LP Partnership with Fei

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Summary

Fei Protocol has approached us and offered a service called Liquidity-as-a-Service. The tldr; is that Fei is partnering with protocols by contributing Fei stablecoin liquidity to LP pairs.

FEI is a stablecoin governed by TRIBE token holders. You can find out more info here.

How it Works

In plain terms, Fei is offering to match POOL tokens in an LP position on Uniswap. It would work like so:

  1. PoolTogether would place X amount of POOL tokens into an Ondo Vault.
  2. Fei Protocol would place a corresponding amount of FEI tokens into the same vault.
  3. Both tokens are added as an LP position in an AMM.

After a pre-determined length of time, the vault is withdrawn and both parties get their tokens back. PoolTogether gets back all of the POOL tokens and Fei Protocol gets back all of the FEI plus a 2-3% fee.

This implies that we’re essentially paying 2-3% for liquidity provision.

Risks

Ondo Finance is a relatively new protocol, but they have received three audits by outside firms. No critical issues were found, and only one high risk issue was found.

Fei Protocol itself holds over $1b in protocol controlled value and has been holding its peg.

Fei Liquidity

FEI has decent liquidity on Uniswap. You can see the TVL here

Pair Tick TVL Volume 24h Vol 7d
FEI/USDC 0.05% $18.12m $9.39m $107.81m
DAI/FEI 0.05% $17.21m $2.14m $28.54m
FEI/USDC 0.3% $2.79m $0.00 $0.00

Fei does not have significant liquidity on SushiSwap.

Let’s Discuss

I’d like to hear from the community what they think of this proposal. In particular I’d like to hear your thoughts on:

  • Risk? Is there some subtle financial risk here? Is there a way PT would get the short end of the stick?
  • Is 2-3% fee worth the liquidity provision?
  • If you like the idea:
    • how long should the term be?
    • how much should we LP?
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Would love PoolTogether to be part of the LaaS launch group, and look forward to getting a FEI prize pool soon!

I see you included Univ3 stats. The liquidity on Uni-v2 is significant, and we would deploy the AMM pair there (Univ3 deployments are on the roadmap, soon tm)

https://v2.info.uniswap.org/token/0x956f47f50a910163d8bf957cf5846d573e7f87ca

FEI-TRIBE liquidity: $341,390,982
Volume 7d: $7,560,366

FEI-ETH Liquidity: $302,587,055
Volume 7d: $55,153,591

Also, the Tribe community voted to provide TRIBE incentives for the launch group participants! The PoolTogether DAO and users would be eligible to participate in the vaults and earn rewards. :relaxed:

https://snapshot.org/#/fei.eth/proposal/0x6cb44737ef462019d65d33b4164684a6786e6c8d0222d4caa55952d067789846

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I don’t think this is a good deal for Pooltogether and would much rather pursue cheaper/free options. I also think we should be focusing more liquidity on L2’s and not increasing L1 liquidity when gas prices are this high. Maybe some exchanges want to pay us for making them the primary dex on the various L2’s?

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LaaS has no upfront costs, can generate revenue for your DAO, and is much cheaper than traditional liquidity mining. If trading fees exceed any IL and the 2% fee, there would be net profit. Moreover, the TRIBE rewards are an extra incentive offering ~43% APY subsidy. In most normal circumstances, this partnership would be profitable for PoolTogether, while doubling the liquidity for POOL.

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I’m not sure this makes much sense for us right now. the IL risk is quite high with POOL price at such a low level.

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I’m not terribly worried about impermanent loss; that would only be problematic if the token value tanked after the program has ended.

To illustrate the IL for everyone:

  • Imagine we joint LP for six months. Say 100 FEI and 10 POOL, for simplicity.
  • In that six months, the value of pool doubles. This would mean the LP balance would shift so that there is less POOL (numerically) and more FEI. Let’s say the pool is now 100 FEI, 5 POOL.
  • After the six months expire, FEI gets back their deposit and PT gets back our POOL. PT still has $100 worth of POOL, but there are only 5 now.
  • If the value of POOL tanks, PT now has less than it did before.

