$SAUCE / $XSAUCE Liquidity Provisioning for Bonzo Finance

Request for Comment
1
  • Title: $SAUCE / $XSAUCE Liquidity Provisioning for Bonzo Finance
  • Author(s): Brady Gentile
  • SaucerSwap Voting Interface: None
  • Related Discussions: None
  • Submission Date: August 5th, 2024

First of all — major congrats to the SaucerSwap Labs team on the launch of their DAO tooling :tada::flying_saucer: truly setting a high bar for the Hedera DeFi ecosystem. We’re excited to be amongst the first proposals using the platform :pray:

Summary

This proposal suggests that the SaucerSwap DAO strategically allocate a portion of currently dormant DAO treasury to the $SAUCE & $XSAUCE liquidity pools on Bonzo Finance, a lending & borrowing protocol on Hedera, based on Aave v2, upon its mainnet launch in mid-August.

This strategic move aims to decentralize SaucerSwap’s treasury management, foster ecosystem collaboration between DeFi projects on Hedera, create greater accessibility of $SAUCE & $XSAUCE assets for more complex DeFi transactions, and potentially generate additional yield 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 v2 for the Hedera network — set to launch on mainnet in mid-August
  • SaucerSwap’s DAO currently allocates a majority of its 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 best interest of SaucerSwap, Bonzo Finance, and the Hedera DeFi ecosystem at large to strategically make available currently dormant liquidity, while earning yield for the SaucerSwap DAO treasury.

About Bonzo Finance

Bonzo Finance is The Liquidity Layer of Hedera — a lending & borrowing protocol based on open source Aave v2, 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, & $KARATE.

Bonzo Finance uniquely offers the ability to unlock currently dormant liquidity across the Hedera DeFi ecosystem, 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
𝕏: x.com

Motivation & Proposal Details

1. Allocation Amount: $200k USD value in total

  • $SAUCE = $125k
  • $XSAUCE = $75k

2. Implementation Method: Hybrid approach

  • Initial deposit: A larger, one-time allocation to bootstrap liquidity

    • $37,500 in $SAUCE
    • $22,500 in $XSAUCE

  • Ongoing vesting: Incremental allocations over time to sustain participation

    • 1/12 months of continued supplying until the $125k & $75k USD figures are met

3. Why more $SAUCE than $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 more 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 recursively supplying the new $XSAUCE back to the protocol. While this creates a leveraged position with compounded yield, it carries significant risks. Neither Bonzo Finance Labs nor SaucerSwap Labs recommend or endorse this practice.

4. Duration: Minimum of 12 months

  • Two full seasons of Bonzo “points” [6 months each // 12 months total].
  • SaucerSwap DAO retains ownership throughout the full 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.

5. Yield & Reward Generation

  • Bonzo Finance points awarded to the SaucerSwap DAO, which convert to an airdrop of $BONZO tokens at the end of every points season, lasting 6 months each
  • HBAR liquidity incentives provided by The HBAR Foundation, if provided [Bonzo Finance RFP: Notion – The all-in-one workspace for your notes, tasks, wikis, and databases.]
  • Native APY generated as fees incurred by borrowers utilizing (borrowing) $SAUCE and $XSAUCE assets
  • 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 additional yield on otherwise dormant treasury assets.
  4. Liquidity Provisioning: Enhance accessible liquidity for $SAUCE and $XSAUCE assets via Bonzo Finance, benefiting both protocols.
  5. Risk Mitigation: By using a hybrid approach of initial deposit and ongoing vesting, the SaucerSwap DAO can effectively manage risk while maintaining flexibility.

Risks

Illiquidity Risk

  • Risk: There is a possibility that SaucerSwap may be unable to withdraw its liquidity if there is high utilization of the $SAUCE and $XSAUCE Bonzo Finance pools. If too many users are borrowing against the provided liquidity, it may temporarily lock SaucerSwap’s funds in the protocol.
  • Mitigation: Implement a gradual withdrawal strategy and monitor utilization rates closely. Consider setting a maximum utilization threshold for our allocation.

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 minting authority to allocate the agreed-upon amount of $SAUCE & $XSAUCE tokens.
  • Smart contracts to be developed to manage the vesting schedule and automate allocations to Bonzo Finance.

