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:
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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.
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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.