1. Proposal Number & Name
PSP-IP: PSP 2.0 - ParaSwap ve80/20 Proposal
2. Keywords
PSP 2.0, Liquidity, Staking, Tokenomics
3. Simple Summary
As part of the PSP 2.0 token discussions, one of the major implementations is the reforming of the current staking system towards a more efficient and practical system.
In this proposal, we suggest a movement away from a single-sided staking system and towards a vote-escrowed LP token composed of 80% PSP and 20% ETH, similar to the safety module. Additionally, we explore the potential emission savings that this system would give, as well as explore how other tokens have performed following this transition.
4. Context
Balancer is a community-driven protocol, automated portfolio manager, liquidity provider, and price sensor that empowers decentralized exchange and the automated portfolio management of tokens on the Ethereum blockchain and other EVM compatible systems.
Balancer Pools contain two or more tokens that traders can swap between. Liquidity Providers put their tokens in the pools in order to collect swap fees. Balancer’s fully flexible design space opens the aperture of possibilities for all types of liquidity providers and their respective considerations.
veBAL (vote-escrowed BAL) is a locked 80/20 BPT (Balancer Pool Token) composed of 80% BAL / 20% WETH. veBAL has a max. lock time of 1 year and can be used to direct BAL Liquidity Mining incentives on the Balancer Platform, vote on governance, and receive a portion of all protocol fees that Balancer produces.
ParaSwap has already got a Balancer-based pool through its safety module. With this proposal, we would simply convert all of the PSP that is currently only being used to single-side staking into a productive asset in this liquidity pool.
5. Goals
Shift voting rights and incentives to a vePSP model utilizing a Balancer 80/20 Pool as the lock token. This would not only establish consistent, long term liquidity for the PSP token but it could also save upwards of ~6mill PSP tokens a year by utilizing an 80/20 Pool Token as the mechanism to participate in PSP governance. In addition to this the downside effects of ve80/20 PSP are significantly minimized. The maximum total downard sell pressure on the PSP token would still be less than 45% of PSP’s daily trading volume, which could be easily arb’ed out and is still extremely unlikely.
The 80/20 Pool Token would also be available on multiple chains due to Balancer’s Multichain nature, so it is available to scale with the ParaSwap protocol as both expand to new chains. Further gauge mechanisms could be developed from here (incentivizing specific PSP pools, chains, etc.) however they are completely optional.
6. Rationale - Locking Liquidity vs Locking Single Sided Staking
- The vote escrow model has already been shown to be extremely effective at removing tokens from the market and creating strong alignment of interests between DAOs and users. The ve80/20 model is the next iteration of this model as it answers one of the most pressing needs in DeFi - “How can my protocol create long-term, sustainable liquidity for my fair launch token?”.
In spite of the idea that users are generally resistant to locking an additional 20% of another asset into an LP, data shows that ~75% of veBAL stakers locked both sides of the LP as opposed to single side locking and creating downside sell pressure for the native governance token.
- Guaranteed long-term and sustainable liquidity for the PSP token at no additional cost to the protocol. Locking pure PSP would have the opposite effect of shrinking liquidity. 80/20 Pools have been shown to be the go-to solution for Governance Tokens, as they provide ~50% less IL and significantly higher upside for users who are bullish on that platform’s token.
- The pool could be the main source of PSP liquidity, so with a higher fee, the protocol can generate a lot of revenues from swap fees only. The pool owner can set dynamic fees so that it can increase them in times of high volatility and decrease it when the market is calmer.
- Users have some exposure to ETH, your stable coin of choice or any other pairing asset (20%) so it gives some hedge. However, since the pool has 80% PSP it has a lot less impermanent loss than a 50/50 pool would.
- PSP Protocol can create a gauge for its 80/20 pool to allow it to receive BAL emissions. It is highly profitable to bribe veBAL/vlAURA holders as we have seen with Lido, QiDAO, Polygon and Stader Labs - among others. As shown by the below graphic, bribes are shown to be 3-6x more cost-efficient at providing Liquidity Mining incentives for any pool.
