Proposal to significantly increase liquidity on Ethereum Curve UST pools through the use of Votium, Convex, and Tokemak

Disclaimer – I am a member of the TFL team.

Context

Recently there have been a few key developments setting the building blocks for Terra USD’s interchain expansion. Wormhole’s decentralized bridge went live, Poll 143 [Deploy $3 million of Community Pool LUNA for UST Liquidity Mining Incentives Across Strategic Apps and Protocols on Major Layer Ones] is set to pass, and an additional 2,705,987,177 UST have been added to the Community Pool from the Pre-Col 5 Burning. Now is the right time to significantly bolster Wormhole UST liquidity on Ethereum.

The ultimate goal is to have UST become the go-to interchain stablecoin. This process begins with deep UST liquidity on Curve Finance, Ethereum’s preferred AMM for stableswaps, and continues with finding the best use cases for UST on Ethereum like OlympusDAO, Rari Fuse pools, Convex Finance, and Tokemak to just name a few.

Curve Finance is the largest protocol in DeFi with a TVL of over $20B and over $100M in daily swap volume. The Curve system allows veCRV holders to vote how CRV inflation is distributed by assigning weights to each pool’s “gauge”. Convex Finance, the third largest protocol in DeFi with over $15B in TVL, is a whale holder of perma-locked veCRV and can participate in these voting procedures by passing these voting rights to vote locked CVX holders. Essentially, Convex controls a majority portion of the reward distribution to each Curve pool.

Votium is an incentives platform where vlCVX holders can receive compensation from buyers interested in amassing voting power. This means instead of market-buying a ton of CVX, buyers can simply incentivize CVX holders to allocate their votes to a given Curve pool, which in turn increases the pool’s rewards emissions. Currently “incentivizing” CVX holders through Votium is an ~extremely~ effective method of providing liquidity incentives since $1 worth of incentives via Votium is equal to $4.65 of CRV/CVX emissions (Llama Airforce) meaning incentivizing is 4.65x more efficient than direct liquidity incentives. In Votium’s current round of incentives the mim-ust pool had over $1.2m in $SPELL incentives from Abracadabra and the frax-3crv pool had nearly $2.5m in $FXS from the Frax Foundation. Clearly projects are continually willing to put up hefty incentives before Convex gauge votes every 2 weeks due to Votium / Convex’s effectiveness at incentivizing on chain liquidity.

In an alternative means to Curve Finance’s AMM solution to liquidity, Tokemak provides various token reactors. Each of the “activated” Token reactors allows depositors of said reactors to earn TOKE yield (current reactors have 40%+ APY), i.e. if a LUNA reactor is activated, LUNA depositors to the LUNA Reactor earn TOKE. Liquidity in each reactor is controlled by TOKE holders to decide how to allocate the funds such as staking the OHM in an OHM Reactor or LPing the funds. Essentially, this provides another black hole for LUNA via which depositors can amass TOKE and direct the reactor funds however they see fit. During each C.o.R.E. voting session (once every few months) the top 5 reactors with the most TOKE voted towards them are “activated.” Similar to Votium, Votemak provides a way to incentivize TOKE holders to vote for a given reactor. Initially, the plan is to win a LUNA reactor as the Tokemak team has suggested, after which the aim is to create and win a UST reactor.

Ahhhhhh I’m incentivizing

In order to significantly grow USTw liquidity on Ethereum, this proposal details a 6 month “incentive” plan by using some of the newly minted community pool funds. All incentives for Proposal 1 and 3 are to be paid in LUNA and thus the UST withdrawn for the community pool will be swapped to LUNA via TerraSwap to not dilute the LUNA supply.

Proposal 1: Votium Incentives

With the modest goal of $500m in TVL in the Curve Wormhole UST-3CRV pool, which currently sits at a mere $15M, this proposal conveys bi-weekly Votium incentives before each Convex gauge vote.

