OIP-132: wstETH/OHM Boosted Liquidity Engine

0xFelix

Summary

Launch a Boosted Liquidity Engine for the wstETH/OHM pool on Balancer with a maximum vault capacity of $5m in wstETH. To match this, approve the minting of up to $5m in OHM for this vault in order for both assets to be deployed in a 50/50 liquidity pool.

Background

The Boosted Liquidity Engine (BLE) leverages Olympus’ competitive advantages (monetary policy flexibility and treasury strength) to mint OHM into liquidity pools with select high quality assets. LPs bring an asset (e.g., stablecoin, LSD) into newly developed vaults and the Olympus treasury mints OHM in equal value (for 50/50 pools) to match and create a complete LP position. LPs benefit from boosted liquidity mining opportunities and partner protocols are able to more efficiently drive liquidity mining programs and deepen supplemental liquidity for their tokens. Olympus benefits from LPs providing counter asset liquidity, enhancing OHM’s liquidity depth, which enables greater utility and stability. Furthermore, the BLE can be a powerful tool for partnerships. BLE is not intended to be utilized for any and all assets but rather select high-quality assets with which an OHM pairing would be beneficial.

For more information on the Boosted Liquidity Engine please refer to OIP-131.

Vault Details

The wstETH/OHM vault will be the first deployment of a BLE. As third parties add wstETH into the vault, the protocol will mint OHM to match this and deploy it into the liquidity pool and stake it to receive incentives.

All the reward tokens earned through this vault will be directed to wstETH depositors. The protocol itself will not receive these tokens, with the exception of trading fees which are accrued inside the LP token itself.

The proposed vault will launch with the following parameters:

Maximum capacity: $5m in wstETH provided by third parties & $5m in OHM minted by the protocol.
Pool: 50/50 wstETH/OHM on Balancer
Incentivization strategy: Aura staking & LDO rewards
Oracle: Chainlink
Fee: 0%

Note that the maximum mint capacity is perpetual and can be utilized by the contracts until the vault closes and/or a governance vote changes these parameters.

Polling Period

This OIP will remain on the forum until the 9th of March. Afterwards it will move to an official Snapshot vote.

Peazy

0xFelix Incentivization strategy: Aura staking & LDO rewards

Did this mean LIDO gonna incentive the pool w/us with ur aura ?

And did we have other plan to acquire aura or accumulated the token ? ( i mean except the 1M$ )

CryptoAnalyst

0xFelix

Please consider launching with a performance fee similar to yearn vault factories, we are not charity.
What a 5m pool gonna do compared to existing pools?

Mark11

I have a few questions on this:

Does this become, effectively, POL because it socializes the volatility of wstETH?

How does this impact RBS? Are we not limited in the amount we can expose the protocol to? How much is that amount?

How much of our AURA voting power are we using for this strategy/ is authorised? How much will each party commit to the incentivization?

Why is this better than just locking up protocol owned ETH as wstETH and providing that as liquidity? which would also give the benefit of incentives to the protocol and holders instead of wstETH holders

How will we benefit from fees if they are set to zero? Why is a zero fee selected?

Does this not compete with the objective of OHM utility and building OHM as having a monetary premium, because it cannibalises OHM utility/liquidity options?

0xFelix

Mark11 Great questions! Let me go through them one by one:

Does this become, effectively, POL because it socializes the volatility of wstETH?

In some way, yes. But we cannot really categorize it as POL because it's not entirely owned by the protocol itself, and the liquidity is not permanent/guaranteed as depositors can always leave the vault when they want to.

How does this impact RBS? Are we not limited in the amount we can expose the protocol to? How much is that amount?

For these BLE deployments we would ideally strive for the liquidity mix that is set by the treasury team. As outlined in the new treasury framework proposal there is an ideal ratio between different types of LPs. On top of that - depending on the success of this vault - the treasury team could decide to remove some of the OHM/ETH POL to make sure the ratio doesn't skew too far while at the same time reducing the IL risk on the pairs that we directly own. I.e. we could potentially externalize the downsides of having ETH POL.

How much of our AURA voting power are we using for this strategy/ is authorised? How much will each party commit to the incentivization?

The treasury team currently manages the exact voting power split and as the vault grows they will likely allocate more voting power. The incentivization split aims for 50/50 but obviously depending on the LDO token price and the exact BAL/AURA rewards per unit of voting power, this will not always be equally split.

