SIP-07: Joining Fei & Ondo's Liquidity as a Service (LaaS) Program

aurelius

In this post, @Googly and I outlay a potential solution to solving the problem of native token liquidity, involving a partnership with Fei Protocol and Ondo Finance.

Summary

Synapse enters a partnership with Fei Protocol and Ondo Finance to create lower cost & higher capital efficiency for $SYN liquidity
Fei DAO to provide $12.5M FEI, at a rate of fixed 5% APR, to be paired with $12.5M SYN to LP SYN/FEI on UniswapV2 totaling $25M in SYN/FEI liquidity.
Significantly cheaper cost than incentivizing LPs, alongside Synapse earning trading fees, in exchange for IL risk taken on by the Synapse DAO
$TRIBE incentives from Fei DAO over the next 3 months
SYN incentives towards SYN/ETH LPs will be reduced, and redirect into Synapse's program with OHM Pro to build protocol-owned liquidity

Background

Core Synapse DAO contributors have been working with Fei and Ondo on a potential partnership to increase SYN liquidity, while substantially reducing the cost of liquidity mining for Synapse.

FEI and Ondo have developed a Liquidity as a Service ("LaaS") program which aims to provide a cheaper alternative to liquidity mining.

Synapse has been selected as a prospective early partner in this program, and specific details of a partnership has been worked on by both teams. Should this partnership proposal receive support from the community, it will go to a formal DAO vote.

Key terms of the program

Creation of a vault on Ondo which consists of two tranches:
- A variable tranche (consisting of SYN)
- A fixed tranche (consisting of FEI)
This creates a $25M LP, consisting of $12.5M SYN (provided by the Synapse DAO) & $12.5M FEI (Provided by the Fei DAO)
Synapse will pay Fei a fixed rate of 5% year, meaning a net cost of $625k/year for the provided liquidity, compared to the existing cost of 4.5M SYN/year (Assuming SYN at $3, $13.5m)
As Synapse assumes the variable tranche, it means it keeps all gains on the LP e.g. trading fees. Additionally should the price of $SYN appreciate vs $FEI (which is a stable asset), it would have extra $FEI (but less $SYN). However, in a downside scenario, it also means that should the price of $SYN fall at the time of vault maturity, Synapse would then need to sell some of the additional $SYN now in the LP for $FEI, or find a way to make the fixed tranche whole.
- To put this downside risk into context, a 70% fall in $SYN price is a 20% impermanent loss. And LPs generate around 20% of extra APY from swap fees. This means that based on current volumes and LP composition, over a year, swap fees can cover up to a 70% loss. This means in that scenario, the protocol would not incur additional losses. However, there would be some incremental downside pressure on $SYN price created by rebalancing the LP into $FEI. This can be can be mitigated by i) an OTC sell of the extra SYN in the LP or ii) or the use of protocol revenues swapped for FEI, effectively creating economically a DCA buyback of $SYN as the treasury would then hold more $SYN that initially
This means that before swap fees revenues (reduces cost) and IL (increases cost) are taken into account, the Fei programme is 22x cheaper
The program will initially be structured through the creation of four different vaults: 69 days, 76 days, 83 days and 90 days. By having different tranches, the IL and convexity risk for Synapse is smoothened.
The program will initially be structured through the creation of four different vaults: 69 days, 76 days, 83 days and 90 days. By having different tranches, the IL and convexity risk for Synapse is smoothened
Additionally, Fei has also approved for the initial duration of the program (3-months) $TRIBE incentives which are currently valued $1.4m. Those incentives are split between all LPs participating in Fei's LaaS depending on their relative size

Modifications to Current SYN incentives

If the Synapse DAO approves participation in the LaaS program, we propose reducing SYN/ETH incentives fully, while increasing the size of the current OHM Pro bond program, migrating linearly as the LaaS program begins.

Overview

The Synapse DAO would contribute ~$12.5M SYN to be paired with $12.5M FEI to create a SYN/FEI LP on UniswapV2. This would result in a cost of 5% APR on the FEI vs. the current 4.5M SYN/year in SYN/ETH incentives. Under this program, the DAO would bear the IL risk of the SYN/FEI LP upon maturity of the vaults. The DAO would earn all trading fees from the SYN/FEI LP, post fixed yield payment to FEI, and earn $1.4M in TRIBE incentives over 3 months (est. 44% APR).