The aim is to deploy a strategic amount of incentives over the next 6 months with the following USTw-3CRV pool TVL goals in mind: 300M by week 2, 400M by week 4, and 500M+ by week 6. Once this goal is reached, the results will be re-evaluated for a more aspirational goal.

The plan is to incentivize $1m of LUNA before each gauge vote for the next 6 months, totalling 12 gauge votes. $1m in UST will be swapped to LUNA every two weeks before each gauge vote.

Using the current CVX/CRV emissions per $1 spent on incentives of 4.65, and $1m of LUNA incentives per vote, back of the hand math can be used to project emission yields on the pool for various TVLs:

  • 300m TVL = $1m * 4.65 * 26 gauge votes per year / 300m = 40% APY
  • 400m TVL = $1m * 4.65 * 26 gauge votes per year / 400m = 30% APY
  • 500m TVL = $1m * 4.65 * 26 gauge votes per year / 500m = 24% APY

By spending 12m in incentives, at current emission rates, the pools will receive 55.8m in CVX and CRV – a low risk 4.65x for our community and liquidity providers.

Total funds for Proposal 1: 12m UST swapped to LUNA (~233.96k LUNA at current price of 51.29) via TerraSwap over 6 months.

Proposal 2: Self supplied Convex Liquidity

This strategy is slightly different and more degen but it provides the most utility of the three proposals. Fund 250m of UST into the Curve USTw-3CRV pool via Convex for 6 months, after which the funds are returned to the Community Pool. On a bi-weekly cadence, all the rewards are withdrawn, max vote lock the CVX and CRV rewards and use it to vote for the USTw-3CRV pool via convex on each gauge vote. This is an important proposal because CVX emissions happen on a diminishing curve and the more acquired, the more able to direct incentives to our Curve pool without needing to continually incentivize via Votium.

Over time, the expectation is that the spend on incentives will get closer to emissions rates due to the arbitrage that exists. This is the cheapest way for us to acquire CVX and is more efficient than market buying. This strategy allows us to build up a treasury of CVX and CRV that can be used to direct incentives to our pool forever. If we can acquire enough CVX and CRV, it may even be possible to taper down Votium incentives while still maintaining the same reward emissions to our pool - the most optimal outcome.

Total funds for Proposal 2: 250m UST

Proposal 3: Tokemak + Votemak Incentives

To win a reactor in the next C.o.R.E. vote, this proposal will incentivize TOKE holders via Votemak. The plan is to start with $500k in LUNA incentives and gradually increase up to $2m in LUNA depending on how the vote is progressing. This means if the LUNA reactor falls out of the top 5 spots, we’ll bump up the incentives $250k at a time until we reclaim a seat.

Total funds for Proposal 3: 2m UST swapped to LUNA (~38.99k LUNA at current price of 51.29) via TerraSwap

fin

These strategies will help strengthen UST’s position and liquidity on Ethereum. More degen strategies and proposals will be presented in the coming weeks to help UST become the interchain stablecoin of choice because after all :clap: a :clap: decentralized :clap: economy :clap: needs :clap: decentralized :clap: money :clap:.

All funds withdrawn from the Community Pool will be kept in a multisig wallet: terra1jrhxdtwxrsxw3t2al6t3sga89974juhpccuxct
The multisig will be controlled by 5 members with 4/5 quorum required: @JeremyDelphi, a member of the TFL Finance team, myself, @Papi, and @lejimmy

tldr

  • Proposal 1: $12m in UST swapped to LUNA (~233.96k LUNA at current price of 51.29) via TerraSwap over 6 months for Convex incentives.
  • Proposal 2: $250m in UST to farm CVX / CRV via USTw-3CRV, returned to the community pool in 6 months
  • Proposal 3: $2m in UST swapped to LUNA (~38.99k LUNA at current price of 51.29) via TerraSwap for Tokemak incentives
  • Proposal 2 will be the most impactful for long term UST success on Ethereum, however ideally all three are enacted

Happy to hear thoughts from the community on each of these proposals. Please reach out to me directly if you have any god-like strategy ideas I can take on next: @ezaan_ on twitter.

