[BIP-43] veBAO 2.0 - Burning inflation and using revenue for buybacks

Summary

This governance proposal aims to implement veYFI-style tokenomics in Bao Finance. It outlines a phased approach to enhance the sustainability and efficiency of BAO tokens, inspired by the veYFI model.

Background

The current inflationary tokenomics in Bao Finance have proven to be inefficient and lack long-term viability due to a mismatch between emissions and revenue generated. This proposal seeks to address these issues by adapting the veYFI model for Bao.

Goals

The proposed changes have the following goals:

1. Ensure the long-term sustainability and viability of BAO tokens within the ecosystem by stopping inflation and initiating buybacks.
2. Introduce dBAO tokens as a means to capture additional revenue.

Proposed Solution

Phase 1: Redirect Revenue to Bao Buybacks & Stop Inflation

• Phase 1 is designed to be quickly implemented, allowing us to stop inflation before refining the model further.
• Inflation will be automatically burned. This can be reversed at a later date via governance if the model does not work - We will have flexibility over the % of inflation that is burned and will start with 100%.
• Revenue from the previous 6 months will be used to kickstart the buyback program. BAO tokens will be purchased and distributed evenly over the next 3 months to gauges based on vote weights. The process will be repeated with the next 3 months revenue and repeat quarterly until revenue is substantial enough to do more regularly.

Phase 2: Introducing dBAO (Discount BAO)

dBAO stands for discount BAO. The idea of distributing option or discount tokens was pioneered by Bunni, a liquidity engine for uniswap. Option tokens allow the holder to redeem governance tokens at a discount. This means that some of the value distributed to yield farmers can be captured as additional revenue. In our case, dBAO will be distributed to gauges instead of BAO

• Gauges pay dBAO that you can either sell for ETH or convert to BAO (by paying ETH, this ETH gets routed to buybacks).
• Gives its bearer the right to redeem an equivalent amount of BAO in exchange for ETH.
• dBAO is burned upon redemption.
• The circulating supply of dBAO must not exceed the amount of BAO available to be redeemed.
• The amount of ETH required for redemption is at a discount to the current spot price of BAO/ETH.
• Discount calculation is an approximation of the following formula:
  • discount = c / (1 + a * e^k(s * x − 1)) , where:
    • c = 1
      • a = 9.9999
        • k = 4.6969
        • s = configurable scaling factor
        • x = veYFI_supply / YFI_supply
• ETH received from dBAO redemption is redirected to BAO buybacks

Phase 3: Automation and Revenue Splits

• If Phase 1 and Phase 2 are successful, and there is a sustainable increase in TVL and revenue in the protocol, a revenue distribution contract will be built to automate revenue splits.
• Revenue will be automatically split between veBAO holders, Gauges, and the treasury. The specific allocation ratio will be determined by veBAO holders.

Risks

Risk of Insufficient Rewards for veBAO holders: There is a potential risk that the rewards generated by Bao Finance’s protocols, such as dBAO and buyback programs and Bao Vaults, may not be substantial enough to incentivize users to lock BAO tokens, impacting Bao’s utility and value. To mitigate this risk, it may be necessary to consider mechanisms for minting additional BAO and rewarding veBAO holders, ensuring that the equilibrium encourages locking.