So IL is only problematic in the event that POOL tanks after the LP program ends.

The benefit of the LP program is that it reduces volatility of the token price. This may be useful in combination with our Olympus Bonds program, so that our price stays strong and keeps the bond price high.

Right now, the POOL pair has so little volume that no bonds have been sold. You can check out the bonds with that link.

If we can reduce the volatility and manipulability of the POOL token, our bonds could fetch higher value.

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This is an interesting idea, I don’t know if I like it, I do know I don’t hate it.

To me this doesn’t seem to align with what we’re trying to accomplish with v4. v4 is all about multi-chain and this is still focusing on Ethereum. No doubt ETH needs love and liquidity, but I don’t see how doing this gets POOL into the hands of the community where you want governance tokens.

I’m barely on board with this as it could possibly help in stabilizing the token price volatility which in terms helps with the Olympus Bonds.

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The Ondo Finance and Fei Protocol LaaS programme is quite interesting. I’ll try to give a very high-level view of how Ondo operates, potential benefits, and any possible concerns for the PoolTogether community.

Vaults, Subscriptions, and Positions

Anyone can review the Ondo Finance docs for a more in-depth review of the protocol. For simplicity sake, I’ll just cover the essentials using Ondo’s terminology.

If anyone here is familiar with BarnBridge and their SMART Yield product, then you’ll be able to get a handle on Ondo. While BarnBridge uses lending/borrowing protocols as the underlying yield source/money lego, Ondo Finance uses AMMs as the yield source. With AMMs, pairs can benefit from periods of volatility and increased trading, and if there are yield farming incentives (e.g., on SushiSwap), the vault can benefit from subsequent higher yields.

With the LaaS programme, FEI is put into the fixed-yield position, or senior tranche, and for PT, POOL would be put into the variable-rate position, or junior tranche. The pair is then paired and put into a Uniswap V2 pair for a subscription period, or a fixed timeframe where the pair is in an LP until a set maturity date.

The pair then earns trading fees during the subscription period. At maturity, the pair is removed and the interest is split between the fixed-rate and variable-rate positions. The interest rate the fixed-rate position earns is referred to as the “hurdle.” Based on the proposal, I’m guessing the hurdle is 2-3%, which would mean any additional interest earned from trading fees would be earned by the variable-rate position that POOL would take.

Considering there is a ~43% APY subsidy, as @bpm6867 pointed out, this would benefit PoolTogether by deepening liquidity and adding value to the treasury. We can focus on the 2-3% hurdle, but this would be taken from trading fees. At best, the treasury earns more in trading fees + TRIBE subsidy. At worst, the TRIBE subsidy offsets any cost to the protocol and there’s a negative return + the 2-3% fee. The price of POOL would have to absolutely sky rocket or plummet for a catastrophic situation. You can refer to the Variable Yield Returns section in the docs. Keep in the mind the comparison here is a price differential against ETH in the chart.

Difference from Olympus DAO

With Olympus Pro, PoolTogether sells POOL in exchange for LP tokens. So far, it hasn’t been successful. There’s a 3.3% fee levied for the bond sale through the Olympus Pro platform. Incentives for the bond sale don’t seem to be aligned given the POOL sale price vs. current market price. That’s another topic altogether.

With LaaS, PoolTogether pays nothing up front and pays the 2-3% after the subscription period ends. Given even a small amount of trading with a 5-8% APY, the treasury comes out ahead with more POOL + the TRIBE subsidy.

Impermanent Loss Risks

Impermanent loss is a risk, and IL + the 2-3% hurdle could cost PoolTogether more for the LaaS programme over a one year period. Let’s say this programme ran for 6 months. Then the fees would be 1-1.5% + IL. To offset this number, we would add the TRIBE subsidy of 21.5% for a 6-month period.

You can review the expired vaults here. All expired vaults had a subscription period of 1 month.

