$SAUCE Liquidity Provisioning for Bonzo Finance

Proposal
1
  • Title: $SAUCE Liquidity Provisioning for Bonzo Finance
  • Author(s): Brady Gentile, Co-Founder & CEO of Bonzo Finance Labs
  • SaucerSwap Voting Interface: None
  • Related Discussions: Link
  • Submission Date: October 24th, 2024

This proposal is an updated version of the previous proposal from August, found here.

This new proposal reduces the scope of activities described in the original proposal; it also opens discussion with SaucerSwap DAO community members and the SaucerSwap Labs team to determine an appropriate amount (if any) of $SAUCE to be provided for this liquidity provisioning activity.

Summary

This proposal suggests that the SaucerSwap DAO strategically allocate a portion of currently dormant DAO treasury to the $SAUCE liquidity pools on Bonzo Finance, a lending & borrowing protocol on Hedera, based on Aave, after its mainnet launch on Monday, October 28th, 2024.

This strategic move aims to decentralize SaucerSwap’s treasury management, foster ecosystem collaboration between DeFi projects on Hedera, create greater accessibility of $SAUCE for more complex DeFi transactions, and potentially generate rewards for the SaucerSwap DAO.

Background

  • SaucerSwap is the leading decentralized exchange (DEX) on Hedera based on market share of total value locked (TVL_ and trading volume.
  • Bonzo Finance is “The Liquidity Layer of Hedera” — a lending & borrowing protocol based on Aave for the Hedera network.
  • SaucerSwap’s DAO currently allocates a majority of its $SAUCE DAO treasury funds to Yield Farming (V1) and LARI (V2) incentives
  • A portion of SaucerSwap’s treasury is vested back to a holding account; this holding account is currently underutilized, with $SAUCE that is considered “dormant liquidity” [i.e. does not count toward TVL and is currently inaccessible to the ecosystem]
  • It’s in the interest of SaucerSwap, Bonzo Finance, and the Hedera DeFi ecosystem at large to strategically make available currently dormant liquidity, while potentially earning rewards as a treasury management activity.

About Bonzo Finance

Bonzo Finance is The Liquidity Layer of Hedera — a lending & borrowing protocol based on open source Aave, the most prominent credit market protocol across web3 based on TVL and utilization.

Bonzo Finance allows retail and institutional users to supply asset collateral to the protocol, earn yield, and borrow any supported asset against their collateral, based on the collateral’s loan-to-value (LTV) ratio. The initially supported assets on Bonzo Finance include: $HBAR, $HBARX, $USDC, $SAUCE, $XSAUCE, $DOVU, $PACK, $HTS, $STEAM & $KARATE.

Bonzo Finance uniquely offers the ability to unlock currently dormant liquidity across the Hedera DeFi ecosystem due to its single-asset pools (no impermanent loss), making it available for use by retail and institutional users for lending and borrowing activities, while increasing overall TVL on the Hedera network.

Bonzo Finance has undergone extensive audits by Halborn, a leading web3 security provider; those audits are available for review here:

Resources
Website: https://bonzo.finance
Testnet: https://testnet.bonzo.finance
Documentation: https://docs.bonzo.finance
Discord: Bonzo Finance
đť•Ź: x.com

Motivation & Proposal Details

1. $SAUCE Allocation Amount

  • The allocation of $SAUCE from treasury that is supplied to Bonzo Finance is and will always be owned and self-custodied by SaucerSwap. This is not a request for a “hand out” of $SAUCE tokens, but rather a liquidity provisioning activity performed by the SaucerSwap DAO to create greater accessibility and liquidity of the $SAUCE asset across the Hedera DeFi ecosystem.
  • We hope to have an open discussion with members of the SaucerSwap DAO and the SaucerSwap Labs team to determine an amount of $SAUCE deemed reasonable for this activity. This is to be discussed in the comments section of this proposal.

2. Why $SAUCE vs $XSAUCE

  • Liquid staking tokens (LSTs) often dominate as collateral in lending protocols, thanks to their built-in yield offsetting borrowing costs. For SaucerSwap, we recommend supplying native $SAUCE, as we expect retail and institutional users will naturally gravitate towards providing $XSAUCE and borrowing $SAUCE, reflecting broader market trends.
  • Historical web3 trends suggest users may engage in “leveraged liquid staking” with $SAUCE and $XSAUCE. This strategy involves depositing $XSAUCE, borrowing $SAUCE, staking it for more $XSAUCE, and supplying that $XSAUCE back to the protocol, recursively. While this creates a leveraged position with compounded yield, it carries significant risks. Neither Bonzo Finance Labs, Bonzo Finance Foundation, nor SaucerSwap Labs recommends or endorses this practice, and it is only described herein for informational purposes.

3. Duration: Minimum of 12 months

  • SaucerSwap DAO retains full ownership of funds throughout the duration.
  • After the 12 month period, SaucerSwap DAO reserves the right to fully remove supplied liquidity, retain their full position, or retain a portion of their position.

