PTIP-45: Fei / Ondo LP Partnership

Leighton · November 16, 2021, 11:35pm

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:

A low cost way to increase POOL liquidity on Uniswap V2
An opportunity for the protocol to begin accruing TRIBE and activating otherwise dormant POOL tokens (around ~43% APR distributed in Tribe tokens)
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:

PoolTogether would place X amount of POOL tokens into an Ondo Vault .
Fei Protocol would place a corresponding amount of FEI tokens into the same vault.
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After a pre-determined length of time, the vault is withdrawn and both parties get their tokens back.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

nallman.ondo · November 16, 2021, 11:55pm

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.

TheRealTuna · November 17, 2021, 12:45am

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.

Leighton · November 17, 2021, 4:45pm

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!

bpm6867 · November 17, 2021, 5:00pm

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

Brendan · November 17, 2021, 5:52pm

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:

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%)
Three months pass
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.

Leighton · November 18, 2021, 4:33pm

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!

Torgin · November 18, 2021, 5:12pm

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.

underthesea · November 18, 2021, 6:24pm

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?

Leighton · November 18, 2021, 9:36pm

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?

bpm6867 · November 24, 2021, 11:48pm

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

nallman.ondo · November 24, 2021, 11:49pm

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

BraveNewDeFi · December 7, 2021, 7:22pm

Analysis of the Fei Protocol <> Ondo Finance LaaS Program

The Treasury Working Group will provide a review of Fei Protocol, Ondo Finance, and the implications for PoolTogether if 1.5mm in POOL is allocated for the LaaS program.

In each section, we’ll talk about the core protocol mechanics for both Fei and Ondo, the use of oracles in each protocol (if applicable), security measures taken by each protocol, and any underlying protocols used in the LaaS program.

If you’d rather not read the analysis, you can scroll to the bottom and read the TL;DR summary.

Fei Protocol Overview

Fei Protocol was launched with the mission of creating a decentralised stablecoin that is backed by decentralised assets held as protocol controlled value (PCV), or assets that cannot be redeemed by users. On October 6, 2021, Fei Protocol announced Fei v2, which provides upgrades that will improve the stability, efficiency, and scalability of FEI within the DeFi ecosystem. Fei v2 is slated for launch on December 15. This launch will be more of a rollout according to storm | Fei.

With Fei v2, users are able to redeem FEI for ETH or DAI on a 1:1 basis. The functionality to redeem for ETH was implemented after FIP 26 was passed, which enabled users to redeem FEI to ETH with a 0.5% spread. Anyone can go to Fei Protocol and exchange FEI for ETH; there is a limit to how much ETH is available on this page, which is displayed in the dApp. Fei v2 targets 100% reserve ratio, which is set through governance. As new FEI is minted, reserves are brought closer to the 100% target ratio.

We outline the makeup of Fei’s PCV in the sections below, but there are a variety of assets held by the protocol that back FEI. Of the assets held by the protocol, 75.5% are productive assets with 15.8% in total provided as liquidity across Uniswap V2 and Tokemak; ETH and DAI deposited in Compound make up 30.3%; ETH deposited in Aave make up 20%; and stETH makes up 9.4%.

A Balancer V2 investment pool will be used to manage volatility risk, though this pool is not yet live. Balancer’s Smart Pools allow for the creation of dynamic pools that can serve a variety of use cases. In Fei v2, a Balancer Smart Pool will be used to rebalance into stable assets like DAI/RAI algorithmically as the collateralization ratio moves closer to 100%. As the collateralization ratio moves higher, the pool can rebalance into other assets like ETH, stETH, DPI, AAVE, etc. The Balancer Smart Pool integration is expected in Q1 2022.

This method replaces the original bonding curve mechanism used when Fei Protocol first launched. By using a Smart Pool and holding a diverse amount of assets, with ETH being the majority of the backing, Fei Protocol has a strong system in place to ensure FEI does not de-peg. The PCV includes a variety of low-risk productive assets, which allows the PCV to steadily grow over time.