Safe to say the TRIBE subsidy would offset any financial downside here.

Smart Contract/Technical Risk

Ondo Finance has been audited by three separate firms. Everyone can review the Quantstamp Audit (Sept. 2021), Peckshield Audit (May 2021), and Certik Audit (April 2021) in Ondo’s docs, which has already been linked above but it’s included here for reference. To my knowledge, there isn’t an active bug bounty programme for Ondo Finance.

On 28 October, there was an announcement about a bug in one contract that required a rebalance where CVX and YGG were sold for ETH. This issue resulted from the bug, which incorrectly swapped for CVX and YGG. You can see the reference to that event from Ondo’s Twitter.

Now, I’d like to point out that I really like this programme and I think it’s a fantastic idea. We all know Uniswap V2 is battle tested, but Ondo Finance is a little more than three months out from launch.

The Ondo <> Fei partnership for the LaaS initiative is amazing, but I’d like to hear greater insight from Ondo on future approaches to rebalance transactions should a similar event happen, and if there are any plans to use crowd-sourced audit platforms like Code 423n4 in the future. Any insight on a bug bounty programme with a platform like Immunefi would also be appreciated.

While I do think this is a great programme, due diligence and caution with treasury funds always take precedence before any funds are deploy for a fixed subscription period.

Questions

In addition to the questions above, it would be prudent to know:

  1. What projected fees would be for a POOL-FEI pair given a 2-3% hurdle for the fixed-rate position. Projected rates are just an estimate but greater insight into the potential upside w/o a subsidy would be necessary before action can be taken, in my mind.

  2. Have any other protocols signed on for the LaaS programme? And if so, what length of time/amount of liquidity have they agreed to?

I’d be eager to hear other’s thoughts on this. With the right allocation, it would be a worthwhile experiment.

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We have 3 confirmed (2 pending) launch partners going live next week. The amounts range from 4-5M and will go for 6 months with multiple overlapping vaults that would reset monthly.

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Hi @BraveNewDeFi thanks for the write-up and would love to have you guys participate in LaaS. We have not done Code432n4 and don’t have a bug bounty set up yet but are planning to do both in the coming weeks. We have admin functionalities behind a multi-sig to rescue tokens or perform override rebalances in the event of any future potential bug.

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This seems like a no brainer for us to do! I’m fully supportive.

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I’m not sure what you mean about a cheaper/free option? This option is better than free for us as they are providing TRIBE rewards to POOL LPs. What would be a better option?

By doing this on Ethereum we no longer need to incentives LPs on Ethereum and can move those to other chains. It should improve overall liquidity.

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I think you’d need to see this as a separate thing from our efforts around V4. The way I see it:

  1. We know for a fact we want at least some liquidity on Ethereum
  2. This is undeniably a better way to get that than we are currently doing (we don’t need to distribute POOL, LPs can get TRIBE rewards, etc.).

This doesn’t take away anything from our other goals that you stated. In fact, I think this frees us up to put more efforts towards them.

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The major risk when LPing on an AMM is that the LP position becomes worthless if either of the tokens in it go to zero.

If FEI loses its peg and becomes worth close to $0, our LP position would then consist only of FEI, with all of the POOL being removed through arbitrage.

As such, it would be important to do due diligence on the FEI stability mechanism and how likely it is to de-peg. As it’s a relatively new stablecoin, I’d be very cautious here.
I have never looked into the stability mechanism of FEI myself. @bpm6867 Has the game theory of FEI been thoroughly studied? What oracles are used?
There have been a number of algorithmic stablecoins that have depegged horribly.
Most notably, IRON finance.

Assuming that everything works as advertised, this seems like a great deal to me.
The 3% fee should be greatly outweighed by the TRIBE subsidy.

One small thing worth noting is that having the majority of our liquidity on the POOL/FEI pair means that people trading from ETH will need to pay 0.6% in trading fees rather than 0.3% on a POOL/ETH pair.

