AMM liquidity improvements

The following is an extract of the proposal posted on the Idle governance forum.

Summary

This research introduces some ideas to improve Idle DAO’s current allocation of protocol-owned liquidity and describes tokenomics improvements that can be applied to increase the decentralization of protocol ownership. From the launch of an 80-20 IDLE/stablecoin pool on Balancer to a 25k BAL grant application, this post recaps the state of the art of IDLE-based AMM markets and which activities can be quickly pursued to foster liquidity efficiency.

This proposal aims to increase current protocol-owned liquidity by 2x, diversify AMM venues and pools, and solidify Idle DAO’s treasury.

Points 1), 2), and 3) define a natural evolutive process, adopting the 80-20 model to make it a core infrastructure for IDLE liquidity provision.

DEX activities overview

1. Launch a 80-20 Balancer pool

Idle DAO was one of the early adopters of the Smart Treasury, a 90% IDLE - 10% WETH pool based on Balancer v1. With the release of Balancer v2, Idle DAO discussed its composable nature for interest-bearing tokens and decided to launch the Idle Boosted Pool at the beginning of this year. [...]

The launch of an 80-20 IDLE/stablecoin pool would help foster volumes even without direct trades, as the use of a stablecoin pair would provide an alternative venue for arbitrage opportunity (with ETH price changes).

The target stablecoin can be chosen according to the following criteria:

• single-side assets like USDC or DAI;
• 3pool (DAI/USDC/USDT), which is almost unused on Balancer;
• Balancer Boosted Aave V3 USD (bb-a-usd), which benefits from boosted APR (2-5%) but increases swap costs;
• emerging stablecoins like R (or the pair R/DAI), GHO, crvUSD. There are no pools with these last two assets, thus the technical feasibility needs to be explored.

The use of 3pool or bb-a-usd brings limited advantages, considering the stablecoin part represents only 20% of the pool’s share. The use of R would represent a potential risk for liquidity providers due to the short longevity compared to USDC/DAI, but it could expand LPs audience with a new ecosystem.

Idle DAO can deploy a size equivalent to the liquidity locked in the Uni v3 concentrated pool (~40k), considering it would only need $8k in stablecoins.

2. Incentives for veBAL voters as a form of LM

With the launch of an 80-20 Balancer pool, Idle DAO can include ad-hoc incentives for veBAL holders to increase pool rewards. Idle Leagues are already familiar with the incentive mechanism and used it on Warden to raise up to $1.8m on the bb-i-usd.

Considering that the current multiplier is 1.2-1.3x, this means that $1 worth of rewards would bring a higher value of AURA+BAL incentives. Idle DAO can allocate protocol-owned liquidity (POL) in the pool, swap accrued rewards into IDLE and reallocate the tokens in future incentives, generating a positive-sum return from an ecosystem perspective.

This flywheel has two potential outcomes:

1. The DAO increases POL thanks to the incentive multiplier
2. Other users deposit liquidity in the pool. DAO’s rewards are diluted, so lower bids are placed in the next rounds. If LPs maintain liquidity, the acquisition cost is lower. If they remove funds, we come back to the previous scenario

The use of an 80-20 pool would reduce liquidity provision barriers for IDLE token holders, given the limited pool share of non-IDLE assets, and incentivize its decentralized nature. This activity does not generate volume directly but could help create deeper liquidity in a more efficient way. This approach can be used on Convex too.

In both scenarios, Warden represents the most suitable venue to place incentives. The platform allows protocols to pay incentives only if the target pool receives votes, avoiding a blind allocation of rewards. The team has been very responsive, and they assist us in identifying the right cost/reward ratio.

3. Use 80-20 Launchpad to apply for a 25k BAL grant

Balancer Launchpad got media coverage after a series of tweets from protocols supporting the 80-20 model. The 80-20 Launchpad page states that “this program is intended to support all systems which involve the staking/locking of 80-20 BPT. ve80-20 is one such system and it’s a convenient shorthand to use, but this program is not limited to “ve” systems only.”

Protocols that implement this model or equivalent on Balancer are eligible for an initial grant of 25k BAL ($125k at the time of writing). All BAL granted through this program must be locked in veBAL, and the beneficiary will provide the 20% share of ETH ($31k) to pair tokens and form ~$156k liquidity in 80-20 BAL/ETH pool.

After launching an 80-20 pool, using POL to seed the pool, and placing incentives to foster liquidity provision, this grant would represent an important addition to the flywheel.

By staking $156k in BAL/ETH liquidity for the max duration, Idle DAO will unlock 12.5k veBAL votes. Users that deposit liquidity in 80-20 IDLE/stablecoin can be entitled to choose veBAL allocation and get rewarded by other protocols interested in acquiring their votes.

As a result, more IDLE holders are incentivized to deposit liquidity in the 80-20 IDLE/stablecoin pool and be part of this decisional process.

Other DEX activities

In the post, there are listed other initiatives that won't be fully copied here, given that the vote will be focused on the first three proposals above involving Balancer.

4. Launch a pool on Convex (paired with FRAXBP)
5. Use Arrakis PALM
6. Launch a bond on Bond protocol
7. Call option as a reward token

Specification

Here are some next steps coming by this analysis and subject to this vote.

• Launch an 80-20 IDLE/USDC pool on Balancer with $40k initial liquidity from DAO’s treasury and set minimum swap fees (>0.01%)
• Place IDLE incentives on Warden to route BAL+AURA rewards to 80-20 pool (amount TBD)
• Start the Balancer governance process to apply for a 25k BAL grant