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.
7 Likes
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Hi Brady,

Thanks for the proposal. I wasnt aware of the unutilized Sauce and Xsauce. I am an XSauce holder.

To help me decide on my vote, can you explain why i would vote for this proposal, over simply adding these unutilized tokens to the staking contract? To me as an XSauce holder, why does your proposal benefit me more than having these tokens added to the staking contract for instance?

P.S loving what youre doing with Bonzo!

Thanks,
Wojak.

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From my perspective, Bonzo is a great project, and they are doing excellent work. However, I don’t think it’s wise to commit Sauce treasury without knowing Bonzo’s performance yet. If Bonzo runs into trouble, it could drag Sauce down with it. The risk-benefit balance doesn’t seem favorable to me. For instance, Kujira committed its protocol’s treasury and is now bankrupt. This is just my humble opinion.

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First, congratulations to being the first one brave enough to make a post, requesting for comments on a potential proposal.

Now to the substance of the matter. I have been hearing from the AMA’s about the synergies of DEXs and Lending protocols, but I do acknowledge @Chris_V 's concerns of performance. Perhaps the SaucerSwap & Bonzo Finance teams could talk about the synergies and performances of DEX and lending protocols from other chains to give some kind of idea of the benefits. Some metrics like the TVL, trading volume changes of the DEX or DEX token pre- and post launch of a Lending protocol. Probably AMA questions, which one is coming up this weekend for SaucerSwap.

As for risks, Brady has covered them (except for network risks, but that’s pretty much a given building on any DLT). But if Brady could reiterate the illiquidity-risk mitigation the protocol have here, it would reassure users. A lot of it was mentioned in the June 08 2024 AMA, but a Sparknotes version would be appreciated.

As for the allocation of DAO treasury, I don’t know how much is in the treasury account currently. I do recall a question to the SaucerSwap team about the treasury, and they did give us numbers at the time and I believe mentioned there would be some way to easily see the account token and values. Something like a webpage showing this, or the contract deployments docs page updated to have the treasury account listed. Once I see the treasury amounts, I would be better able to comment on the proposed deposit amounts. I will say I do like the hybrid approach.

The final thing I would comment on is the duration, more specially after the 12 months period. I personally think the default position should returning the tokens to the treasury, unless there’s a proposal to keep the liquidity on the protocol (or maybe even add to it). It would also incentivize the DAO to keep an active eye on the Bonzo protocol, while being flexible to look at other protocols to potentially bootstrap.

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I will say it, the first proposal being from some “company” that releases nothing on their website other than how it’s “supposed” to work and a bunch of monkey images, kind of leaves a bad taste in my mouth.

What happens when we don’t give them the money, is there still a website/company?
Is this just a setup to steal sauce (make it contractually unavailable when it is higher in value)?

Show me that you can do business without hand outs first, then we will talk about funding.

Sauce spent before proof of a working site is wasted sauce.

So far you have proven NOTHING.

Funds should not be handed out in this way, it should be tit for tat.
You provide proof of a good project, we provide funding.
Simple as.

How many grants were given out to people that never produced anything?
Let’s try to learn from our mistakes rather than repeating them.

2 Likes
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Hey Wojak,

Thanks so much for the kind words and appreciate the thoughtful question; happy to explain.

Our understanding of treasury management for token-based projects is that there typically exists a holding account of the project’s native asset that is considered dormant or unused; these are funds set aside for various future purposes, voted on by the DAO or planned as part of the project’s treasury strategy early on in the DAOs formation.

Supplying of $SAUCE / $XSAUCE liquidity to pools in the Bonzo Finance protocol is akin to a liquidity provisioning activity, similar to token listings on a decentralized or centralized exchange. This is due to the fact that supplied liquidity in decentralized lending protocols creates greater accessibility / availability of the asset for various DeFi activities and strategies by retail and institutional users across the ecosystem; in this case specifically, activities enabled by lending protocols, such as ones found here.

The SaucerSwap DAO always retains full self-custody ownership of the assets supplied — it’s protocol-owned liquidity (POL), that is supplied to the lending protocol, as part of a comprehensive treasury management strategy, whereby the DAO receives benefits in the form of $BONZO tokens that can be held or sold on market, as well as a native APY in $SAUCE and $XSAUCE, from borrowing fees, that grows the overall amount of the assets for future use by the DAO.

