PGP-10: Expanding liquidity into other DEXes with an under-collateralized loan

Summary: Take a 500,000 agEUR under-collateralized loan from Angle Protocol and pairing it with 500,000 PAL to have a 1M € pair on Uniswap v2.

Context:

Our DAO currently owns 1.8M$ of liquidity on Curve and 350k$ on Balancer. From numerous discussions with traders and whales, it has come to our attention that the slippage was too large for them to come into play.

Currently there is 5.26% slippage for a 25,000 USDC buy, 7.93% for a 50,000 USDC buy and 12.56% for a 100,000 USDC buy. This is too much to enable a large trading activity and create sustainable liquidity with our POL.

Rationale:

We’ve taken some measures to broaden liquidity by incentivizing users to come LP with us but the plan is taking a bit more time than anticipated and we currently are the ones LPing.

For this reason, we partnered with Angle Protocol to borrow 500,000agEUR and deposit them into a Uni v2 pool via Ondo Finance’s Liquidity as a Service. This will add 1.1M$ of depth, enabling 50k$ trades under 4% slippage, giving access to PAL through a euro pool and raising trade volume by creating a third pool to arbitrage.

We would also benefit from all fees and positive slippage done on this pool.

Means:

  • This is a unique opportunity as Angle has offered a 4% APR loan for the duration of 3 months (ie : 5000agEUR of fees to be paid upfront).
  • We would also have to provide Angle with call options that could be redeemed in case of IL on the pair.
  • Use 350,000 PAL from Treasury + 150,000 that were unallocated from PGP 7: Adding POL Depth

Sustainability:

This is a 3 month liquidity boost program to quell a temporary delay in liquidity depth with a significantly cheaper budget than liquidity mining.

Ondo can also remove the LPs on notice in order to avoid us getting too wrecked by IL.

Voting options:

Yes / No / Abstain

5 Likes

Just an idea that I have :
why not let the users deposit liquidity and let them benefit from the Chest?
Same process as for locked hPAL ; they will have to lock their liquidity for a given period of time but maybe more incentivated because of IL risk ? and let them juggle their liquidity with Uniswap v3?

always with the aim of having more liquidity and depth

3 Likes

This is planned, but we’re figuring our the technicalities.
LP tokens are dynamic, so the underlying PAL per LP changes and it’s impossible to compute on-chain.

Right now we want to use Quest on out own Curve pool to attract holders to come and LP with us, should be live in a few weeks. The current solution aims to add another DEX to our list and quickly fix the current depth problem.

As a side note, 5000agEUR is what we have earned in fees since we’re live on Curve.

4 Likes

Super happy to read this !
Great work !

2 Likes

overall it sounds good to me… I would be in favor.

just a few details, out of curiosity:

Is that our decision in order to hedge ourselves? The way Angle/Ondo describe the process is as follows:
“At the end of the program, the repartition of the risks would be as followed: Liquidity is withdrawn from the pool, and Angle is first paid back its initial investment plus a fixed interest rate - which may require some swaps of the DAO token (potentially increasing a negative price action on it). Then the DAO keeps the rest. Basically this means that the DAO will get price variations, trading fees, and assume Impermanent Loss.”
There is no mention of options.

What is the plan for liquidity in 3 months? Would we renew the service, or do we have something else coming up?

How much notice would Ondo require to pull liquidity, and how much of a %age loss do we consider “is getting wrecked by IL”?

3 Likes

Seems like a solid opportunity to get CapEx for cheaper.

I believe @FrenchTony raises a good point:

Is there a way to fix this slippage long term? What is your reasoning for electing V2 Uniswap vs V3?

Two last questions - do you have an estimate on fees generated from this pool?

Is there an upper limit on the size of this loan dictated by Angle Protocol?

Sorry for the bombardment of questions…

3 Likes

As always, very relevant questions.

and assume Impermanent Loss

That’s basically an option, same financial consequences, same cover. It seems I might have mispoke on the form of the hedging tools, but it will work similarly (minus cost of creating an option then).

What is the plan for liquidity in 3 months?

There is a plan that should be live before the 3 months are up. But we need the gauges and Quest to be live to execute it. So this move is meant as a pressure relief more than a long term solution.

How much notice would Ondo require to pull liquidity

We were told under 24h. I think over 100,000$ of IL is the limit.

Is there a way to fix this slippage long term?

No, it’s a general problem of AMM, our goal is to reduce it. We have 3 plans, this being the temp fix while we execute the others.
Angle hasn’t specified an upper limit, but we judged 500,000 agEUR was a size we could manage even in case of black swan. I believe more would be too risky.

In terms of fees, if we open a 0.3% Uniswap pool, at current volume (20,000$ / day) we can expect 5,400$ for 3 month, just the price of the loan. So if volume remains the same we can expect a zero-sum move. If the prices or volume goes up we make money, of both fall off a cliff, its when risk management mode comes in.

4 Likes

Do we know that this approach would be cheaper than bribing on curve (assuming that the pal-eth gauge vote will be successful)? I am in support of increasing liquidity on PAL, I guess I would support whatever the team thinks is the best approach for this

4 Likes

The idea is to do both but on different timelines.
Having liq. on Uniswap is better to increase trading volume while bribing is to increase TVL and reduce slippage.

Bribing is significantly more expensive than this operation. For 5500$ (price of the loan) you could get 183,000 veCRV votes for one week (current market average is 0.03$/veCRV/week) or 15,000 veCRV for the 3month duration. Needless to say it wouldn’t even attract 1/10th of the current strategy

3 Likes

If you own any Angle please vote for us ! We will also put up the vote on our side tomorrow, if all feedback was deemed enough.

2 Likes

I was just thinking about this again… In order to reach that level of IL (100k on a 1M$ pool), the Pal token would either need to lose another 60% or gain 155% compared to agEUR.
If that were to happen over the 3 month period, would pulling the liquidity not send a negative signal?

1 Like

We wouldn’t have to pay anything if we gained, as the IL would be on our side of the LP (the PALs), it would effectively be more like DCAing into agEUR.

And yes, we would need a 60% loss to be at 100k of IL. Tbh I don’t even think that’s possible in the current set of things. As it would imply the project goes under 1.5M of market cap. Not sure sending a negative signal would be the problem at this point.

3 Likes

Agreed…. So the IL question is not really anything to be concerned about in this proposal. Thanks for the clarification.

1 Like

Thanks for starting this discussion,

I’m in favor of increasing the Paladin POL and I support this proposal !

The current liquidity is 1.7M$ on Curve + 350K$ on Balancer. By adding 1.07M$ (1M€) on Uniswap as well, the total POL would be at 3.12M$ so we just need to be careful about not growing the liquidity too much too quick compared to the current market cap imo

3 Likes

I will abstain from this vote as I believe I have a conflict of interest that prevents me from voting in an unbiased manner.

Having said that, I want to urge caution when it comes to taking a debt position with undefined terms as a DAO. The management of debt is difficult on the individual level… it is even harder on a communal level. Without having a clear payback schedule defined, both collateral risk and IL risk are even higher. The interest might be easy to payback, but, judging from my experience with Threshold DAO’s loan, the principal is difficult to payback.

That being said - I trust @Figue’s guidance on this matter. The benefit likely outweighs the (theoretical) cost. I just urge for the DAO to establish a clearer plan for going about this loan. As they say in America - there is no free lunch.

3 Likes