De-peg Risk/Use of Oracles

Fei Protocol uses Chainlink oracles for price feeds. In the Fei Protocol documentation, they show addresses for ETH-USD, FEI-ETH, FEI-USD, DAI-USD, DPI-USD, RAI-ETH, and RAI-USD Chainlink wrapper oracles. According to Eswak | Fei, the protocol only uses Chainlink oracles. In this comment, he also says that the protocol has limited proxy contracts and indicates that contracts are replaced as the protocol is upgraded.

Given that Fei uses decentralized price feeds and primarily uses immutable contracts, the protocol has robust protections against potential attacks. Their upcoming use of Balancer Smart Pools will enable the protocol to algorithmically rebalance into stable assets as the collateralization ratio approaches 100%. When coupled with 1:1 redemption for ETH or DAI, the peg mechanism appears to be quite strong. The greatest threat to a decentralised stablecoin is a potential situation where the stablecoin becomes undercollateralized, given Fei’s model. The upgrades coming with Fei v2 will provide robust protection against a de-peg event.

However, in a situation where Fei de-pegged, PoolTogether would see considerable losses. It would be highly improbable that FEI would go to zero unless a catastrophic failure in the protocol were to occur where the PCV was completely lost. In a more realistic scenario, FEI would de-peg according to the collateralization level.

With the information included in Fei’s v2 posts, the model in place should provide robust protection to ensure the FEI achieves a 1:1 peg.

Security

The protocol has been audited previously. Audits were conducted by OpenZeppelin and ConsenSys Diligence. Fei Protocol has a bug bounty managed by Immunefi with a critical vulnerability payout up to $1,000,000 USD.

This shows that Fei Protocol has taken steps to ensure the protocol is secure. With Fei v2 close to launch, additional audits are underway for the v2 upgrades.

Fei Supply

Total supply of FEI is 705,775,968 with 365,514,237 FEI owned by Fei Protocol and 340,261,731 FEI not held by the protocol.

Fei Protocol Analytics, PCV, and Protocol-owned FEI

You can review Fei Protocol analytics here: Fei Protocol

This page provides a breakdown of the protocol controlled value (PCV), which are assets held by the protocol that are not redeemable by users. Below is a breakdown of Fei’s PCV:

Source: Fei Protocol

There’s also a breakdown of the Protocol-owned FEI, which is included below. Note that 42% of the $365.51mm is allocated to FEI-ETH LP on Uniswap V2. There’s $308,803,847 USD in total liquidity with 154,494,957 FEI paired with 32,626 ETH.

Source: Fei Protocol

Ondo Finance Overview

Disclaimer: sections of this review were included in a previous comment on the LP Partnership with Fei forum post. Certain information has been changed, updated, and included to provide a more in-depth review for this proposal.

We will 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, we will 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 @leighton’s comment on the proposal, Fei Protocol gets back all of the FEI plus a fee equal to 5% annualized APR on the Fei contributed.

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.

TRIBE Rewards/Fixed-rate hurdle/IL Review

We consulted with @bpm6867 and confirmed that TRIBE incentives will be provided for the first three months, or 13 weeks, of the LaaS programme. The programme started one week ago, so PoolTogether would, at best, be eligible to earn at least 100,000 TRIBE if POOL/FEI were deployed within the next two weeks. Brianna indicated the 10AP per 1mm in liquidity translates to 10,000 TRIBE per week in rewards. Fei Protocol’s Allocation Points are used to determine the weight, or allocation, of where TRIBE rewards are distributed on a per-block basis. If PoolTogether were to deploy $1.5mm in POOL, then the protocol would earn 15 AP.

To be more precise, Fei Protocol has a schedule for TRIBE emissions, which decays over time. The LaaS programme started on 29 November: assuming 13 weeks equals 91 days with the assumption that PoolTogether would deploy POOL/FEI on 20 December, the protocol would earn TRIBE rewards for 69 days total, which would translate to the values included in this Google Sheet or the image below with the current price (at time of writing) of $1.04/TRIBE:

The total return would be 7.33% (105,704.217 TRIBE valued at $109,932.59) over 69 days; annualised, this would be 38.77% APR. While PoolTogether would only earn TRIBE rewards for 69 days of the subscription period, subscription periods are monthly, so we need to assume a three month subscription to project the cost of the hurdle.

