How Protocols Can Sustainably Manage An Infinite Amount Of Liquid Staked Wrappers
Convex has pioneered the popularity of liquid staked wrappers due to the immense success of $cvxCRV which is its liquid version of veCRV. By doing so convex has managed to gain control of more than 50% of the total veCRV, hence making $CVX a proxy dictator in the Curve wars.
How does Convex ensure that $cvxCRV is “LIQUID” ?
$cvxCRV has to maintain a 1:1 peg with $CRV and, hence, there is a cvxCRV-CRV pool on Curve finance where $cvxCRV holders can exit back to $CRV at any point of time. The stable swap technology of Curve finance also helps to hold the peg. In order to incentivise LP’s to provide exit liquidity, Convex shareholders like $vlCVX holders and Votium allocate a fixed amount of votes to ensure that the LPs providing exit liquidity are incentivised and well compensated to continue doing so. This has enabled Convex to become the blackhole for $CRV that it is.
The big question is will Convex be able to pivot away from Curve finance and what would they need to do in order to successfully do it, as all resources are currently allocated towards conquering Curve finance.
The vLABS team would like to present a possible solution for protocols to create multiple liquid wrappers for any number of protocols in a safe and sustainable manner without having to allocate too many resources and worrying about the peg of the liquid derivative.
Example Protocol With Multiple Liquid Staked Wrappers: Tetu
Tetu is a Web3 asset management protocol built on Polygon that implements automated yield farming strategies and has a number of liquid staked derivatives like $tetuQI, $tetuBAL, and several other liquid staked derivatives like $tetuVIX and $tetuOLIVE in the pipeline. This would make $dxTETU, the governance token of TETU, a proxy for the governance token wars of whichever tokens they wish to wrap.
Why does TETU need multiple wrappers?
TETU, being an asset management protocol for automated yield farming strategies, is dependent on the token emissions of other protocols on which it has built strategies on top of.
TETU built a wrapper for $Qi to direct more rewards to the compounding Aave pairs which is used in one of TETU’s signature strategies called “AMB”. A key component of the AMB strategy was the stablecoin yield on the Balancer stablepool (MAI). With Balancer’s shift to a “veMODEL”, TETU built $tetuBAL to ensure sufficient rewards are directed to the above pool.
Similarly, it is in TETU’s best interest to create wrappers for any protocol that it has a symbiotic relationship with as it is cheaper and more efficient to create a liquid staked version instead of outright purchasing the tokens from the open market.
The challenge that TETU, or any other protocol going down this path will involve the following:
- Maintaining a 1:1 peg with the underlying governance token at all times.
- Ensuring that there is sufficient “exit liquidity” such that the token is liquid in both naming and in reality.
- Incentivising LPs to provide liquidity in the form of “XXX — tetuXXX” by providing incentives.
The above steps are not sustainable beyond 1 liquid wrapper as the governance token holders will bear the cost of expansion in the form of token emissions to LPs of the various “XXX — tetuXXX” pairs. As a result, protocols must look for a more sustainable way to scale their and achieve domination of governance wars.
A. Identifying core and secondary liquid staked tokens:
A protocol must separate core liquid staked tokens that are essential for survival and secondary liquid staked tokens that are merely sources of additional income. Vector Finance, on Avalanche-C Chain, is a very good example to showcase core and secondary dependencies.
Vector Finance is the Convex to Platypus, a stable swap on Avalanche. A user can convert $PTP to $xPTP, or $JOE to $zJOE, at a 1:1 ratio on Vector Finance. Since Vector earns almost all of its revenue from Platypus, $xPTP would be the core liquid staked token and $zJOE would be secondary as it is not as important.
B. Provide exit liquidity and governance token incentives to only core liquid staked dependencies:
If a protocol is providing emissions to incentivise LPs of non-core liquid staked tokens, the governance token holders pay the price as protocol expenses in the form of token emissions would almost always be worth more than the revenue from operations in the non-core protocol.
Ideally, vector finance should not have created an LP for “zJOE-JOE” as it is a non-core dependency.
C. Create an Anchor for non-core liquid staked tokens:
Anchor is a mechanism which helps maintain the peg of an asset through arbitrage. A few examples of protocols that use Anchor are QiDao and Beluga Finance. Minting and redemption of non-core liquid staked tokens can happen via Anchor in such a way that minting is always done 1:1 and redemption at 0.99. This 1% tax goes towards providing further exit liquidity and is an important aspect of the design.
D. Potential model for Vector Finance:
The xPTP wrapper, being a core wrapper, should have an LP for exit liquidity on a dex which can be incentivised. Ideally, this should be a stableswap like Curve finance (the only permissionless stableswap on Avalanche) as a Uniswap v2 style AMM can have a severe impact on the peg as shown in the example below:
For example, if there’s 100k PTP and 100k xPTP in a trader joe LP, selling just 1k xPTP would result in 99k PTP and 101k xPTP in the pool. This causes each PTP token to now be worth 1.02 xPTP which is a 2% premium. Due to this arbitrage opportunity, a new user would buy xPTP and bring up the price but the opportunity cost for Vector finance is that the user did not lock PTP for xPTP which they would have preferred as it increases their influence over Platypus.
E. Create a boost for non-core liquid staked tokens and use protocol revenue as incentives and exit liquidity instead of token emissions:
Vector finance can allocate a portion of its revenue generated from Trader Joe vaults towards providing a boost to zJOE holders such that they earn a higher return than the original veJOE vault. Higher returns combined with liquidity would incentivize users to lock their $JOE with vector instead of Trader Joe.
Part of the yield generated from vaults can also go towards funding exit liquidity for zJOE holders back to JOE using Anchor. Since there is no LP mechanism involved, Vector would never have to worry about zJOE depegging.
Applying Observations And Findings Towards TETU
TETU already has 2 core liquid staked tokens namely $tetuQI and $tetuBAL which are essential for boosting returns for its AMB vaults. Due to the nature of DeFi in Polygon, TETU can sustain both of the above tokens as well as an infinite amount of future liquid staked tokens without any emissions at all. Below is a high level overview of the plan:
Suggestions for $tetuQI:
Since TETU has received ~0.2% of the total $DYST supply in the form of a veNFT from Dystopia, it can migrate the tetuQi — Qi LP entirely to Dystopia and use its voting power to ensure that sufficient token incentives are available to the LP. Dystopia stableswap mechanism will also be better than hosting it on a Uniswap v2 for maintaining the peg at 1:1.
Suggestions for $tetuBAL:
TETU can use Balancer v2 on Polygon as the liquidity sink for $tetuBAL. A fixed part of TETU’s voting power can go towards directing $BAL emissions to the LP to ensure that liquidity providers are well compensated.
Future liquid staked tokens like $tetuOLIVE, $tetuVIX…
For future non-core tokens, TETU can adopt the Anchor model as described, in which they direct part of the yield from the various 0vix and OliveDAO strategies to give boosts and provide exit liquidity to respective liquid staked token holders.
Potential for creation of liquid staked derivatives = ∞
$TETU emissions required = 0
By following the above, any protocol can achieve the goal of having their governance token become a proxy for an infinite number of tokens.