FIP-105: FEI Savings Rate for VOLT

Background and Motivation
In order to support FEI Protocol’s contractionary monetary policy and serve as a more effective FEI sink, Volt Protocol is seeking alternatives to deploying FEI in lending markets like Aave which may result in more pressure on the peg. After consulting with some TRIBE contributors, we propose the following plan, effective for 3 months and to be revisited by or before 8/25/22.

Proposal Summary
Provide a 3% FEI-denominated savings rate to FEI held by Volt Protocol in exchange for a commitment to hold this FEI in venues that do not apply peg pressure (custodial PSM or Balancer pool, not markets like Aave). Direct BAL rewards to a VOLT-FEI pool and swap TRIBE for the BAL rewards earned by Volt Protocol on its PCV. Accumulate more BAL for TRIBE while increasing Volt’s alignment. All at a lower cost of capital than current liquidity incentives by a wide margin.

Proposal Detail
In the immediate term, Volt Protocol will maintain its PCV FEI in a custodial PSM with all FEI available for VOLT-FEI redemptions. The fee will be 0.3% on minting and zero fee on redemption. This FEI will serve as a supply sink as opposed to depositing in a lending market like Aave.

Going forward, Volt will provide equal parts FEI and VOLT liquidity in a Balancer metastable pool. Diligence is needed to confirm a metastable pool will not have any issues with VOLT price going above peg. If so, a more standard pool configuration can be used. As VOLT price increases, the VOLT-FEI pool will naturally come to include more FEI over time and serve as a FEI demand sink.

Once this pool is live, the TRIBE DAO will vote using a portion of its veBAL to direct rewards to the VOLT-FEI pool, and deposit its own VOLT into the pool paired with protocol FEI if desired. We propose that initially 20% of the TRIBE veBAL vote for this pool, which can be adjusted depending on performance. BAL APR parity with other incentivized pools like the B-70WETH-30FEI pool would be an appropriate target.

BAL rewards earned by Volt Protocol will be remitted to the TRIBE DAO in exchange for TRIBE at a 20% discount to a rolling one month TWAP for BAL (accounting for the need to pair BAL with WETH at 80/20 to lock as veBAL) and undiscounted TWAP for TRIBE. Our long term vision for how Volt will use PCV TRIBE looks something like using it to Turbo Boost or otherwise draw a line of credit against VOLT which can be rehypothecated into a MakerDAO FEI vault.

The TRIBE DAO can then lock this BAL as veBAL, increasing its stake in Balancer.

As Volt foregoes earning yield on FEI in the LP pair, the TRIBE DAO will pay a 3% FEI Savings Rate (FSR), the same rate proposed here, to Volt Protocol on the balance of FEI deposited in the Balancer pool through the VOLT PSM. This rate could be disbursed through staking of B-50VOLT-50FEI LP tokens in the TribalChief, or simply disbursed to Volt Protocol on a monthly basis through OA during this initial period.

While Volt Protocol may underperform inflation on its FEI in the immediate term, the TRIBE it obtains will have long term growth potential and the FSR is competitive under current market conditions for the risk level it represents. The rate can be revisited on a quarterly basis or on occasions when Volt considers sizing adjustments for the PSM.

In the future, there are additional ways Volt can help stabilize FEI liquidity and peg. We are designing a lockup structure that will incentivize VOLT holders to lock up funds for longer periods (3 months to a year). By bounding redemptions flow on VOLT, the protocol can also create a predictable demand sink for FEI. Volt Protocol in turn can commit to locking up portions of its FEI holdings into longer term FSR arrangements. Access to long term debt that won’t be called in at the worst times is a key method to reduce risk on an ETH-heavy balance sheet with substantial short term debt.

Another structure that VOLT will want to create in the more intermediate term is a credit facility for the Tribe DAO to draw down stablecoins when it has a liquidity crunch and has a large redemption flow. This could take the form of a special PSM where the VOLT DAO would accept FEI in exchange for other PCV stablecoins at a fixed fee, allowing TRIBE DAO access to a portion of Volt’s PCV as a liquidity buffer. By having long term debt and locked VOLT holders, the VCON DAO will have a surplus to lend to Tribe DAO in times of need.

As receiving BAL rewards will require going through a Balancer governance process, it is understood that enabling the 3% FSR for Volt Protocol may proceed separately from setting up BAL rewards and associated BAL<->TRIBE swap.

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Based on feedback, we are moving this proposal to last call with the following clarifications:

The FEI Savings Rate will be disbursed to Volt Protocol by Tribal Council or relevant pod/OA on a monthly basis. The amount disbursed will be based on the average FEI balance held by Volt Protocol in the PSM at first, and in the future based on the FEI portion of B-50VOLT-50FEI LP tokens help by Volt Protocol.

The FSR will begin accumulating with the passing of this proposal, with payment to be disbursed within five days of the end of each calendar month.

Volt Protocol commits not to deploy PCV FEI into venues which put pressure on the FEI peg, such as Aave or other lending markets, while contractionary monetary policy in effect.

Once the B-50VOLT-50FEI LP Pool is live, TRIBE DAO will vote with its veBAL to whitelist this pool for a gauge on Balancer, and direct a minimum of 20% of its veBAL voting power toward this pool. The TRIBE may choose to seed this pool with VOLT-FEI liquidity using its own PCV VOLT.

After Volt DAO begins receiving BAL rewards, TRIBE<->BAL OTC swaps will be performed along with the monthly disbursement of the FEI Savings Rate. Volt Protocol DAO will remit BAL it earns to the TRIBE, with a 20% discount on BAL price for the past month. These swaps will be performed by the Tribal Council or appropriate Treasury pod/OA same as the FEI Savings Rate Disbursement.

Voting options:

YES, offer a FEI Savings Rate and BAL<->TRIBE swaps to Volt Protocol
NO, do not accept the proposed terms for a Volt FEI Savings Rate

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