine doing it myself, so it can’t be too far off. Having the ability to purchase these success/KPI tokens with both SLP tokens as well as with ETH directly would be a good idea though.

Heyo! Good point about treasury size being less game-able when things get close to expiration, but I’m sure we could work out a way to make the price more resistant to manipulation (i.e. a long enough TWAP)

From the responses above, I find myself realizing that the metric for any KPI option will be influenced by the general functioning of the DAO at that time. If we have made a bunch of changes around incentives outside of this program then the incentives of this program would change. My gut here is that we should focus on the questions of “how much” with regard to the amount of liquidity the treasury should own, the bonus that we think will be needed to make this effort successful, and the related question about how much YAM the community is willing to spend (mint) to make it happen.

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Excellent work here @ross. Yam needs a revamp and clean up. Your ideas are the right direction. Thank you.

I am coming to the conclusion that offering Yam at a discount with long term alignment a few things:

  1. Very complicated and difficult to implement and market
  2. Requires a significant discount the longer the required hold time is. Easily see discounts surpassing 20% in order to get interest. Currently market interest in Yam is already very low, if the market were moving up, it could be another story. In addition the current potential buyers are all current Yam holders, which could easily reduce their position of Yam to buy discounted long term Yam.
    If this process were not done correctly or marketed correctly, it could not only cause a further price reduction of yam but also cause potential buyers to be not interested.

Here’s my suggestion which i’ve spoken to the team a bit about:

  1. The treasury creates its own Protocol owned Liquidity by using un-productive ETH that’s sitting in the treasury and pair it with newly minted Yam with a guarantee that these Yams will be burned if it is ever removed from the liquidity position.
  2. If and when the total LP position 5x from current value, we remove the original value of ETH to be placed back in the treasury to be utilized for benefit of Yam’s Treasury.

An example:
Current liquidity is approximately $1 million in Sushiswap’s Yam/ETH pool.
We stop all liquidity incentives which there is currently ~$275K in YAM earmarked toward liquidity mining.
We use $500K in ETH from the treasury and pair it with $500K newly minted YAM and add to the Sushiswap’s Yam/ETH pool. If all current LPs remove their positions the pool will still have $1 million in liquidity but now it is owned by Yam’s Treasury.
If and when the treasury’s LP position grows in size to $5 million, then we remove $1 million in liquidity, burn the $500k in Yam and deposit the $500 in ETH back into the treasury.

This accomplishes many things:

  1. Creates Protocol owned Liquidity for Yam’s Treasury
  2. Yam’s treasury earns the swap fees. Currently the ETH is not producing any revenues.
  3. Yam’s treasury has a direct incentive to grow the value of Yam (it has skin in the game)
  4. Treasury value is currently ~$5.5 million so it will require about 10% of the treasury, but the ETH is still owned by the treasury.
  5. Ends YAM inflation from the liquidity rewards.

Feddas

I’m glad people are thinking about this but I have a few issues with this strategy.

This is subjective and I disagree. UMA’s success tokens are simple to create and we have plenty of experience with their contracts. Is simply taking ETH from the treasury easier? Yes, but this has to be considered from more than just that standpoint. In the same way we are looking at how to restructure YAM for long term improvement and growth, we need to think about PoL in the same way.

Again we must consider what is in the best long term interests of the DAO. We all agree that we should stop paying liquidity mining rewards and it makes sense for the DAO to own it’s liquidity. Both options are paths to do this.

If the success token is available to all token holders and some believe that a short term drop to the YAM price is worth taking a longer term bet on the YAM token, who is that problematic for? As you mention, interest in YAM is low, meaning that most people who currently hold the token either don’t care about it or are actively willing to hold it for a longer period of time. The DAO itself does not need the token price to appreciate over the short term. It has runway to continue to operate, and we need to sort out a model for YAM issuance that supports that (but it’s a separate issue).

The DAO should care about the token price only inasmuch as it helps promote the goals of the DAO. The goals of the DAO are long term and our thinking around funding initiatives like PoL should be equally long term aligned.

The “un-productiveness” of the ETH is a straw man. We can and should make this ETH productive, but using it for ETH/YAM liquidity is not a good way to do so. The sushiswap pool is historically low volume and the IL from the pool has far outweighed the fees from the volume. This shouldn’t come as a shock and shouldn’t be considered an outlier. This is how most small crypto AMM pools function and is why incentives are used to get LPs. The biggest misconception with OlympusDAO’s messaging is that these low volume pools are assets for the DAOs who own the liquididty. They are not. They are liabilities and public goods that the DAO chooses to fund because their only other option is to rent liquidity monthly. If the pool does start generating lots of volume then that is great but, this should be considered an exception to the rule.

Similar to the assumption that the LP pool will make the ETH productive, this is also a dangerous assumption. Do I want this pool to grow by 5x? Of course. That would mean the market cap has increased by 5x, which is undeniably a good thing. But should we assume that this will happen in a timeframe that benefits the treasury? Given the state of the markets, ETH could drop 50% and bring YAM down just as much with it.

Furthermore, this logic can be applied to any way in which funds are raised for protocol owned liquidity. We can do this with success tokens too. if we want to set a metric for when the treasury takes profits from it’s PoL, we can do that in exactly the way you propose.

All these points are also true if the funds are raised with YAM via success tokens.

The crux of your disagreement here is about whether raising funds in YAM will have a detrimental effect on the token price. This is possible, but your arguments rests on the fact that using ETH from the treasury is costless, which is silly. That is $500K is not easy to get back and when in the Pool can’t be used in other revenue generating activities. I agree that we have too many assets in the treasury just sitting around, and have ideas to put it to work that should be more lucrative than the ETH/YAM LP pool. If the treasury is used to reward voters then using 1/11th of the treasury in a way that won’t directly benefit them is not trivial.

Furthermore, this doesn’t have to be an either-or decision. We don’t have any great pressing need to make sure we have all our PoL available right now. We can do a success token raise to get liquidity and if it doesn’t provide as much as we need, we can augment it with ETH from the treasury. All we have to do to make this happen is agree to it and get to work. UMA has expressed interest in helping with this and they have a large focus on facilitating deals like this. The worst that can happen is that there is limited interest and we have to fall back to buying the liquidity.

It would also be good marketing. It shows that we can do something different that moves the space forward and pioneers a model for PoL that has not been seen yet. This in itself makes it worth trying. PoL is a huge narrative in the space and we can get our name out there by doing something innovative.

Yes we need to determine a discount rate, and there is a chance that those who participate will sell YAM to participate. Yes this will add additional YAM issuance, but we need to figure out the future of YAM issuance anyway.

Lets stop thinking about short term solutions and start thinking about how we can use all the tools available to us to make YAM successful in the long term. This will require innovation and all the runway we can get. We have the opportunity to have our cake and eat it too.