Why is this better than just locking up protocol owned ETH as wstETH and providing that as liquidity? which would also give the benefit of incentives to the protocol and holders instead of wstETH holders

First, we reduce the IL risk on volatile pairs. Second, I consider this to be a B2B product - meaning that we can create vaults in collaboration with other protocols for multiple high-quality assets that we would normally not LP ourselves. Then, on the long term, this also opens up two other things: 1) we can create more of these pairs, so that OHM could become a routing layer between various LSDs and stablecoins, and 2) you could argue that POL doesn't scale indefinitely, especially in an environment where there are no new bond sales. So through this product we could more efficiently scale our liquidity. For example, one option that we've been thinking about is using this product to bootstrap OHM liquidity on L2s.

How will we benefit from fees if they are set to zero? Why is a zero fee selected?

Olympus will get part of the trading fees accrued in the LP token. The vault fee is set to zero at the start since we want to test these vaults and see the results before determining a fee structure. This product is not meant to create revenue at the start, but rather to scale our liquidity and grow the OHM routing layer.

Does this not compete with the objective of OHM utility and building OHM as having a monetary premium, because it cannibalises OHM utility/liquidity options?

I would say it doesn't and I think it's important to not view this as a zero sum game. In fact, this product really adds to the overall utility of OHM because we start to create a routing layer for OHM that could settle transactions between various LSDs and other assets (and realistically, we wouldn't pair against all these assets ourselves without this product). It also (re)introduces DeFi users to Olympus since entering, exiting and viewing the vault can only be done on the Olympus front-end. Plus we intend to partner with various protocols so it also brings more exposure to the protocol and the recent changes we've made (RBS, utility, liquidity products, etc).

Also worth noting that the launch of this product doesn't mean that we will stop creating options for retail users to LP with OHM themselves. There are still pools being incentivized with voting power, the treasury team is looking into bribes, and we are actively exploring passive LP products for retail users with other protocols.

Mark11

Thanks 0xFelix

Just a little further:

I.e. we could potentially externalize the downsides of having ETH POL.

I am confused how this would work - the way it seems to me is we would have the same exposure wrt to IL on the OHM as ETH (other than the fact it is wstETH)

2) you could argue that POL doesn't scale indefinitely, especially in an environment where there are no new bond sales.

This would be a drastic departure from the current consensus for how the protocol should operate and would have the potential effect of chicken egging no new bond sales.

What it seems to me:

we put in incentives + taking on Lido protocol risk into our protocol through the deployed liquidity + eliminating a potential use for our holders + internalizing wstETH volatility = what we get out is no net change in liquidity because we would just use POL + potential trading fees + good protocol relations + liquidity rail we wouldn't usually be attached to.
they put in matched incentives = what they get out is very cheap liquidity rail + usecase for more yield on wstETH driving monetary premium to their protocol

The biggest issue here imo is that this product could just as easily be vaults on the frontend for OHM holders rather than it being deployed from the protocol. I.e make front-end get OHM holders to deploy OHM (with a withdrawal delay period) providing them volatility exposure to ETH, pool incentives and trading fees. This would provide the upsides + drive monetary premium to OHM + provide utility + more net net liquidity = for the marginal cost of incentives to the pool.

Please don't take this the wrong way - I think this pilot should go ahead and I love we are exploring this landscape. I am just concerned the impacts of entering into long term arrangements at exactly the time we are looking to reduce/remove the staking rate. This is exactly the type of product that could present an attractive alternative for holders from staking and, imo, could scale much further and more broadly if it is OHM holders providing the liquidity.

0xFelix

Mark11

I am confused how this would work - the way it seems to me is we would have the same exposure wrt to IL on the OHM as ETH

Yeah sorry I worded that badly, the protocol is still exposed to IL risk except that it is denominated in a single asset that we minted into the pool. I.e. either OHM is being bought out of the pool or it's being sold into the pool and as a result of that the protocol ends up slowly releasing supply or slowly buying back supply. One potential advantage here is that we can substitute the ETH POL for ETH BLE and use the freed up ETH for staking and/or yield strategies.

for the marginal cost of incentives to the pool.

In today's environment this is not true though true. A good example is the OHM/FRAXBP pool, which we heavily incentivize through voting power and it's still at 25% yield for a pool that essentially has 0 IL.

