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.
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
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.
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.