All – I’ve been working on a proposal to bring Protocol Owned Liquidity (made popular by Olympus DAO on Ethereum) to Sovryn. It would be extremely valuable to Sovryn, but we cannot copy the exact structure. So, I’ve made an initial write-up and could use the communities help to review and brainstorm.
Here’s a summary of what we’d try to build, the problem we’d need to solve and a few suggestions on how to make it work:
First a brief overview. Olympus in a protocol on Ethereum which allows users to exchange their LP tokens for the native Olympus token, $OHM at a discount. For example a user would trade their $100 ETH / $100 USDC LP position worth $200 for some greater amount of Ohm, let’s say $220. The user
gets “instant profit” and the protocol now owns the liquidity. The process of selling LP for discounted tokens is referred to as “Bonds or Bonding” in this context.
The primary risk with this and the one we need to solve for Sovryn is how do you prevent users who just received discounted tokens from dumping onto the market and causing a negative feedback loop on price? In theory, users would arbitrage the discounted token price they receive via bonds until the discount is gone which is not sustainable.
The way Olympus prevents the above problem is by offering users astronomically high APY yield % to re-stake their $Ohm token in the protocol instead of selling. The offer from the protocol essentially is 'Why sell the fresh $Ohm you just received a discount on into the market when you can stake them instead for some insane 8,000%+ APY to get even more $Ohm tokens?). Olympus can offer this because the $Ohm token can be minted in a near unlimited fashion (like the Federal Reserve), so they’re basically paying out fractionally reserved monopoly money but the token price can maintain some semblance of integrity because of this cycle that continually incentivizes people not to sell. Sovryn cannot do this because $SOV is a real token and there is a limit to how may $SOV tokens we have. We also do not want to create some arbitrary ponzi token to pay out APY’s in.
From Sovryn’s perspective we can pretty easily fork Olympus Pro’s model and build out a system where we offer discounted $SOV tokens in exchange for LP tokens. However, as we exchange more discounted $SOV tokens for LP token pairs the question becomes how can incentivize users to NOT dump their tokens for quick profit and specifically do this without creating some sort of ponzinomics or arbitrary and unnecessary additional token? If we can solve this then I think the idea of PoL for Sovryn is an amazing idea which can build out our balance sheet, reinforce the token price and stabilize the liquidity pools.
Potential Solution: Please note this isn’t tested or rigorously analyzed but it is meant to serve as a brainstorming exercise.
To put it bluntly, we solve this issue by appealing to the financial motive of the apes. The two ways I see this as possible is by allocating a portion of the LP tokens Sovryn receives from bonds and doing 1) A Buy-back and burn of $SOV tokens as well as a 2) Revenue Subsidy paid in Bitcoin to Bitocracy stakers. Now, if users know the protocol is going to buy-back and burn $SOV it means there will be upward pressure on the token price. Additionally, if users know Bitocracy stakers will be receiving additional revenue then there is further motive to stake in the protocol (in addition to all of the already existing benefits). These are pumpamentals to the $SOV token.
In normal circumstances we would ask ‘Where is the money coming from to buy-back & burn and/or subsidize stakers?’ Well, that’s the beauty, we’re getting fresh non $SOV liquidity from the bonds. The more tokens we sell via bonds, the more LP tokens we have which gives us assets on our balance sheet to either 1) Keep in the AMM pools to maintain liquidity 2) Buy and Burn $SOV or 3) Disburse to stakers.
Think of it in a circular nature with the intent of creating a reflexive cycle where bonding leads to more bonding. An example:
- Sovryn sells discounted $SOV for LP tokens, which are assets like rBTC, ETH, BNB, etc.
- Sovryn signals to the entire market 'Hey for every bond we sell we’re going to intentionally give more value to $SOV holders by buying and burning token supply off the market AND giving a straight Bitcoin dividend to stakers.
- This causes more people to want to buy $SOV to capitalize on this financial benefit via holding or staking.
- Now users are motivated to buy $SOV, and if they want $SOV they’ll want to do it with any discount they can possibly find and therefore will need to buy it via more bonds that Sovryn issues.
- By issuing additional bonds, the cycle repeats, which constantly builds up more assets in the treasury and additional value of the $SOV token.
Even though it may seem we’re using the LP we acquired from the bonds in a counter-productive and costly way (by burning and rewarding stakers), it is a necessary mechanism to create a reflexive cycle where the net effect is more value to stakers, higher $SOV price, stronger treasury and more stable LP pools.
A further example of how it could work:
- User bonds a $100 rBTC / $100 ETH position for $210 of $SOV.
- Sovryn keeps 90% of that LP in the AMM Pools ($180 out of the $200 acquired via LP)
- Sovryn takes 7% and designates to buy-back $SOV on the market and burn it ($14 of the LP)
- Sovryn takes the remaining 3% and allocates it to stakers as a BTC dividend ($6 of the LP).
- By pushing back value to SOV holders and stakers, we create a scenario where the forced up-side of holding $SOV should out-weigh the opportunity to sell and make a measly “instant profit”.
- In theory this pushes users who just bonded to not sell. therefore the price of $SOV up (making Sovryn’s $SOV treasury larger and potentially off-setting the loss of initially offering a discount) and incentivizing all parties to do more bonds, which adds more assets to Sovryn’s protocol and adds more value to $SOV holders and stakers.
- This creates a circular, reflexive effect.
The reality is we have to toy with these numbers to find the sweet spot (maybe building some sort of curve). Maybe giving more to stakers, less on the burn, etc. But ideally it becomes a scenario where the gains in Sovryn’s treasury from new LP, in addition to the increase in $SOV token price out-weigh the cost incurred by Sovryn protocol of selling discounted tokens, as well as burning and subsidizing stakers.
Should we move forward with this type of proposal, we also signal our intention to the market loud and clear and build it into the protocol. So anyone knows if they’re buying a bond on our platform that it will cause some sort of upward price appreciation and therefore the incentive is for all parties to hold or stake.
The Risk: The primary risk and where this model can fall apart is if the upward price pressure from the burn and staking subsidy is not enough to off-set the down-ward pressure on the $SOV token because users just decide to sell the $SOV token anyways. I have a hard time seeing this happen because if I am a user that just took a bond and received a measly 5% discount, is it really worth me selling versus the prospect of myself and a bunch of other apes joining in on the model and getting out-sized returns? Probably not. I also know that even if other people sell and I decide to stake then I am not necessarily as concerned with the token price but instead trying to get out-sized returns in Bitocracy. So I almost don’t care about minor price swings if the revenue share is amazing. In these types of scenarios we can allocate more to Bitocracy to incentivize that sort of game theory.
I could really use the communities help to give this idea a reasonableness check. Does it make sense? What do people think?
I could also use a more quantitative mind to start hashing out some of the numbers like how we determine what % to discount bonds at, what % of LP we burn or offer to stakers, then how those numbers move depending on different scenarios.
Here are some more of my own internal notes and document that I’ll try to update if anything new comes to mind: Here’s my initial and not yet complete proposal: Prelim - Protocol Owned Liquidity Proposal - Google Docs