Idea summary:
Liquidity Amplifier Pools (LAPs) are a novel method of bootstrapping liquidity to protocols using the rebase mechanism (such as Ampleforth) through the use of Balancer smart pools and stable coin trading pairs. These pools have two distinct features:
- The ability bootstraps liquidity by farming AMM governance tokens (such as BAL) and subsequently sells those tokens for the pools underlying assets in a certain ratio which are then infused back into the pool
- The ability to mitigate impermanent loss by combining stable coins and Balancer smart pool functions with the Ampleforth rebase mechanism.
A simple example of this would be the creation of an AMPL/USDC Balancer smart pool. Liquidity providers of the pool would gain access to farming the Balancer governance token BAL while also be getting a share of the trading fees from the Balancer pool with little to no impermanent loss thanks the interaction between smart pools adjustable weights and the rebase mechanism. While in this scenario the liquidity providers are now in control of BAL tokens, the process of bootstrapping liquidity could be further automated by developing an yVault style strategy that automates the selling of the farmed BAL tokens and injects liquidity back into the pool pairs.
This, in theory, should increase the underlying pools liquidity. Because of the elastic nature of the Ampleforth token, this cloud potentially create almost perpetual liquidity growth that is only constrained by the stable coin supply capacities.
While this is an example of what a basic strategy could be, basically any strategy could be built on LAPs.
Example of different LAPs:
Basic:
- AMPL/USDC pool
- AMPL/sUSD pool
- AMPL/DAI pool
Advanced:
- AMPL/yUSD pool (currently low liquidity but would create exposure to CRV DAO token rewards, unsure if feasible)
- AMPL/sUSD pool via Synthetix mintr (depositing SNX to the Synthetix Mintr, minting sUSD and providing the sUSD to the pool, this requires extra capital but gains exposure to SNX rewards)
- AMPL/USDC/DAI/USDT/sUSD pool (multiple stable coins in the same pool could further amplify liquidity if it is possible to find a balancing mechanism that works with multiple stable coins)
Benefits and Risks:
Benefits:
- Potential long term liquidity bootstrapping (AMMs like Balancer and Curve have indicated that the governance token distribution will last multiple years. See notes at the end of the proposal)
- Liquidity providers are not exposed to impermanent loss which should attract more willing participants
Risks:
- At the time of writing it is unclear how the Balancer smart pool will react to infusion of outside liquidity and how the infusion affects liquidity providers when they want to withdraw liquidity from the pool
- It is also unclear how this type of liquidity bootstrapping would affect other pools with AMPL pairs (could possibly result in massive impermanent loss in those pools)
- Novel method might possess an unknown attack vector that has gone unnoticed in the audits and the team
- Multiple smart contract risks
- Dependance on 3rd party issuance and governance
- The use and creation of yVaults require the holding of YFI (this could possibly be mitigated by developing an own vault program)
- Stable coin supply side crunch could lead to temporary impermanent loss (no pun intended)
Budget/Cost:
unclear, but most likely requires solidity developers to implement and audits to confirm the safety.
Examples of similar ideas:
yVault automated yield strategies have been around for awhile but are not focused on pools probably because the risks related to impermanent loss.
Idea timeline:
unclear, most likely needs several months of development and testing
Notes:
BAL Distribution schedule (10 years):
https://medium.com/@fernandocmartinelli/proposing-balancer-liquidity-mining-897aecf744d4
CRV Distribution schedule (6 years):
https://guides.curve.fi/crv-launches-curve-dao-and-crv/
Absolutely love the idea, Tim.
Amplesense can add value by making the vault a one stop shop. A lot of the math and mechanics is very complex for most people. If they can just deposit into a smart vault that does all the work for them and spits out potentially a number of different coins that’s huge.
Yield farmer attention spans are low in my experience, and there is always another shiny thing just over there; so anything that is simplified and profitable will be a massive winner.
While it is being quite a while since I posted this idea. I have gone over my notes and noticed that this idea may indeed not be suitable in its current form because the Balancer whitelisting process quotes the following:
“The barrier to entry would be quite low for whitelisting tokens, but at any time, if a token is deemed to be either maliciously harming LPs or gaming the BAL distribution, it could be removed with a governance vote. Note that this approach passes no judgment on the intrinsic value of a token and leaves liquidity providers to decide for themselves what is and is not a “good investment” or a “legitimate project.” Tokens would never be omitted or removed from the list on subjective merits; rather, one of two explicit removal criteria must be met:
1. There is significant evidence supporting the hypothesis that a fraudulent event took place in which token holders lost funds, i.e. an exit scam.
2. The token is being used as a BAL farm, thereby disadvantaging other Balancer liquidity providers. For example, perhaps 80% of the token’s supply sits in a Balancer pool with a 0.0001% fee, and it draws either very little or mostly inorganic trade volume. Care must be taken not to over-emphasize volume here, but it may help to refine the list of potential manipulators. Another example of BAL farming could be that a single entity launches many different tokens to circumvent the $1M liquidity cap.
Since the idea in it’s original form has at its center to use the distributed $BAL to boost AMPL liquidity, it might be a good idea to take a step back and ponder if it is feasible.