- 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 truly setting a high bar for the Hedera DeFi ecosystem. We’re excited to be amongst the first proposals using the platform
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:
- Staking Module: Staking-Module Audit
- Finance Contracts: Finance Contracts Audit
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
- Treasury Decentralization: Diversify treasury holdings across multiple protocols within the Hedera ecosystem.
- 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).
- Yield & Points Generation: Potential to earn additional yield on otherwise dormant treasury assets.
- Liquidity Provisioning: Enhance accessible liquidity for $SAUCE and $XSAUCE assets via Bonzo Finance, benefiting both protocols.
- 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:
- Staking Module: Staking-Module Audit
- Finance Contracts: Finance Contracts Audit
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.