PoolTogether

PTIP-45: Fei / Ondo LP Partnership

PTIP-45

Simple Summary

Work with Fei Protocol and Ondo to increase POOL liqudity and start earning TRIBE tokens in the PoolTogether protocol.

Motivation

Fei Protocol has approached us and offered a service called Liquidity-as-a-Service. This service gives us three things:

  1. A low cost way to increase POOL liquidity on Uniswap V2
  2. An opportunity for the protocol to begin accruing TRIBE and activating otherwise dormant POOL tokens (around ~43% APR distributed in Tribe tokens)
  3. A partnership with a leading protocol

Rationale

This proposal would significantly improve liquidity for the POOL token on Ethereum. Current liquidity is $2.8 million so adding $3 million would more than doubling it. Importantly, it would do so without us needing to distribute more POOL rewards to LPs and instead we would actually be increasing our protocol controlled value by starting to earn TRIBE rewards. So this proposal continues to move us towards being less reliant on POOL distribution and increasing overall protocol controlled value. Having this would give governance the option of continuing the POOL LP rewards, or ending them, or moving them to a different blockchain. This proposal takes no position on what should be done but simply notes it is now possible.

Exact returns will depend on price movement and volume to the pair during the terms of the arrangement.

Technical Specification

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After a pre-determined length of time, the vault is withdrawn and both parties get their tokens back.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 fee equal to 5% annualized APR on the Fei contributed.

Total liquidity for the initial term $3 million for 3 months. Half of that would be in Fei and half in POOL. Assuming POOL = $10 this would mean 150,000 POOL tokens contributed by the protocol.

Status

This was extensively discussed here.

  • Support the Fei LP Program
  • Oppose the Fei LP Program

0 voters

1 Like

This all looks great – excited to see the interest @Leighton!

One small point of clarification for the community is that the amount of POOL returned at maturation of a particular vault may be more or less than the original amount contributed. The variable tranche – which POOL would go into – receives all of the returns, whatever those may be, after the fixed tranche is paid back. I think we all understand this especially looking at the discussion on the other thread just want to make 100% sure.

We’d also suggest you re-subscribe in 6-8 weeks in new vaults to ensure there is sufficient exit liquidity for the first vault. The Ondo smart contracts can perform the rebalance at maturity of a vault – when FEI is sold for POOL or vide versa – through any Uni v2 pool (assuming we create the FEI-POOL LP on Uni v2), including by routing through your existing ETH-POOL LP then through the ETH-FEI LP. However, we think it’s best to kickstart this program for some planned continuity of liquidity for the FEI-POOL LP. We’d suggest reserving at least half of the total liquidity for the program for vaults after the first one.

1 Like

Do we have any info on how the tribe rewards are structured?
That is kind of the determining factor for me as we have the USDC to provide this liquidity ourselves if we wanted. I’d have to be sure the TRIBE rewards were going to be enough to offset the fee we are paying.

2 Likes

I was going off of @bpm6867 earlier comment that APR from tribe is projected to be around 40%. I’m not sure exactly what the underlying numbers are on that but perhaps she can guide us forward!

It’s about 10,000 TRIBE per week per 1M in liquidity.

The variable tranche – which POOL would go into – receives all of the returns, whatever those may be, after the fixed tranche is paid back

We’d also suggest you re-subscribe in 6-8 weeks in new vaults to ensure there is sufficient exit liquidity for the first vault.

So you need more liquidity to satisfy the exit of the previous liquidity?

The Ondo smart contracts can perform the rebalance at maturity of a vault

So rebalancing is where one token is sold for another, and that is why you need more liquidity

My understanding of the Ondo system is becoming clearer. I want to re-iterate it to you for my own clarity:

  1. FEI and POOL are entered into an Ondo vault and LP’d into Uniswap. The FEI portion is a 5% annualized APR senior tranche. This means they expect to get back their FEI plus 1.25% over the three month period. (3/12 * 5%)
  2. Three months pass
  3. At the end of the period the LP position is withdrawn and the vault is “rebalanced”. If there is less FEI than at the start, POOL will be sold until the 1.25% fee is met. If there is more than 1.25% growth in FEI, then the excess FEI is sold for POOL.