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This just seems to contradict what we were doing in the OHM bonds deal in trying to buy back some of our Ethereum liquidity. Maybe you’re right and the TRIBE rewards do make this a decent deal but as @Torgin just pointed out this also increases the trading fees for users trading from ETH. Pairing with a stable coin also means if POOL pumps it would be sold off for FEI which means we are kind of betting against ourselves by pairing with a stablecoin. My idea of a cheaper/better option would be using collateral to raise funds and continue what we started with the OHM deal by buying back much of the LP on Ethereum. You are right though that the TRIBE rewards may offset things, I just don’t like relying so heavily on TRIBE/FEI’s success when we can own much of that liquidity ourselves and not have to rely on anyone.

My main question would be:
If the plan is to add the FEI deal while continuing to slowly cut back LP rewards while buying back the UNI POOL/ETH LP to be held buy treasury. I could probably get behind that.
Or
If the plan is to add this and cut LP rewards immediately and think that this will just replace what we have in place then I don’t think it’s a great plan. UNI POOL/ETH LP will be dumped and we will be left paired with a stablecoin instead of paired with ETH, which is not ideal in my opinion.

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This just seems to contradict what we were doing in the OHM bonds deal in trying to buy back some of our Ethereum liquidity.

To me it doesn’t contradict it. It complements it. If the proposal was to stop the Olympus program and do this instead I could see that, but that’s not the proposal. If anything this should make the Olympus program stronger because it would reduce volatility making it more attractive (as others noted).

My main question would be:
If the plan is to add the FEI deal while continuing to slowly cut back LP rewards while buying back the UNI POOL/ETH LP to be held buy treasury. I could probably get behind that.
Or
If the plan is to add this and cut LP rewards immediately and think that this will just replace what we have in place then I don’t think it’s a great plan. UNI POOL/ETH LP will be dumped and we will be left paired with a stablecoin instead of paired with ETH, which is not ideal in my opinion.

On this point, I don’t have a super strong preference. But my main point is that doing this frees us up to do whatever we want! We could 1) keep LP rewards so LPing just gets better or 2). Move LP rewards to Polygon so we have better liquidity on multiple chains or 3). Move LP rewards to increase the Olympus Pro program or 4). just end LP rewards

We really could do whatever we want! At this stage this is a way for us to get MORE liquidity and more value into the DAO while distributing LESS POOL. What we want to do with that savings is up to us!

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I am in support of this proposal. As others pointed out, it brings clear benefits in form of:

  • Likely supporting the so far unsuccessful Olympus bond program
  • Being a profitable use of treasury thanks to TRIBE rewards
  • Supports liquidity of the POOL token (although with the drawback of higher swap costs as highlighted by @Torgin)

My biggest concerns are

  • Audits: 2/3 are outdated, involving Code432n4 would provide way more comfort
  • FEI peg: not knowledgable enough, but agree with @Torgin’s concerns. This can however be mitigated by not taking a too large amount

Our first attempt to own liquidity instead of renting it hasnt been successful yet. Supporting liquidity in the meantime through LaaS with a reasonable amount, taking the 3% fee into consideration, makes sense to me.

Special thanks to @BraveNewDeFi for the extremely helpful post.

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I’m in favor of supporting the proposal and the listed benefits it brings. The Olympus bond program needs some support, profitable use of the treasury is a huge plus and the more POOL liquidity the better.

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After the discussion here between a lot of Poolers whose opinions I highly value, I’m quite a bit more on board with this. Let’s get the Pool Fei Tribe party started!

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Thank you all for your valuable insight and taking your time to

I understand this will only be positive for liquidity and would better the capital efficiency.
I feel that classic LPing isn’t a sustainable option and is expensive, so all in all I am in favor of going the direction of DeFi 2.0 with the Fei partnership.

If we have the OlympusPro and Fei programs running alongside - how do we find out their impact on $POOL? Will the community be able to do the proper analytics? Will analytics be supplied by Olympus & Fei and are we able to interpret those correctly?

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