Fei Protocol and Ondo Finance to provide Liquidity-as-a-Service (LaaS)

Proposals
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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).

Context

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.

Proposed Solution

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.

Partnerships

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)

Risks

  • If the other token drops more than 80% in a month, Fei protocol will suffer losses. This is unlikely, but still possible.

Summary

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.

6 Likes
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Very interesting and novel idea. This transfers the risk of liquidity provision to the DAO. Sounds like a service that FEI can provide as a stablecoin issuer.

How is the 80% derived? In general, how would the DAO pay us back if their token falls in value? Suppose the pool starts with 10M FEI and 10M XYZ, and ends with 9M FEI and 11M XYZ. If the vault window ends and 9M FEI is pulled, how would the DAO sell their XYZ for 1M worth of FEI? Or would we just seize 1M XYZ?

1 Like
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The Ondo vaults split the returns into a Fixed Yield (Senior) tranche and a Variable Yield (Junior) tranche. Fei would be in the Senior capital position - meaning that Fei will get paid first before the junior. Investors in Ondo vaults are paid back in the assets they put in, this is one of the benefits. So in your example the paired asset would automatically be sold into FEI so that the Fei Protocol receives back just FEI.

The 80% is an estimate, and may vary depending on a number of factors including how high trading fees are in the underlying LP (ie if trading fees are higher than the paired asset would need to drop further for FEI to be impaired). We have created a worksheet that shows the sensitivity and let’s one input their own scenarios.

4 Likes
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hi narwhal welcome to the tribe forum

as people have mentioned here and in the discord, Fei should use some sort of criteria for deciding which projects can be partnered with. things like having enough non-Ondo liquidity to mitigate risks to Fei, and having enough Lindy+reputation to make rugs/exploits/crashes sufficiently unlikely

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Since certain criteria can be very subjective, we should aim to have a tiered system for the launch group that would allow us to put DAOs / projects in one of three categories:

T3 - up to $2M,
T2 - up to $5M,
T1 up to 10M

This is for the initial 25-50M group. After that, we will have verifiable data on the system, what works and what does not, and can refine it without jeopardizing the protocol.

Anything below or above these levels is considered case by case.

2 Likes
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Loved the idea!!! With this new service, FEI is becoming the Stablecoin for DAOs.

Maybe a source of potential projects to launch is the ones we already have a partnership in a Fuse pool. My first impression is that we could increase the value of each tier ($2M seems very low). How many projects we are expecting to support in the launch?

I think the fee is small comparing with others stablecoins in Ondo vaults (8%-10%). I agree that this is good to start, but we can highlight this is a promotional price.

1 Like
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how about buy insurance for the loan？

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Is this fee paid on the value of the tokens offered by the project or the value of the project’s token + Fei liquidity? I’m writing up the LaaS option for another DAO I’m in and want to clarify the mechanics.

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It’s on the roadmap but definitely not live. However, we’re keeping duration on these products very short (30 days) to minimize risk to Fei.

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It’s paid out of the assets removed from the FEI-ABC LP (where “ABC” is the issuer’s token) at maturity. When the vault is created the FEI-ABC LP represents purely contributions from Fei and ABC DAOs, but at maturity it also represents accrued income from trading fees, liquidity mining (if applicable), and impermanent loss – so I think it’s fair to say it’s paid out of the yield first but it’s hard to ascribe attribution.

1 Like
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I think the fee should be small to start as we don’t know what trading activities on these brand new pools against FEI will be. If/when trading fees and/or liquidity mining are sufficient to justify a higher fee, then we should increase it.

I agree $2m is very small but it’s basically the minimum size. These pools can and in many cases should be substantially larger.

Love the idea of partnering with projects on Fuse! The tranche positions will actually be tokenized soon so we could create Fuse pools with them to let issuers leverage up their liquidity!

2 Likes
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Hey Ferdinand - great to see you back here, and thanks for bringing up LaaS with the other DAO you are part of. I posted this article earlier today that might help explain the offering in a bit more detail. Please bring me into any conversations, if you think it would be helpful. :slight_smile:

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If I understand correct your question, 2% a.a. fee is charged on the FEI amount provided. So if FEI provides USD10,000 for 1 year (just for simplicity) and the partner project provides USD10,000 in their own token, Fei will receive USD10,200.

The worksheet also helps to better see that.

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Yes, that’s right. Thanks!

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Given the positive feedback about our LaaS offer with Ondo, I wanted to get a temperature check with the community about offering TRIBE incentives to the launch group participants for three months. This will be a great way to ensure strong launch group participants, and will help build strong alignment with other projects, while increasing utility for FEI.

4 Likes
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Definitely in favor, this could be a powerful product for Fei Protocol so we should try to incentivize its early usage. Can consider increasing the FEI fee accordingly so its not completely one-sided benefit to these early partners