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.
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.
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.
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
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.