The only benefit of organizing it the way you described is that there would be an easy solution for retail users to add OHM to the pool. While that may have a (marginal?) increase in uptake vs. directly LPing on a DEX, it negates most of the benefits this product has, e.g. that we can do this at zero cost of capital. Why would other protocols want to participate in this if it essentially becomes traditional liquidity mining? At that point they might as well bribe Convex/Aura directly to increase their liquidity. The biggest advantage of using the BLE is that it makes incentivizing liquidity 50% cheaper for partners plus we throw in additional voting power for the first few vaults.

Now, that's not to say that we shouldn't create more opportunities for retail users to LP directly and in an easy manner. That is important and we are working with other protocols on potential solutions for that. The BLE just isn't the right product for that. It really is meant to be a B2B product that leverages some key aspects that are unique to Olympus (like the zero cost of capital).

Mark11

0xFelix

0xFelix In today's environment this is not true though true. A good example is the OHM/FRAXBP pool, which we heavily incentivize through voting power and it's still at 25% yield for a pool that essentially has 0 IL.

This is not correct:

the pool has a potential for high IL as we have literally discussed before if OHM price increases
it requires you to sell half your OHM or source additional assets to participate
it has only been functional for a few weeks
there is no integration with the Olympus frontend - it requires medium level of technical capability to access
it has the potential to drop substantially/totally in rewards
there is no long term commitment to the pool by the protocol
the OHM staking rate is potentially being reduced/removed as we speak so alternatives are urgent/more attractive

0xFelix The only benefit of organizing it the way you described is that there would be an easy solution for retail users to add OHM to the pool. While that may have a (marginal?) increase in uptake vs. directly LPing on a DEX, it negates most of the benefits this product has, e.g. that we can do this at zero cost of capital.

It does cost us in incentives, volatility and exposure to protocol risks of Lido.

0xFelix Why would other protocols want to participate in this if it essentially becomes traditional liquidity mining? At that point they might as well bribe Convex/Aura directly to increase their liquidity. The biggest advantage of using the BLE is that it makes incentivizing liquidity 50% cheaper for partners plus we throw in additional voting power for the first few vaults.

Under the alternative scenario I suggested it isn't traditional liquidity mining because the OHM holders would absorb the volatility and the non-OHM asset just deposits and receives extra rewards. The value in this is that the non-OHM asset just has to provide a marginal incentive to attract liquidity cause the OHM holders accept the volatility (the usual barrier to providing liquidity).

0xFelix Now, that's not to say that we shouldn't create more opportunities for retail users to LP directly and in an easy manner. That is important and we are working with other protocols on potential solutions for that. The BLE just isn't the right product for that. It really is meant to be a B2B product that leverages some key aspects that are unique to Olympus (like the zero cost of capital).

I am all for this product going ahead, and have voted accordingly. There is an alternative and potentially superior, more scalable and OHM holder aligned product which I have suggested which deserves to be considered and not dismissed outright

JaLa

Peazy The plan is for Lido to coincentivize the pool, exact amount TBD at launch.

The treasury team plans to have an OIP up in short order on Aura strategy beyond the $1M approved to date. Some of it is dependent on the success of the BLE program and partner needs.

0xFelix

Mark11

"the pool has a potential for high IL as we have literally discussed before if OHM price increases"

I don't want to rehash the same argument we had in the Discord server and I think we should agree to disagree on this point. If we were to break out of the upper wall there would be ~0.5% IL for that pool, and if OHM were to double in price (which would be huge considering RBS mechanics) the IL would be ~5%. As an LPer those numbers are very low and I personally think it's pretty unlikely for the OHM price to double on any reasonable time frame.

I do agree with your other points about the commitment and ease of access, as I mentioned before.

"Under the alternative scenario I suggested it isn't traditional liquidity mining because the OHM holders would absorb the volatility and the non-OHM asset just deposits and receives extra rewards."

Maybe I'm misunderstanding your proposed idea, but how does this not turn into de facto liquidity mining? We would need to incentivize both wstETH deposits and OHM deposits. And yes, you can play around with the incentives and IL split between both groups but the fact remains that we now have to incentivize more, which makes the PMF more questionable. For the OHM depositors we would need to beat whatever the staking rate ends up being + compensation for the IL/volatility risk on top which, for a ETH pair, would be quite high. For the wstETH depositors we would need to incentivize up to the extent that it beats existing opportunities in the market and there are numerous alternatives.

In fact, it sounds to me that what you're describing is Ondo v1 style vaults. While we might be able to improve on that product, those vaults never really found PMF and are now defunct for various reasons (if I remember correctly, a large part was due to the high realized IL and losses for the variable side - OHM in this case).

