Summary

This proposal introduces the creation and implementation of staked synthetic tokens (S-Tokens) within the Bao ecosystem. S-Tokens will be yield-bearing versions of synthetic assets like baoUSD and baoETH, aiming to maximize capital efficiency, offer high-yield savings, and enhance liquidity across Bao Lend Protocols through innovative Re-Lending strategies.

Background

What is re-lending: Re-lending involves using a single staking deposit to back and insure multiple lending market deposits, earning yield from each and, in exchange, protecting the protocol from bad debt.

This proposal initially covers sbaoUSD and sbaoETH, with future staked tokens following a similar model.

Yield-bearing tokens have become essential in the growth of DeFi projects. For example, DAI’s liquidity surged with sDAI’s introduction, while USDe experienced rapid growth thanks to the yields available through sUSDe. These cases demonstrate the demand for yield-bearing instruments and their role in driving liquidity and user participation.

To become more competitive, Bao must implement staking wrappers for pegged tokens. By launching S-Tokens with unique Re-Lending strategies, Bao will offer an exceptional high yield product to help attract users to the ecosystem.

This approach will boost capital efficiency and increase the yield potential of synthetic assets, making Bao’s offerings highly competitive in the DeFi space.

Goals

The primary goals for launching S-Tokens are:

• Maximize Capital Efficiency: Enable synthetic assets to generate yield from multiple sources.
• Enhance Lending Market Liquidity: Use S-Tokens to provide liquidity for Bao’s lending markets.
• Achieve Competitive Borrow Rates: S-Tokens can enable more attractive borrow rates by distributing liquidity across multiple lending sources.
• Attract and Retain Users: Offer high-yield synthetic assets to draw participants to the Bao ecosystem and encourage long-term asset holding.

Success Metrics

• Liquidity Growth: Increase total value locked (TVL) in S-Tokens and related lending markets.
• Yield Performance: Competitive and stable yields for S-Token holders compared to other DeFi protocols.

Proposed Solution

To increase the effectiveness of the bootstrapping phase, all three phases should be completed as quickly as possible. In addition, it will be essential to roll out new lending markets before the end of the bootstrapping phase so that real yield can replace the subsidized yield.

Phase 1: Bootstrapping Liquidity

Objective: Use project incentives to bootstrap initial S-Token liquidity.

Outcome: Attract liquidity and offer immediate yield opportunities while preparing for Phase 2.

• Up to $30,000 will be allocated for sbaoUSD liquidity bootstrapping, and up to 10 ETH for sbaoETH, distributed over three months.
• The Council of Guardians will manage weekly incentive deposits to achieve an initial 20% APR target, based on the allocated budget.

Phase 2: Re-Lending with S-Token Backing

What is a lendFED: LendFED is a liquidity mangement contract that supports minting and burning of synths to a specified market.

Implementation: LendFED contracts will be deployed for each lend market, allowing baoUSD and baoETH to be minted and burned into each market based on sbaoUSD and sbaoETH deposits and the soft and hard bounds set for each market.

Why Are Soft and Hard Bounds Needed?

Soft and hard bounds ensure that liquidity allocation remains balanced, which helps maintain optimal risk levels and yield performance.

• Soft Bounds (40-60%): These create a buffer zone for normal market fluctuations. If liquidity allocation drifts outside this range but remains within the hard bounds, LendFED will be used to rebalance the deposits weekly. This approach avoids frequent adjustments while still responding to gradual changes in market conditions.
• Hard Bounds (30-70%): These serve as strict limits. If the allocation reaches beyond these boundaries, LendFED will be used to rebalance the deposits to avoid excessive risk exposure or suboptimal yield distribution. This ensures that the system can react quickly to sudden market shifts or liquidity demands, safeguarding both the protocol and S-Token holders.

Yield Distribution: Yield generated from lending markets will be distributed weekly to S-Token holders, gradually increasing the underlying token value over time.

Outcome: S-Token holders will benefit from multi-market yield opportunities, optimizing their returns.

Phase 3: Integrating S-Tokens as Collateral

Objective: Add S-Tokens as collateral in Bao Lend markets, further expanding their utility.

Outcome: Enable S-Token holders to leverage their yield-bearing tokens within the Bao ecosystem in various ways.

Risks and Mitigation

• Overexposure to Market Downturns: S-Token holders face risks across multiple markets. We will mitigate this by limiting the re-lending ratio and adjusting allocations dynamically during volatile conditions.
• Oversupply of Pegged Tokens: Increased synthetic token deposits in liquidity pools could reduce the efficiency of liquidity balancers. Active monitoring and periodic adjustments of the staked token allocation will address this issue.
• Smart Contract Vulnerabilities: Introducing new mechanisms increases complexity and risk. We will conduct thorough audits and testing of all contracts before deployment.