The blockchain industry is rapidly evolving, DeFi especially. I have been researching liquidity incentive programs across the industry and have been intrigued by a new liquidity mining incentive program, Protocol Owned Liquidity and Bonds.
Right now, BALN is inflated on a daily basis to pay liquidity providers. Balanced just straight up gives away money. One way of thinking about this is that Balanced is “renting” liquidity. When BALN tokens eventually stop inflating so much, the liquidity that is there right now may move on to greener pastures with higher yields, projects that are newly launched, etc.
Basically, we spend a lot of money on liquidity, giving away BALN every day, but there’s no guarantee it will stay.
Protocol Owned Liquidity. This means that the Balanced DAO Fund will supply liquidity to its own pairs. If Balanced owns the liquidity, then Balanced gives away less BALN for the same results, as it will be mining its own tokens (evenutally, we could just stop giving out BALN to liquidity providers if we owned enough liquidity).
This can be achieved in two ways:
1.) Use the funding we already have in the DAO Fund. This is a great first step and shouldn’t be all that hard to do. See our balances here.
2.) “Bonding” mechanisms, as pioneered by Olympus DAO. Detailed information on how Olympus manages Protocol Owned Liquidity can be found here. Long story short, instead of giving away BALN for free to liquidity providers, the Bonding structure has the DAO Fund sell BALN at a discount in exchange for LP tokens.
It’s almost always focused on what they call “pool2”, which is the governance token (BALN) against the native protocol token (ICX). Initiatives like this tend to bring in more liquidity providers, therefore bringing more ICX into Balanced.
For example, Balanced would buy $100 worth of BALN/sICX LP tokens in exchange for $105 worth of BALN, but the discounted BALN would be vested over a period of time. Let’s walk through an actual example:
Bob starts with $100 of sICX. Bob wants to participate in the Balanced Bonding program to purchase BALN at a discounted rate.
- Bob trades half his sICX for BALN and now has $50 of sICX and $50 of BALN
- Bob supplies liquidity to the BALN/sICX liquidity pool and receives 100 LP tokens, worth about $50 of BALN and $50 of sICX
- Bob sells his 100 LP tokens to the Balanced DAO Fund in exchanges for $105 worth of BALN
- The $105 worth of BALN will be vested for 7 days (vesting schedule is just an example, tho Olympus commonly uses 7 days)
To the DAO, that’s a net loss of $5. However, this is exponentially better than just straight up giving away money the way it does now. Not only that, the DAO is an LP, so it is also earning trading fees as all LPs do.
In summary, I offered two options. Option 2 is a lot more work I’d say, something that needs fine tuning and a new user interface to allow people to sell their LP tokens to Balanced. Option 1 is something we could act on shorter term. The DAO can start supplying liquidity on Balanced and earning the BALN that it’s giving away, keeping some of it off the market at least while also creating some permanent liquidity, which is the ultimate goal. We don’t want to be “renting” liquidity forever, it’s better to buy and hold it within the DAO.