The idea of this product is that it makes attracting liquidity significantly cheaper for partner protocols and if instead of making it significantly cheaper, we only make it marginally cheaper (because we now need to incentivize both sides), then I don't know if this product will be attractive enough vs. existing solutions.

"There is an alternative and potentially superior, more scalable and OHM holder aligned product which I have suggested which deserves to be considered and not dismissed outright"

I'm not trying to dismiss it outright. I realize that all nuance is lost in textual communication but I do really appreciate the comments!

Mark11

Thanks 0xFelix

I think we can say that IL is a material consideration for those deploying to the OHM-FRAXbp and any other pool in which OHM is part of the pair.

0xFelix In fact, it sounds to me that what you're describing is Ondo v1 style vaults. While we might be able to improve on that product, those vaults never really found PMF and are now defunct for various reasons (if I remember correctly, a large part was due to the high realized IL and losses for the variable side - OHM in this case).

This is exactly the issue - someone has to pay - here we are socializing it to all holders of OHM and putting the protocol on the hook for $5M if there is a protocol failure of Balancer or Lido which, if we deploy this system widely, is net bad for OHM holders imo. Instead we should consider if we could incentivize OHM holders to take risk. What I am suggesting a similar product but instead of the protocol taking the IL risk, the Lido protocol risk, the Balancer protocol risk - you can socialize the cost of the liquidity by paying out OHM to the OHMside of the pool for doing something that is useful for the protocol (i.e. we pay ppl 7.3% currently to do something not useful for the protocol which is putting it in a staking contract). It is just a different way to skin the same cat. In this scenario Lido merely has to provide a marginal cost of incentives for half the liquidity with no IL risk or their holders (which we can boost with Aura if we like). Any way I just think that we are a bit myopic about BLE and haven't considered that it is a product, if widely deployed, that could have a negative impact on utility - as the main utility of holding a reserve currency should be liquidity provision and BLE will act as a direct competitor with holders for liquidity provision. The staking rate reduction opens up an impetus for liquidity provision and we need to be in a position to capitalize on it.

0xFelix

CryptoAnalyst The idea is that we test the product first, create a number of different pairs and evaluate the success of this product after that. If the results are good then we can turn on the fee switch for all vaults. But our thinking is that it doesn't make sense to charge fees for a novel experiment with limited TVL (the actual fees collected would be marginal unless it scales up).

Can you clarify your second question?

0xFelix

Mark11 Just to be clear: the protocol is not bearing the full IL risk for BLEs. Counter asset depositors will only get their pro rata share when they withdraw, i.e. they bear IL risk as well.

We looked at Ondo v1 style vaults earlier in the development process and maybe that is something we should evaluate again. But if the variable (OHM) side bears the full IL risk I fear that the protocol will have to pay a significant amount of rewards in order to compensate/incentivize depositors. Especially considering the fact that the going rate for OHM/stablecoin incentives is >25% at the moment and so an OHM/ETH pair will have to be significantly higher.

Finally, I will say that I disagree that this product will have negative impact on utility because this is not a zero sum game IMO. They more we proliferate OHM throughout DeFi and increase the number of liquidity pairs, the more utility we will add on the long-term.

But thanks again for the feedback! If you want, I'm happy to open a chat/channel where we can discuss Ondo style vaults further, in order not to deviate too much from this specific OIP.

CryptoAnalyst

imho we should go all in with the Boosted liquidity Engine but on stablecoins. control that first, then we can go fk around with LSDs.

Mark11

Thanks for answering all my questions 0xFelix - I think we agree, just a matter of a few degrees apart

0xFelix If you want, I'm happy to open a chat/channel where we can discuss Ondo style vaults further, in order not to deviate too much from this specific OIP

Maybe a thread in the discord would be good - I think there is something here especially if we consider stablecoins as the paired asset

CryptoAnalyst

0xFelix

What would be the pool utilization %? How much volume can we expect to be routed? Is that competitive enough to begin with?

Maybe you already answered that and I missed it. sorry.

0xFelix

CryptoAnalyst If this BLE reaches maximum approved capacity it will be a $10m pool, so it would be a fairly large pool. It also integrates into the existing OHM pools on Balancer as well as some wstETH pools there - so lots of opportunities for arbs. The exact utilization will be a bit tough to predict but it should see good volume I think.