This partnership would not only establish Synapse as a leader in managing protocol liquidity effectively compared to traditional liquidity mining programs, but also build deeper links between Synapse, Fei, Ondo, and Olympus, strengthening DAO-to-DAO relationships across the board.

The LaaS program would begin as soon as the DAO finalizes its decision on program participation.

Siaubas

Could you please expand on the possible losses associated with FEI/SYN LP? It is basically a gain if SYN stays stable or loses no more than 70% of its value. However, should SYN appreciate violently, we will be losing SYN. How much SYN do we lose if SYN goes 5-fold or 10-fold? Or even more?

Googly

Siaubas Let's say SYN increases by 5x

Using some round numbers here. SYN starting price is $3 and it goes to $15 over a year. We do a $25m LP meaning there is initially 4.2m SYN in the LP and 12.5m FEI. Assuming no ETH/SYN LP for comparison and 0 swap fees for starter (which would have grown the LP).

Once SYN does a 5x, there is only 1.9m SYN left in that LP and 28m FEI. At maturity of the vault, we give back FEI their 12.5m token and are left with 15.5 FEI. Assuming we use them to buyback SYN (rather than operate with a larger LP or decide to move the FEI to the treasury and use as we see fit), we buy 1m SYN on the market (further fueling up the price but let's assume we can still get it at $15). This means we are left with 2.9m SYN i.e. we "lost" (or rather spent) 1.3m SYN.

You may think it doesn't look that great, right (albeit people that like buybacks are happy)? Actually to put it in context, over that year, we would have spent 4.6m SYN to liquidity providers (87.5k x 52). So we actually saved 3.3m SYN vs. status quo, not too bad.

And this before swap fees are taken into account. Assuming similar volumes than in November, you have actually generated over a year 1.3m SYN (same number that we "lost" in the LP) as well as close to 4m FEI compared to 625k FEI we need to payout for the interest rate.. As such it means that the interest rate paid on the loan was negative.

On the way up, you can flex it as much as you want based on the current parameters and you always end up with LaaS being cheaper over time. This is mainly because APR paid to SYN LPs right now is extremely high: much more SYN are paid out over a year than there are in that LP so IL cannot make up for it: TLDR, there are 3.8m SYN in that LP (including protocol owned liquidity and people LPing on Sushiswap rather than Synapse) but Synapse is paying 4.6m a year

quijote

Siaubas in my opinion "losing" SYN to impermanent loss basically means the protocol was able to sell that SYN, which it as plenty of, for a USD equivalent, which it needs a lot more of in the treasury. This is a major perk of this set-up, IMO - not only do we get to rent $25M of liquidity at 2.5% (1/2 of the 5% being charged for the $12.5M FEI), we also get the potential upside of being able to convert protocol-owned SYN into FEI without exerting any downward sell pressure on price.

quijote

This is next-level.

1) Rent a high floor for SYN liquidity via LaaS, at massively reduced cost compared to what we are currently paying in SYN
2) Reduce our dependence on even that reduced cost by continuing to send those SYN rewards that we would have spent for transient liquidity towards Olympus Pro bonds
3) Create a new SYN liquidity pool on Uniswap, which can then be arbed with the Sushiswap pool, generating greater trading fees for LPs in either pool - and the fees in the Uniswap pool would be protocol income we would not have access to outside of this proposal
4) Develop a relationship with Fei (and Ondo), premier protocols committed to decentralization, with stable assets we can potentially continue to leverage in creative ways - and with the Synapse community getting TRIBE incentives to tie them to Fei
5) Meanwhile, provide an outlet for SYN being released from SYN-ETH liquidity provision through single-sided staking

The only downsides I see come from token price nuking, which would really fuck the protocol no matter what. This way at least if token price does fall there will be a liquidity pool that will not be pulled to support any aggro selling, and there will be an agency to negotiate the fallout with. IMO that is pretty easy to spin into another positive. So I am all for it.

#S2W

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