Possible Scenarios

Here are some scenarios as a thought experiment to help myself understand the behaviour.

Value of POOL Token goes up

If users are buying POOL, then the pair will shift to become FEI-heavy. When the vault matures PT will receive the POOL back. If the price has gone up significantly then some FEI may even be sold for POOL.

Value of POOL token stays the same

When the vault matures 1.25% worth of the POOL token will be sold on our existing markets.

This proposal is for $1.5m. 1.25% would be $18750. The 2% depth of our existing Uniswap market is $56,000. Ballpark I’d imagine the price impact of rebalancing the vault would be about 0.5%.

Value of POOL token goes down

If the POOL token goes down, then people are selling POOL for FEI. The vault will need to dump POOL. Let’s say there is 5% less FEI at maturity; the vault will need to sell 6.25% of POOL to satisfy the rebalance.

6.25% of $1.5m is $93750. Given our +/-2% depth of $56k on the current UNI V2 pair, this would hurt the token price by 5% when the vault rebalances.

Summary

Price impacts:

  • If POOL stays the same: -0.5% price impact on vault maturity
  • if POOL goes down: -0.5% or more on vault maturity.
  • If POOL goes up: positive impact on POOL price.

Notes on Ondo:

  • Senior tranche impacts the market upon vault maturity. This is why they want us to re-subscribe (create another vault)

It’s really too bad the senior tranche has to exist at all. I would prefer a straight token swap with Fei rather than use a mechanism that impacts our market when the liquidity exits.

Because of the senior tranche, this program needs liquidity to end. This is why they want us to re-subscribe. It’s not ideal.

Fortunately, there are healthy TRIBE incentives. If we need to, we can sell the TRIBE at the maturity of the vault to compensate for price impact. This is our safety net.

We could also opt for a much longer term at a lower APR. I believe other teams did it for 6 months at 3% APR.

2 Likes

Great analysis! Thanks for this Brendan.

It does seem net / net though. Our worst case scenario is highly mitigated – because we still have the TRIBE token. And our best case scenario is all upside!

I think before we do this with significant amounts of money, we need to study the risks more. Specifically, oracle and depegging risk of Fei as well as any risks associated with Ondo (haven’t looked into what exactly Ondo does).
I haven’t seen any evidence of risk research, maybe I missed it and someone has looked into it deeply?
This could be something for the treasury working group to do.

1 Like

I agree with @Torgin, I think the risks should be carefully assessed. I believe maintaining Pool Together’s squeaky clean reputation is paramount in these types of new opportunities.

150,000 POOL is a pretty large sum for what I feel is being proposed as an experiment. I expect our trading volume on mainnet to be decreasing as we have reduced emissions 90%. As someone else pointed out FEI pairing means an extra step for most swaps.

Can the program be for a smaller amount?

1 Like

I think $1 million is the minimum. In terms of trading volume, it’s hard to identify cause vs. effect. I know there are people who don’t trade it because the liquidity is too low. Regardless of volume, having better liquidity is just better because you don’t have price manipulation (relevant for things like Bonds).

I do agree though, risk analysis is important. I believe @nallman.ondo brought it up in the other thread but perhaps he can also post here… Nathan, could you give us the latest in terms of audits / security for the Ondo smart contracts?

Also @bpm6867 what is the post resource for studying the pegging mechanism around Fei and any risks associated with that?

FEI is 1:1 redeemable (this is the same model of centralized stablecoins like USDC) and ~400% over collateralized.

You can read more about Fei v2 and the peg mechanism here: Introducing Fei v2. The vision for Fei Protocol is to be a… | by Joey Santoro | Fei Protocol | Oct, 2021 | Medium

1 Like

You can find Ondo’s audits here (from Quantstamp, Peckshield, and Certik): Audits - Ondo Finance

1 Like