BIP-110: Sonic LP Recovery Vault and Pro-Rata Claim Mechanism

Summary

This proposal establishes a Sonic LP Recovery Vault to compensate liquidity providers affected by the stS/S exploit. The Vault combines Beets S2 Gems allocation and S contributions from the Affected LPs distributed by Sonic Labs with ongoing protocol support and introduces a flexible, pro-rata claim mechanism that allows affected LPs to claim compensation any time and exit early, while preserving upside for long-term participants.

Affected LPs who want to participate in the Recovery Vault will be required to send the full amount of S distributed by Sonic Labs (listed as Recovery (S) in this file https://github.com/0xsoniclabs/beets-recovery/blob/main/recovery.csv) to a secure multisig address provided by Beets within 28 days of this proposal passing governance.

The Recovery Vault will grow over time, meaning affected LPs can either claim later and get a better rate or exit early and redeem their shares at the current rate of the vault. Early exits effectively benefit remaining participants by forfeiting their possible future allocations.

Beets commits to build and possibly audit the solution as well as spend its Gems Season 2 allocation and 10% of Sonic protocol revenue until full recovery is achieved, meaning that any remaining claims can redeem their shares at the rate of 1:1.

The affected LP list can be found here https://docs.google.com/spreadsheets/d/14F8TR8b1sDqhwh3L6rAX8D6SELOr3MbiKEaUNXf4iCU/edit?gid=1239812253#gid=1239812253

Motivation

Following the exploit, affected LPs incurred losses that cannot be sustainably resolved through a single, immediate distribution without placing excessive strain on the protocol. At the same time, Beets recognizes that how it responds sets a critical precedent for LP trust, ecosystem credibility, and long-term liquidity alignment on Sonic.

This proposal defines a path toward making LPs whole that:

• Delivers concrete compensation,
• Preserves optionality for affected LPs,
• Rewards long-term alignment without mandating lockups,
• Remains adaptable as governance discussions evolve.

Rather than framing recovery as a one-off event, this BIP establishes a durable recovery mechanism that can grow alongside the protocol.

Initial Recovery Capital

The Recovery Vault will be initially seeded with:

• S contributions in full by the participating affected LPs which is distributed from Sonic Labs as part of the recovered 5.8M S

After 6 months of the Recovery Vault going live, the Beets S2 Gems allocation will be added to the Recovery Vault (currently 642,000 S). The Gems allocation should be converted into stS in the meantime, to accrue yield and increase the value to be added to the Recovery Vault.

These allocations represent the initial capital base for recovery and reflect what is currently feasible and committed. In addition, 10% of Beets protocol revenue generated on Sonic will be deposited into the Recovery Vault over time.

Recovery Vault Structure

All recovery assets will be consolidated into a dedicated Recovery Vault contract.

Assets in the Recovery Vault are converted into stS, increasing the effective recovery pool over time.

Importantly, the Recovery Vault is not closed. Based on future governance discussions, additional Assets from other sources (e.g. treasury allocations, grants, donations, or further ecosystem support) may be added to the Recovery Vault through separate proposals. Likewise, allocations can also be removed through separate proposals.

Claiming Mechanism

Affected LPs may claim compensation at any time, subject to the following rules:

• Claims are pro-rata, based on each eligible LP’s share of the total recorded loss.
• At any point in time, an LP’s maximum claimable amount is equivalent to the total LP’s loss.

When an LP makes a claim:

• The claimed amount is paid out immediately at the current rate of the vault
• The claimed portion at any point of time of their entitlement is considered settled in full under the current rate of the vault

This structure allows LPs to exit fully or remain aligned for long-term recovery.

Alignment Effects and Forfeiture

If an LP chooses to fully exit by claiming their entire available entitlement at a given point in time, they implicitly forgo any upside from future growth of the Recovery Vault.

Conversely:

• LPs who do not claim retain exposure to future Vault growth,
• Any forfeited capacity effectively benefits remaining participants,
• Yield generated within the Recovery Vault compounds in favor of long-term aligned LPs.

This creates a natural, voluntary alignment mechanism without mandatory lockups or penalties.

Governance and Safeguards

• Any material changes to revenue allocation, Vault deployment, or scope of recovery require governance approval.
• The addition of new sources to the Recovery Vault must be approved through governance.
• The removal of sources from the Recovery Vault must be approved through governance.

Rationale

This proposal reflects several learnings from the exploit and subsequent discussion:

• Fixed-duration recovery windows are arbitrary and risk under-delivery.
• Mandatory lockups reduce flexibility and voter support.
• A growing recovery Vault aligns incentives between LPs, Beets, and Sonic’s long-term success.

While this approach does not guarantee full recovery, it maximizes the probability of LPs being made whole over time.

Risks

This proposal carries the following risks and trade-offs:

• Extended recovery timeline: Full recovery is not guaranteed and depends on protocol performance, revenue, and potential future funding sources.
• Opportunity cost: Allocating protocol revenue to the Recovery Vault reduces funds otherwise available for reinvestment or incentives.
• Governance risk: Future governance may choose not to add additional assets to the Vault, limiting recovery growth.
• Smart contract risk: The Recovery Vault introduces new smart contract logic, which must be carefully designed and audited to minimize risk.

These risks are partially mitigated through governance oversight, optional participation, and transparent accounting.

Impacts

Treasury

• The S from the Beets S2 Gems allocation approved in this proposal.
• Funding of possible audit
• Future treasury contributions, if any, require separate governance approval.

Execution Plan

1. Finalize LP Loss Registry
   • Confirm affected LP list and loss amounts (as published).
2. Design Recovery Vault Contract
   • Implement pro-rata accounting and stS deployment logic.
3. Audit (If Required)
   • Conduct a targeted audit depending on implementation complexity.
4. Confirm Eligible LPs and Loss Amounts
   • LPs are eligible to participate if they send the full amount of S distributed by Sonic Labs to a secure multisig address provided by Beets within 28 days of the proposal passing governance.
5. Deploy Recovery Vault
   • Seed with initial S allocations and begin stS conversion.
6. Initiate Revenue Streaming
   • Route 10% of Sonic-generated protocol revenue into the Vault.
7. Launch Claim Interface
   • Provide a transparent UI/dashboard for LPs to view and claim entitlements.
8. Ongoing Governance Oversight
   • Evaluate additional funding sources or parameter changes through future BIPs.

Conclusion

This BIP establishes a principled, extensible recovery framework that balances immediacy, fairness, and long-term alignment. It allows Beets to act responsibly today while preserving the ability to do more tomorrow, subject to governance.

Adopting this proposal signals that Beets takes LP trust seriously and is committed to recovery paths that scale with success rather than relying on one-off gestures.