With a hurdle at an annual cost of 5% APR, PoolTogether would pay Fei Protocol $18,698.63 assuming a subscription period for 91 days. If PoolTogether experienced impermanent loss (IL) totalling 6.08% ($91,233.96), this would leave the protocol net zero when TRIBE rewards are considered. With a higher TRIBE price, this leaves more room for IL; with a lower TRIBE price, it leaves less room.

Now, consider that PoolTogether is paying 200 POOL per day to Uniswap V2 LPs. Given 91 days at 200 POOL per day, we’d be paying 18,200 POOL for liquidity, which at current prices ($6.95/POOL) is equal to $126,490.

Take the $126,490, add it to the $91,233.96 in TRIBE rewards after the hurdle, and PoolTogether would have to experience $217,723.96, or 14.51%, in IL to equal the current cost of liquidity.

What are TRIBE tokens and what can we do with them?

TRIBE rewards are a safeguard that could cover our losses if significant POOL is lost in the POOL-FEI LP. TRIBE is the governance token of Fei Protocol that is used to manage PCV. How can we best manage the TRIBE rewards we would be receiving?

Selling TRIBE For POOL. If PoolTogether decides to go ahead with this proposal, one option would be to sell the TRIBE we are earning. If our plan is to sell the TRIBE back for POOL, then this may not be seen as building toward a mutually beneficial relationship between our DAOs. PoolTogether should consider how the sale of TRIBE would potentially impact partnerships with other DAOs. PoolTogether’s actions could be approached in a way that can benefit both parties and selling our TRIBE rewards could be seen as a non-ideal scenario for Fei Protocol.

Using our TRIBE As Voting Power and to earn interest. Instead of selling our TRIBE rewards, we could become an active participant in Fei Protocol governance and use our TRIBE tokens to help shape our relationship in a way that could benefit PoolTogether. Fei Protocol is currently in the process of negotiating a merger with Rari Capital, which could be a further reason to build this relationship as PoolTogether could use TRIBE to vote in favour of a whitelisted Fuse pool where POOL and/or tickets could be used as collateral to borrow other crypto assets. Establishing PoolTogether in the Fei Protocol community could be a strong path forward to growing POOL and the PoolTogether community. Getting involved in other protocol’s governance is a way to help grow our ecosystem.
PoolTogether could potentially stake TRIBE or TRIBE/FEI in an LP with the ability to vote via snapshot in TRIBE governance proposals. Currently 31.7% on TRIBE staking and 49% on the LP. Standard liquidity provision risks apply. If TRIBE price were to go on a run, the LP would be selling off our TRIBE tokens to FEI. If TRIBE were to tank, we would be buying more on the way down. If one of our goals is to secure voting power, it would probably be wise to stick with the safer and still very lucrative single-sided option.

Potential Benefits of LaaS

Creates deeper liquidity for POOL on Uniswap V2
May result in a financial gain for the treasury
May allow the protocol to transition away from POOL drip for LPs in the future
Opens the possibility for further collaboration with Fei Protocol

Potential Drawbacks of LaaS

Could result in a financial loss for the treasury
TRIBE rewards could drop in value
Variable-rate position exposes POOL to more risk

TL;DR | The LaaS programme is beneficial for PoolTogether and complements the Olympus Pro bond sale initiative. PoolTogether would earn TRIBE incentives for participation in the programme, but these rewards only last for the first 3 months of the programme. Assuming PoolTogether and Fei deployed POOL/FEI totalling $3mm in liquidity on 20 December: the total return would be 7.33% (105,704.217 TRIBE valued at $109,932.59) over 69 days; annualised, this would be 38.77% APR.

With a hurdle at an annual cost of 5%, PoolTogether would pay Fei Protocol $18,698.63 assuming a subscription period for 91 days. If PoolTogether experienced impermanent loss (IL) totalling 6.08% ($91,233.96), this would leave the protocol net zero when TRIBE rewards are considered. With a higher TRIBE price, this leaves more room for IL; with a lower TRIBE price, it leaves less room.