In this post, we propose a solution for protocols and DAOs to avoid unsustainable liquidity mining through a partnership between Fei Protocol and Ondo Finance to provide Liquidity-as-a-Service (LaaS).
Liquidity is one of the primary goals of any developed financial market. The problem is essentially, “I want to make X trade as cheaply as possible, and I need someone on the other side.” This applies not only to swapping tokens, but also to lending, borrowing, derivatives, and structured products. For young DeFi projects, liquidity is especially important.
However, acquiring this liquidity through traditional liquidity mining is expensive and mercenary. From the perspective of consumers, “yield farming” is the optimal strategy to move capital wherever it is paid the most in liquidity mining rewards. This creates a tendency for capital to leave as soon as rewards dry up, in addition to a slow bleeding effect when earned project tokens are continuously dumped onto the market as soon as they are earned.
Current liquidity mining schedules are not sustainable. Projects and investors alike are becoming increasingly aware of the harm liquidity mining does to the long-term growth of a project, and are looking for solutions. Fei Protocol is in a unique position to solve this problem, while simultaneously expanding its reach and providing additional value to current Fei ecosystem participants.
We propose solving this problem by using Ondo Protocol’s unique liquidity vaults. These vaults are structured financial products that allow different parties to take on different levels of risk when contributing liquidity to a common AMM pair.
Essentially, projects can deposit their project token into an Ondo liquidity vault with a flexible duration, and Fei Protocol will match their deposit with an equivalent amount of newly minted FEI. The tokens get deployed as liquidity onto DEXs such as Uniswap or SushiSwap. This arrangement provides immediate liquidity, and essentially doubles the contribution of the other project. At the end of the vault window, the vault returns all remaining project tokens to the project, and returns the FEI to Fei Protocol plus a small fixed fee. The project keeps trading fees and assumes any impermanent loss during each vault period.
A DAO trying to create liquidity for their token without sacrificing their treasury for creating AMM pairs or unsustainable liquidity mining would be the most obvious use case. Partnering with Fei and Ondo would allow this DAO to efficiently create liquidity for their token with no upfront costs. Fei Protocol would take on a senior position in this arrangement, and the other product would take on a junior position.
Creating LaaS partnerships with as many protocols as possible would be great, but even if Fei DAO takes on the senior tranche in this arrangement, the risk is minimal, but remains non-zero. Risk should be minimized by evaluating potential partnerships along dimensions such as: market cap, Lindy, existing liquidity, and reputation.
We propose a capped launch with 25M - 50M FEI (2.5 - 5% of PCV) available for protocol’s and DAOs who apply to be part of the launch group. Those selected to be in the launch group can benefit from the low fees associated with the group (only 2%!) and can potentially earn TRIBE rewards from the TribalChief by generating community approval for the allocation.
This is a low barrier to entry option for protocols and DAOs to double their liquidity, and earn trading fees for a flexible duration with no upfront costs.
Benefits and Drawbacks
Benefits to FEI
- Fees earned for the protocol
- Increased circulating FEI and increased utility for FEI
- Contributes to a narrative of FEI as the Stablecoin for DAOs
- Stronger alignment with other projects
Benefits to DeFi
- Help to DAO’s (DAO’s double their liquidity, earn trading fees and get to keep their project token)
- Projects can get liquidity much cheaper than liquidity mining
- Less reliance on centralized assets as projects get liquidity in a decentralized USD pegged stablecoin (FEI)
- If the other token drops more than 80% in a month, Fei protocol will suffer losses. This is unlikely, but still possible.
The partnership between Fei and Ondo offers cost effective and flexible term liquidity as a service (LaaS) offering. Projects can get immediate liquidity on their token without upfront capital costs.