SIP-04: AAAAAAH I'M BONDING

Chi_Squared

Overview

Olympus Pro allows effective locking of DEX liquidity in pool 2 via its bonding mechanism.
What is the current situation? Synapse is currently incentivizing users to provide liquidity at SushiSwap with 171500 SYN/week in automatic emissions, which at the current price of $2.80 is a bit more than $2M/month.

If the SYN rewards are reduced by the DAO, and LPs feel that providing liquidity purely to collect trading fees is not a viable strategy, they will pull their liquidity of the pool. Essentially this will mean that Synapse was paying $2M per month to rent liquidity temporarily.
Not to mention the fact that most of the SYN rewards will be sold, either to re-enter the pool (sell 50% and pair it with the other 50%), or to take profit.

The solution provided by Olympus Pro is "bonding". Basically, liquidity providers are incentivized through the Olympus Pro smart contracts to surrender their share of the SYN/ETH LP with discounted governance tokens.

There is a discount, because:

The user incurs the gas fees for the bonding action
The bonded SYN tokens are vested linearly over the period of 7 days, so bonders of LP tokens can't immediately arbitrage the discount.

The pricing for the swap (i.e., the calculation of the discount) is done algorithmically by the Olympus smart contract based on the rate at which LP tokens are being bonded. If more LP tokens are bonded, the discount automatically falls, and vice versa. This allows an effective bond market to exist.

Worth noting that all the infrastructure is already built by the Olympus team. They will provide the battle-tested smart-contracts, feature bonds on their marketplace
Olympus charges a 3.3% fee on all bonds as compensation for their services.
In our case this would mean that for every 1000 SYN bought via bonds, Olympus will receive 33 SYN.

It is worth mentioning that Olympus is using the bonded tokens as the backing reserves for OHM, which would help to reduce the SYN circulating supply.

Proposal

Redirect 50% of the current incentives for providing SYN/ETH liquidity at SushiSwap into the Olympus Pro bonding program. This will change the current scheme "171500 SYN/week to SYN/ETH LPs" to "85750 SYN/week to SYN/ETH LPs; 85750 SYN/week to bonding program".

The bonds will have a vesting period of 7 days. Further parameters, if any, will be advised by the Olympus team.

Olympus DAO will receive 3.3% of bonded SYN tokens as compensation for providing the infrastructure, their expertise, and the listing on their Bond Marketplace.
The SYN tokens, received by Olympus, will be used as additional backing for OHM.

All further actions with bonded SYN/ETH LP tokens will be decided by further Synapse DAO governance voting.

As time goes on, another voting may be concluded to modify the distribution proportion between the bonding program and the LP rewards program.

Analysis.

As of now, Synapse is paying a big price for renting liquidity in the SYN/ETH pool. If the rewards stop -> most of the liquidity goes away (some LPs will stay to collect fees/stake at Sushi). This proposal is trying to fix that by incentivizing current LPs to effectively lock their existing liquidity.

Let's take a look at the numbers. According to the Olympus Dune Analytics page, the average discount for their bonds is around 4-6%.
Dune Analytics page

Those are their own bonds (OHM/DAI, OHM/ETH and so on), so let's use the upper bound of 6% in our case. Olympus charges a 3.3% fee, so in total this will result in ~90% conversion from SYN to SYN/ETH LP, if you look from Synapse's perspective (100% - 6% - 3.3%).
~65% of the "effective discount" will go straight to SYN bonds buyers, which is reasonable.
Also worth noting is that SYN that Olympus will gain will be used as a backing for their token, OHM, which means these SYN tokens will be effectively leaving circulating supply (at least for now).

It's also important to remember that in the future, the DAO will be able to further decide how to best use these bonded LP tokens.

Googly

Yes.

(for once, you won't need a TLDR)

Cam

Love it, brilliant stuff as always, Chi.

RamielCapital

Liquidity Engine activating

Freud

Perfect.

Siaubas

ELI5?
Emissions don't change, we just redistribute them to a different contract. We are reducing volatility in TVL. Is that the goal here, or am I missing something?

Googly

Siaubas yes on volatility + the token emissions are actually being used to buy those LPs. As such, after a certain critical mass is reached (level TBD), you can decide to switch off the bond program (and hence those emissions) if you want to, thereby reducing future emissions.
Additionally, the LP owned by the protocol can decide to stake and receive a share of the SYN emissions, thereby reducing real inflation

JayJ

Awesome work on the proposal Chi, thanks for spending the time.
Couple questions -
#1. Could you share the rationale behind redirecting 50% of the incentives to OP? Why not maybe 70%, 100%?
#2. How did you end up with the "₆₅% of the effective discount", didn't quite follow that one.
#3. How are you thinking about the case for SYN-AVAX? Do you see us eventually expand bonding to Trader Joe and other dexes we might be on in the future? (assuming OP has cross chain support)

Chi_Squared

JayJ #1. Could you share the rationale behind redirecting 50% of the incentives to OP? Why not maybe 70%, 100%?

50% is a reasonable starting point. And if the DAO feels that bonds are being bought too fast/slow, DAO can tune the percentages.

Btw, the 50% reduction of rewards for SYN/ETH LPs does not mean that the LPs APR will decrease by 50%, and here's why:

According to Sushi's "weekly fees" statistic, the "fees APR" is around 54%.
According to Synapse's SYN/ETH pool, the "SYN APR" is around 62%.
So the total estimated APR is around 116%.

Once the SYN rewards are cut in half, the "SYN part of APR" becomes ~ 31%.
And the new total estimated APR is around 93%.
93% = 116% * 0.8, so I estimate the APR to reduce by 20% (assuming the TVL doesn't change). If TVL is reduced by 20%, the new estimated APR should be on par with the current estimated APR.

#2/3 were covered by Googly

The only thing I would add, is that DAO can use the bonded SYN/ETH LP tokens to move the liquidity to other chains (if the DAO feels that the Sushi pool has simply too much liquidity, while the pool on TraderJoe is shallow).

Googly

My own views

#1 idea is probably to start with a lower ratio, see how it goes and then we can then adjust the ratio going forward. Additionally if you go 100% on day 1, existing LPs may just withdraw their liquidity (while you had not the time to build protocol own LPs) hence not a great outcome. As protocol owned liquidity increases, the percentage of emissions going bought by the protocol can also increase
imo this probably also increases the rationale in favour of introducing separately single staking

#2 assumes 6% of discount (upper end of the range) on the bond. As OHM also charges 3.3%, you have 6%/(6%+3.3%)=65%

#3 OHM doesn't have yet cross chain support I believe. But imo the aim here is to replace liquidity we rent. Liquidity on Joe (or other dexes that may add us in the future) is not rented by Synapse and there is therefore a limited incentive to buy it. I also clearly don't mind people being able use their $SYN to LP on other chains if they want to and be paid for that service (and utilise their tokens). Should replacing that rented liquidity in the SYN/ETH LP be successful, the logical next step to me would be to look for ways to replace part of the stablepool liquidity rather than target LPs on other chains

brucey

Great work, I like this as it is and think a good secondary benefit is increasing awareness of SYN among the OHM community and general perception as an early-adopter of frog technology.