22 Likes

Yeah. We need this. Two questions:

  1. What do you think happens when the 6 months of incentives run out? How will you get people to continue providing liquidity in the long-run?
  2. Why do we need to do all 3 of the proposals when it seems like proposal 2 will create a sufficiently deep pool of liquidity?
1 Like

it’s not clear to me the benefits to Terra in this proposal. I can see the tl;dr call to actions but I’m not sure I quite understand the reasonings. Is there a ELI5 version of the context?

1 Like

It’s no secret that TFL wants to bring UST to every chain possible. If you want UST go cross-chain, then you need UST liquidity on these chains… By figuring out multiple avenues to fund Curve pools, people will be able to readily swap from USDC/USDT/DAI (and other popular stables) to UST at reasonable prices. Right now, swapping from USDT to UST results in 30bps slippage on Curve whereas swapping from USDT to USDC only incurs a 3bps slippage.

A bet on TFL / LUNA is a bet on the stablecoin. The more adoption we can bring to UST, the stronger the ecosystem will ultimately be. A strong ecosystem == a higher price on LUNA.

7 Likes

Good questions ser.

As you pointed out in your 2nd reply, having sufficient liquidity on other chains to allow low slippage trades is extremely important if we want UST to be an actual usable asset there.

Responding to your first question, ideally proposal 2 takes care of this. Once we have gathered enough CVX and CRV over 6 months we can continue to use them to vote rewards to the USTw-3CRV pool in perpetuity. However there is a flywheel affect that addresses your second question. If we’re not incentivizing CVX holders to vote for our pool via Votium (Proposal 1) then we will get no CVX and CRV emissions making Proposal 2 useless since we won’t be able to farm the tokens to vote more rewards to our pool.

Tokemak on the other hand is not directly tied into Curve but it creates yet another great use case for Luna and UST on Etherium. The incentive spend is ~far~ less than the rewards LUNA holders will receive both in terms of TOKE rewards and buy pressure. see: https://twitter.com/dcfgod/status/1460483706276089862

3 Likes

First of all, please create separate on-chain polls for each of the proposals instead of lumping them into one.

Proposal 1

Could the target APY be too high? We only need it to be slightly higher than the market’s prevailing stablecoin farming rate in order to attract significant liquidity.

EDIT: Someone pointed to me that the prevailing farming rate is indeed in 20 - 25% range. So this incentivation is appropriate. Please ignore this comment

Proposal 2

Is there an estimation on how much CRV/CVX we’ll be able to earn in 6 months, and how much voting power will that give us in Curve/Convex governance?

How will the farmed CRV/CVX tokens be managed? Since they are farmed using community fund, they should also be governed by the Luna staker community.

Would prefer more clarity on the multisig (how many signers are there and who are they?) considering it will manage a significant amount of money for a long period of time.

Proposal 3

Doubtful how much benefit this will bring. I don’t think TOKE holders necessarily have better idea on how to best deploy Luna liquidity than individual Luna holders.

1 Like

These proposals make perfect sense for contributing to the longevity of UST - I am dripping with excitement.

4 Likes

A natural benchmark for this would be the MIM and d3pool, which currently sits at 20-30% APR (former having billions and the latter having ~60M in the pool). We’d want stronger incentives than these for USTw-3CRV pool. Seems the proposed numbers are within the ballpark, and I think there is room to actually go higher.

My initial assumption is that they would initially be managed by the multi-sig and then fully transferred over to governance along with the original community funds. Clarity on the multisig participants (@ezaan chime in?) should be made clear and perhaps follow a similar structure to the Rapid Grants Committee with regards to introducing/removing members. Note that proposals 1 and 2 have been specifically designed with the idea of the Terra protocol capturing most of the CVX/CRV which can then be indefinitely locked.

