PIP-42: Utilizing Aura Finance to bootstrap PSP liquidity on Optimism

Authors: jeffery, json, Oxytocin, aura maxis

Abstract Aura Finance is a meta-governance protocol built on top of Balancer. Aura Finance has topped over $700M in TVL on mainnet and has a massive ecosystem of partners that encompasses everything from major lending markets like Aave, to cross-chain infrastructure providers like Stargate, to top LSD providers like Lido and Rocketpool. In total, Aura has obtained and maintained fruitful relationships with over 40 different protocols within DeFi. Based on its success on mainnet, Aura contributors believe in Balancer’s potential to be a first-choice for protocols considering to either seed or grow liquidity.

Aura helps to amplify the effectiveness and growth of Balancer in addition to the protocols within the ecosystem. Aura’s voting incentive markets are one of the most diverse in DeFi, with over 20-30 active participants on any given round. Moreover, Aura has maintained a solid track record in the accumulation of governance influence for veBAL, which has helped to keep markets lively.

It seems beneficial for the protocol to add the extra yield layer that Aura provides on top of the 80/20 Balancer pools to increase the return for the participants and Paraswap DAO.

We propose staking the BPT from the 80/20 PSP/OP Balancer / Beethoven X pool 2(on optimism) into AURA and introducing a gauge incentive for it using Aura voting incentives markets. This will generate the following benefits:

Increase in pool size (liquidity), by encouraging single-sided stakers to migrate to an LP position, increasing the PSP token liquidity;

Make these pools more attractive for market participants;

Enhanced yield generation by staking the BPT token on Aura; and

Introducing voting incentives with a lower cost;

Liquidity is a major expense for protocols, and often forces farm & dump game theory. Providing better returns on an 80/20 pool than on a single-staking pool means that the protocol can enhance the token liquidity on the market sustainably. Furthermore, staking the POL in Aura will help to increase Paraswap’s influence within the Balancer ecosystem, which can be later used to support cost-effective PSP liquidity and reduce protocol expenses.

Using Aura as an additional yield layer makes these pools more attractive for market participants. Liquidity Providers improve their returns when staking the BPT token in Aura, as the APR is boosted by Aura emissions. This can incentivize market participants to become Liquidity Providers, as they can lock their AURA rewards into vlAURA, and be rewarded by participating in Aura governance.

As these pools are the major liquidity source for PSP in Optimism, improving its yield by providing gauge voting incentives on Balancer makes sense. And doing it using Aura is the most cost-effective way: In the last voting round (2023-08-21), the return was $1.21 per $1 provided. 2 This means that it was 21% more effective to use Aura than to provide incentives directly. In addition, on Optimism, thanks to the OP grant Aura received, 1 the voting incentives provided by Paraswap DAO will be matched 1:0.5 by Aura (with a maximum of 25k OP per week), which would lead to even higher efficiency for using AURA market to incentivize.

Paraswap can also lock farmed AURA rewards as vlAURA to significantly reduce the need for PSP spending in the future while maintaining a robust liquidity layer on Optimism and Ethereum. Thanks to the recently passed AIP-42, 2 AURA incentives will be distributed from the Aura DAO treasury to be allocated pro-rata to pools based on their vlAURA gauge weight; this will further benefit the “better aligned” liquidity provider, such as POL of Paraswap DAO.

In view of this efficiency, we propose Paraswap DAO allocate a voting incentive budget of $20k each voting epoch ($10k weekly) to the vlAURA market to help incentivize the pool and bootstrap liquidity. The budget may be adjusted after further evaluating the efficiency and pool utilization.

Goals & review The main goals of the proposal are:

Improve yield generation on the 80/20 pools; Make these pools more attractive for market participants; The metrics for evaluating the success of this proposal would include:

TVL increase on the ‘Night at the OPara’ pool on Optimism.

Means Allocate $5K in $PSP + $5K $OP weekly for 10 weeks. Swap BAL + OP rewards to $PSP, and distribute it to Stakers in sePSP1 at the end of each epoch. GovCo will handle preparing payload and providing program analysis to ensure sustainability and profitability

Implementation Overview Creating a Balancer Proposal to create a gauge for the 80/20 pool on OP.

Introducing BPT staking on Aura

Start to incentive gauge voting on Aura

Provide voting incentives to vlAURA market epoch-wise.