4. Yield & Reward Generation

  • Bonzo Points are awarded to the participating account used by SaucerSwap DAO performing this activity; Bonzo Points are used to inform claimable $BONZO tokens at the end of every points season.
  • Native APY generated as fees incurred by borrowers utilizing (borrowing) $SAUCE
  • All yield and rewards generated from this allocation is owned by the SaucerSwap DAO

Rationale

  1. Treasury Decentralization: Diversify treasury holdings across multiple protocols within the Hedera ecosystem.
  2. Ecosystem Collaboration: Demonstrate support for new DeFi protocols on Hedera, fostering a collaborative environment that drives growth in key DeFi health metrics, such as TVL, trading volume, and asset utilization (borrows).
  3. Yield & Points Generation: Potential to earn rewards on otherwise dormant treasury assets.
  4. Liquidity Provisioning: Enhance accessible liquidity for $SAUCE and $XSAUCE assets via Bonzo Finance, benefiting both protocols.

Risks

Illiquidity Risk

  • Risk: There is a possibility that SaucerSwap may be temporarily unable to withdraw liquidity supplied. This can only occur if there is 1) high utilization (borrowing) of the $SAUCE asset from Bonzo Finance AND 2) at the time of desiring to withdraw, SaucerSwap is the majority provider of $SAUCE liquidity in Bonzo Finance.
  • Mitigation: Implement a gradual withdrawal strategy and monitor utilization rates closely over time.

Smart Contract Risk

  • Risk: As with any DeFi protocol, there’s an inherent risk of smart contract vulnerabilities or exploits.
  • Mitigation: Bonzo Finance has undergone extensive audits by Halborn, a leading web3 security provider; those audits are available for review here:

Opportunity Cost

  • Risk: Allocating these funds to Bonzo Finance means they’re not available for other potential uses or investments.
  • Mitigation: Regularly review and compare the performance of this allocation against other potential uses of SaucerSwap DAO treasury funds.

Technical Implementation

  • The SaucerSwap DAO will use its authority to allocate an agreed-upon amount of $SAUCE to supply to the Bonzo Finance protocol.
  • We hope to understand from the SaucerSwap team and its DAO treasury participants an amount deemed reasonable for this activity, to be discussed in the comments section of this proposal.

Governance and Oversight

  • Regular updates will be provided to the DAO on the performance and status of this allocation.
  • The DAO retains the right to adjust or terminate this arrangement through future proposals with justification.
1 Like
2

Hi Brady, thanks for the detailed proposal. It seems like a good solution to use underutilized $sauce tokens.

What would you consider the minimum $SAUCE amount required to effectively acheive the goals of the proposal?

1 Like
3

Hi Brady

In the previous discussion, I had two comments but they were not addressed at the time.

https://gov.saucerswap.finance/t/sauce-xsauce-liquidity-provisioning-for-bonzo-finance/27/4?u=h-barbara

https://gov.saucerswap.finance/t/sauce-xsauce-liquidity-provisioning-for-bonzo-finance/27/10?u=h-barbara

Mainly two things.

What happens to the liquidity of the tokens supplied after the 12 months. By default, ideally it should be returned back to the DAO, unless another DAO proposal pops up in support of maintaining the liquidity on the Bonzo protocol. This would incentivize the Bonzo team to be in more active engagement with the SaucerSwap community.

How much SAUCE and xSAUCE are you requesting? The previous discussion mentioned a USD amount, but given the markets, it could end up allocating more or less of the DAO treasury. If SAUCEUSD went down, then more SAUCE would be allocated to match the USD amount.

And finally, and this is more directed to the core team, can we get a DAO treasury dashboard? It would help the community and proposers get a idea of how much is in the treasury, and have better discussions on how much to allocate.

1 Like
4

I like this version of the proposal, and I agree with H Barbara that the investment in the Bonzo platform should be measured in SAUCE, not in USD. I also agree that the community should decide the amount.

It makes sense that there is some level of SAUCE we should allocate to take a calculated risk on BONZO’s future. The real question is simply: how much?

To determine this, it would be great to start with a DAO vote that’s not a simple yes/no decision. Instead, it would aim to find the amount of SAUCE the community prefers to allocate. This could be done through a weighted vote with multiple options, not just two. The outcome of this vote could then guide the final allocation amount when the official yes/no vote goes live.

For example:

How much SAUCE should the SS DAO invest in BONZO liquidity?
This vote is for informational purposes to help craft another proposal and will have no effect on it’s own.

• 0

• 10,000

• 100,000

• 1,000,000

• 10,000,000

• 100,000,000

After the community has had a chance to vote, the results would be used to calculate a weighted average everyone could verify. This average would then serve as the proposed allocation when you create the final yes/no proposal. This way, everyone would enter the yes/no vote with the confidence that the amount was determined through a fair and systematic process, and you’d likely increase the chances of the proposal passing.

Just an idea, but overall, I love it and I’m excited for BONZO to go live!