Proposal: Activate Greatly-Reduced LM Rewards for LQTY

[Derrick]

This proposal is expected to appear on Snapshot for voting on 2021-08-15T12:00:00Z. Make sure to stake your vBNT for voting before this date and time to participate in the DAO decision.

Proposal to Activate LM rewards for LQTY

TL;DR

• Proposal to activate liquidity mining rewards for LQTY.
• EDIT: Based on feedback, the proposed allocation/duration is 500 BNT/week for 12 weeks.
• The LQTY/BNT Pool was recently whitelisted on 6/25/2021. The previous proposal and additional information can be found here.
• The benefits to Bancor are clear.

LQTY token address: 0x6dea81c8171d0ba574754ef6f8b412f2ed88c54d

Project Website: https://www.liquity.org/

Project

Liquity is a decentralized borrowing protocol that allows users to draw interest-free loans against ETH as collateral (akin to MakerDAO). Loans are paid out in LUSD (USD-pegged stablecoin) and need to maintain a minimum collateral ratio of 110%. Loans are secured by the Stability Pool, where users can deposit LUSD and provide up-front capital to offset uncollateralized debt. In return, they receive ETH collateral when liquidations occur and continuous LQTY rewards (our secondary token).

In addition to Liquity’s focus on capital-efficiency, the protocol is fully decentralized. Liquity contracts have no admin keys and are accessible via multiple interfaces hosted by different Frontend Operators, making it censorship resistant. The protocol is also governance-free, as all operations are algorithmic and fully automated, and protocol parameters to maintain system health were set at time of contract deployment.

Tokenomics

Liquity’s native token, LQTY (ERC20), is used as a reward mechanism within the Liquity ecosystem as stated previously. Furthermore, LQTY can be staked to capture 100% of protocol fees (paid in LUSD & ETH) with no additional risks added (such as token slashing) to backstop the system. Since launch on April 5th, stakers have been paid ~$13.7M in protocol revenue.

Benefits to Bancor

Liquidity

The LQTY/BNT Pool was recently whitelisted on 6/25/2021 (the previous proposal and additional information can be found here) and has already attracted ~$350k in liquidity — slowly catching up to the LQTY/ETH pool on Uniswap V3.

With borrowing activity and protocol revenue (i.e. APR) being inconsistent due to market conditions (ranging from about 4%-36% at time of writing), LQTY stakers may want to diversify how they use their LQTY tokens — the Bancor pool with LM rewards could be the perfect place. This would be the first and only incentivized LQTY pool, making Bancor the clear choice of migration for some of the ~6M LQTY staked and the 74k LQTY currently sitting in the Uniswap pool. Users in our community have been looking for more things to do with their LQTY and providing liquidity to Bancor with single sided protection and LM rewards could scratch that itch while providing value for the Bancor ecosystem.

Volume

Due to LQTY’s fragmented liquidity, volume is heavily skewed towards the DEX with the most liquidity. On August 1st (and surrounding days), trading volume of LQTY increased significantly across Uniswap and Bancor. Here’s how the overall volume was split:

Note: Daily volume of the LQTY/BNT pool can be found here.

Uniswap attracted over $2M in trading volume while Bancor attracted $277K because Uniswap had more liquidity available. This dynamic could be flipped if Bancor were to capture a majority of the liquidity instead.

It’s also the case that users cannot make decently sized trades for LQTY since liquidity is split between Uniswap and Bancor, and driving most of the liquidity to one DEX would significantly mitigate this issue — leading to more volume as a result.

LQTY is relatively young and is clearly still developing its liquidity. We believe now is the optimal time to capture it, which only benefits Bancor as LQTY continues to mature.

Duration and BNT Allocation

To provide flexibility, the Bancor DAO should decide the duration and BNT allocation if possible (Re: this post). This allows an option for the DAO to not overcommit with rewards, while still being able to bootstrap the pool to their liking and leaving the door open to make a near future decision based on how successful this campaign is if passed. Preferably, the duration should be on the longer side and rewards should be competitive enough to compete with Uniswap and the LQTY staking pool to ensure:

1. Bancor becomes the long-term home for LQTY
2. Liquidity doesn’t dry up in the short-term
3. Existing Uniswap LPs and some of the LQTY stakers migrate to Bancor

EDIT: Based on the discussion below and data from @tenzent, the proposed duration and allocation is 500 BNT/week for 12 weeks.

[eldude]

@Derrick

Will let the DAO decide the duration and BNT allocated.

• We can’t vote on this unless we know how much BNT you are asking for. Standard is 10,000 BNT per week (20,000 BNT with multiplier)

Thats seems a bit overkill

[tenzent]

Yes, so it’s essential to know:

1. What is the “Target Liquidity” we’d like to see on the pair.
2. What APR on said liquidity is fair.

A regular 10,000 BNT Campaign would definitely be overkill since there isn’t tens of millions in liquidity up for grabs. If people have suggestions for the two above it’s just a bit of napkin math.

EDIT:

Looking at the Uniswap Pair’s Volume it certainly does seem like we could benefit from a reduced campaign. Aside from that, there does seem to be a great amount of LQTY up for grabs in terms of single sided staking should we compete with LQTY’s own native 19% APY.

I would say looking at the numbers above a Pool around 1M USD deep would suffice, using LQTY’s own native APY of 19% as a desirable apy :
1,000,000 * 19% = 190,000$ / 4 (BNT Price) = 47,500 BNT / 52 (Weeks in Year) = 915 ~
Let’s call it 1,000 BNT. That’s 500 BNT a week (2x Multiplier).

I would be fine calling it 500 BNT per Week for 12 Weeks.

It’s a real small expense to the DAO and should make us the optimal choice for a pair generating great revenue.

Sidenote @Derrick Looking through the protocol I was wondering how the protocol liquidates ETH positions, does it dump it on the market ? if so, what market and can the process be moved to Bancor (Atleast under certain conditions) ? - If something like this could be done, I would be more than happy to vote for higher LM Rewards. Otherwise I think my proposed rate above is fair.

[Derrick]

Thanks for coming up with the numbers! If decided that’s an ideal allocation/duration, I’ll edit the proposal accordingly before it goes up for voting.

To answer your question: Troves (loans) are liquidated by offsetting remaining debt against available capital (LUSD) in the Stability Pool. In exchange, depositors receive the liquidated ETH collateral at a ~10% discount.

Liquity doesn’t utilize any external market for liquidations, so I’m not exactly sure if or if not Bancor could benefit from the Stability Pool.

[glenn]

Thanks for putting up this proposal. I think it is going to be very hard to get the DAO to back this LM campaign without a stronger justification. With that said, I think there could be some beneficial integration with the release of V3 from our end. Specifically around the following:

• Shadow Tokens: A new pool design will allow for limitless stablecoin pools, with minimal impermanent loss.

and I would love to bring LUSD liquidity into our platform when shadow pools are available. I think the Bancor community would support a dual LM campaign such that the LUSD pool gets incentivized with BNT from our side and with LQTY rewards from the liquity side.

[tenzent]

@Derrick

500 BNT/week for 12 weeks.

Totally okay with this, its an incredibly minor amount of emmisions. might be helpful to add to the tittle something like “Greatly Reduced” LM Rewards. We have some apes that only read the title on snapshot so they might be led to believe its a regular campaign. I think it will garner more support if you make it more explicit.

@glenn I would think you should reconsider voting for this, the LQTY pair brings in a regular 35-40% APY and with the regular 70/30 this campaign mints less than 5K BNT on the LQTY Side.

[Derrick]

Got it. Thanks for all of the feedback, it’s much appreciated! @tenzent