[FIP 013] - BANK Bonds for Owning AMM Liquidity

BANK Bonds for Owning AMM Liquidity

Summary

Implement a bond program for the DAO to own its own liquidity. Protocol-owned-liquidity is a powerful tool to enable tapering of liquidity mining programs.

Motivation

Currently, Float Protocol is incentivizing its liquidity for the BANK/ETH pair on Sushi with 200 BANK per week, or roughly $850k annually to maintain ~$6M in liquidity. Implementing bonds for liquidity reduces the need for long-term BANK incentives which create persistent sell pressure when users compound their rewards into the pool. A different way of thinking about liquidity mining incentives is that currently the Treasury is renting its liquidity, while bonds allow the Treasury to own its liquidity.

Structure

Float Protocol and OlympusDAO have been in discussions over the past few weeks about implementing a liquidity bond program. For those unfamiliar with bond mechanics, bonds sell assets (ex: BANK) at a slight discount in exchange for LP tokens (ex: BANK/ETH). Bonds allow active users to stack governance tokens at a discount, while being insulated from impermanent loss from liquidity mining. The discount rate on bonds is set by the market via a mechanism which increases the discount until a bond is purchased, which then pushes the discount back down. For reference, here is the average discount of Olympus’ bonds with their extremely high APY:

Olympus is offering to provide its expertise in bond contract management to support other DAOs interested in owning their own liquidity. This will include providing the UI for bonds and maintaining bond control variables to balance emissions with liquidity accumulation. In exchange for the implementation and community engagement, Olympus would take 3.3% of all BANK bonded. Olympus will use the BANK earned as backing for the intrinsic value of OHM, which would act as a supply sink for BANK.

BANK bonds would vest over the course of one week, which prevents immediate sell pressure from the bond discount. This helps align the incentives of bond buyers with the goals of the DAO. Bonds vest linearly and partial rewards can be claimed at any point during the vesting period.

Terms

The terms of the proposed bond program and success criteria are as follows:

  • 800 BANK per week over an initial pilot period of 4 weeks
  • Bond vesting period: 7 days
  • Success Criteria: Discount on BANK < 10%
  • Success Criteria: Minimal sell pressure on BANK

Next Steps

After the pilot program, the DAO would gauge its success and move to extend the bond program based on long-term liquidity goals for BANK.

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BANKers will already know about our highly positive opinions on the power of bonds having been discussing a FLOAT-based bonding mechanic since June (Recover Basket and Support BANK during distressed times - #9 by paulm) - a protocol owning liquidity allows for a permanent assurance for our assets and turns a otherwise ongoing cost into a income earner.

It has been great to collaborate with OlympusDAO on BANK bonds, themselves having undeniable success with a Bond & Stake based system. They’ve have been a great partner and we’ve always believed that the money lego that is crypto works even stronger together.

Ultimately the team thinks is the perfect trial to see how Float Protocol can acquire bonds on the open market, and we hope to see it lead to a long-term bond program and closer partnership.

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