Our understanding is that the $SAUCE / $XSAUCE which would be allocated to Bonzo Finance would otherwise never be just added to the Single-Sided Staking reward contract as staking reward for the community, as the funding mechanism for staking is driven by the $SAUCE buyback program.

Happy to help answer any other questions or follow-up related to this; thanks.

Brady

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Hey Chris,

Thanks for the kind words wrt Bonzo Finance — we’re excited about bringing DeFi 2.0 to the Hedera ecosystem; part of that is ensuring greater understanding and education about the impact lending protocols have on the broader ecosystem.

It’s important to have healthy skepticism and critique with regards to new projects entering the ecosystem, especially ones which have far reaching ecosystem impact potential, such as lending protocols.

As mentioned in reply to @Wojak, the best way to be thinking about this activity / engagement is that it’s a liquidity provisioning activity — akin to a listing on a centralized or decentralized exchange for a project’s asset (which requires liquidity provisioning). This activity ensures a project’s asset is widely available for various DeFi activities — in this specific case, lending and borrowing strategies, like the ones found here.

Lending protocols face unique risks when there’s insufficient liquidity in supported asset pools. For $SAUCE / $XSAUCE, these risks can significantly impact the asset’s price and stability:

  1. Liquidity Shortage: When liquidity is low, the supply-demand balance becomes volatile.
  2. APY Fluctuations: This volatility can cause extreme fluctuations in the asset’s Annual Percentage Yield (APY) for borrowers.
  3. Increased Liquidations: Sudden APY spikes may trigger liquidations, as some borrowers might not be able to maintain their required collateral ratios.
  4. Market Pressure: These liquidations force the sale of $SAUCE / $XSAUCE collateral on the open market.
  5. Price Impact: The forced selling can flood the market with supply, potentially driving down the price of $SAUCE / $XSAUCE.

By ensuring ample liquidity of $SAUCE / $XSAUCE, we can mitigate these risks, protect the SaucerSwap project, its native asset, and by extension, asset holders.

The Kujira example isn’t relevant here, as they collateralized their asset to borrow against it, which isn’t what we’re proposing. In the case of Kujira, the foundation collateralized their project’s asset in a lending protocol in order to borrow against it — then, the price of their collateralized asset dropped below the liquidation threshold, causing the collateralized assets supplied to be sold on market (liquidated), further depressing the price (spiraled to bankruptcy).

While the funds supplied by SaucerSwap DAO could theoretically, after supplying, be used as collateral to borrow against by the SaucerSwap DAO (for example, for $USDC) — that is not what’s being proposed here and we strongly recommend against this, with Kujira being a prime example of why it’s not a good idea.

Let me know if you have any follow-up questions / thoughts / ideas around this — I want to make sure everyone is sufficiently educated on what’s being asked here and how lending protocols function, their risks, etc.

Thanks,
Brady

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Thank you for your responses and clarifications, Brad. You’re doing an excellent job. :clap:t3:

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I’m excited for the Bonzo protocol but I’m also a SS maxi, so naturally I have some reservations. The current proposed terms by Bonzo doesn’t seem to properly reward SS for the risks that it’s asking SS to take. If Bonzo wants SS to inject liquidity, then the terms should favor SS more. Will SS be earning bonzo points at a 1.5x, 2x, 5x, or more? Are there other incentives for SS?

It seems from the past AMAs that the SS team has already allocated all of their funds for development, marketing, and other future plans. How did Bonzo arrive at the 200k liquidity injection? Has bonzo asked SS if they have that much funds to doll out? And if SS did supply $200k, how would that affect SS’s roadmap and development? Would it upend SS’s current and future plans?

$200k is a very big ask from Bonzo since it doesn’t have any performance metrics and a 1 year lockup is a very long time in crypto–I don’t want to see SS becoming every project’s liquidity daddy at the expense of SS’s own stability and future developments.

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@bonzobrady As token prices changes rapidly, may you update the proposal to have token amount? It would still be helpful to have USD equivalent as of [date].

As written now, it’s a dollar amount worth of tokens and if token prices drop, that would mean supplying more tokens from the DAO treasury.

1 Like