- Because of how Balancer works, the price of PSP has a lower boundary relative to ETH because for PSP to go down relative to ETH, the 80/20 pool has to absorb PSP from the market. The more PSP is locked in the pool, the less the price can drop relative to ETH because of this effect.
Several Convex Style platforms have already launched on top of the veBAL platform - Those include Aura, Stake DAO and Tetu. The 0xMaki-led Aura is currently in the lead with ~1.9M veBAL ($31M) locked, with the other protocols slated to launch in the coming months.
Protocols or Users looking to direct incentives to their pools can also bribe vlAURA and veBAL holders to vote for their pool on Hidden Hand. Current ROI on Hidden Hand is very lucrative for DAO’s with Protocol Owned Liquidity. As of writing this document, the average protocol returned $2.80-$5.80 of Emissions per $1 of bribe money spent.
7. Analysis - Cost Savings and veBAL case study
| Current System | ve80/20 | |
|---|---|---|
| Projected Emissions/Year | 5,967,500 | 119,350 |
| Projected USD Costs/Year | $119,350.00 | $2,387.00 |
| Projected Savings/Year | $ - | $116,963.00 |
Emissions are sourced from the PSP/ETH Safety Module, ve80/20 assumes 2% of emissions are used to sustain as shown by the Balancer 80/20 Pool
The above table highlights the total cost savings ParaSwap could see by utilizing a ve80/20 model. This $116,963.00 in savings could be used to further the ParaSwap Protocol in ways outside of just sustaining liquidity - such as bounties or hackathons to help further the protocol itself.
| Current PSP Liquidity | Projected ve80/20 Liquidity | |
|---|---|---|
| Total Liquidity (all pairs) | $1,251,000.00 | $4,237,317.08 |
| Liquidity Gained per $1 of Emissions | $10.48 | $1,775.16 |
Liquidity is sourced from all pools listed on the ParaSwap “Farms” page. Projected liquidity assumes an average veTOKEN lock rate of ~40%
As can be seen by the above table, ve80/20 is significantly more efficient at capturing liquidity when compared to typical LP mining. For every $1 of emissions spent, ~$10.48 of PSP liquidity is captured, while for every $1 of emissions spent, ~$1,775.16 of PSP liquidity is captured by utilizing ve80/20 tokenomics. Once again this just shows how effective ve80/20 is at capturing cheap liquidity for the PSP token at no additional cost to the DAO or protocol users in the form of dilution.
| Average Single Side Lock % | 25.50% |
|---|---|
| Target Total veTOKEN Lock Rate | 30% |
| Total Max PSP Selloff ($) | $ 125,277.20 |
| Daily Average Trading Volume | $ 300,000.00 |
| Total Max Selloff % of DAV | 41.76% |
The above table outlines the average single side lock % for veBAL holders (this is the average % of veBAL that was single asset locked as either BAL or ETH, resulting in a sale of either asset to make the LP whole). Over the course of the 8.5 mos of tracking 80/20 BAL/ETH LPs nearly 75% of all LPers chose to lock both sides of the asset, while only 25% chose to lock a single asset in their LP.
The table also outlines what the total max “sell off” of PSP could be if the target lock % (30%) was done in a single day. The total max sell off could be a total of ~42% of the Average Daily trading volume for the PSP token. This should easily be arbitraged out if it were to occur, however unlikely. Most veTOKEN’s take a significant amount of time to get to peak efficiency, even veCRV did not reach its current ~55% lock ratio until nearly 1.5 years in. So any sort of selling pressure on PSP should be extremely minimal when utilizing a ve80/20 model.
TLDR; ve80/20 PSP creates long term, sustainable liquidity at little to no cost to the DAO (allowing funds that traditionally would go towards Liquidity Mining to then be used to further the ParaSwap protocol) while preserving upside potential for users and limiting any sort of downside sell pressure on the token by locking the 80/20 LP. Other potential benefits include BAL emissions for users (+ another source of revenue for ve80/20 lockers via BAL gauges) and any sort of accrued swap fees.