Bringing external communities to direct liquidity to Terra assets not only provides liquidity on non-native chains, but it also brings in interest from user bases outside of the Terra ecosystem. I would dare to even say that these users (with strong involvement in the Ethereum ecosystem and ‘flavor of the month’ protocols) would be more knowledgeable in deploying liquidity than Terra-centric users.

6 Likes

Proposal #1 and #2 make a lot of sense and are inter-related. We should definitely be incentivizing Curve pools and acquiring CVX in the long term to keep it sustainable. The question in my mind is how we acquire CVX. Can we see some math related to #2. If take the “shortcut” of market buying CVX and self-voting on USTw-3CRV how does it compare to the slow accumulation over 6 months? Other protocols are aggressively acquiring CVX, will we be too late with the farming method?

Proposal #3 is not so clear to me. What is the purpose of incentivizing LUNA liquidity on Ethereum? What is the use case for LUNA on Ethereum? Also, there are some risks left out in the proposal. If we fail to win a reactor @$2m, we get nothing but it still costs $2m. Votes carry over to the next round, but we would need additional bribe money in that round to finish the job. (~$1 million was able to secure reactors in the last round, but other protocols have a head start from carryover votes and who knows if protocols will escalate). Not 100% sure on how Tokemak works, but there is an additional vote to distribute liquidity over won reactors, which currently has no bribing. Unsure if bribing will be needed there in the future (currently no such thing exists).

I’m definitely a fan. The flywheel effect of using proposal 1 to improve the long term benefits of proposal 2 makes a lot of sense. The breakeven on when the capital spent on proposal 1 gets paid back via rewards to the self supplied liquidity (proposal 2) is basically when this hypothetical 250m UST deposit represents less than 1/4.65 of the pool (~$1.2b). At that point we’ve effectively accomplished the goal of creating deep liquidity.

5 Likes

I like all 3 proposals (especially proposal 3 - Tokemak is a rising star for defi liquidity on Ethereum). It is key for UST to establish deep liquidity on Ethereum. Wish we could’ve implemented this earlier tbh. It’s as the saying goes - the best time to plant a tree was 30 years ago, the next best time is now.

2 Likes

Is there a reason why you can only do one of these?
Why can’t you do all 3 (with potentially smaller amounts) at the same time?

1 Like

Hey @ezaan,

Firstly, great proposal. Like @YanDelphi, I’m a big fan of this approach, Proposal 1 & 2 is highly synergistic and your head is definitely in the right place. Just wanted to share some quick thoughts on my end to hopefully tighten this initiative, hope you can provide some clarity on these.

  1. Can we do a quick cost-benefit analysis of market buying CVX with funds set aside for proposal 1 vs bribing via Votium? Almost 80% of all CVX has already been emissions and emissions happen on a diminishing curve so worth noting that this proposal is quite time-sensitive. Would love to see some analysis here.

  2. What plans do you have for farmed CRV? Will it be used to farm CVX via locking it into cvxCRV or is the plan to trade farmed CRV for more CVX? I’m a fan of stacking more CVX in the interest of time, and the number of veCRV represented by CVX is almost constantly on an upward path. cvxCRV and CRV peg has broken quite a few times in the past so I think it’s not the best asset to accumulate for the Community Fund, the path to perpetual CRV incentives is more obvious by accumulating CVX in my opinion.

  3. I’m sure you have reasons but the objective behind proposal 3 is not 100% clear. Would love more clarity here.

2 Likes

The competing centralized stablecoins are more familiar to users in the Ethereum network and they aren’t likely to venture into Terra just to find out what Terra stablecoins are about. With these incentives, we can make ETH people more familiar with $UST, and thus more likely to investigate Terra ecosystem options and trust UST pairs where they can find them in future. Liquidity spread in other chains also increases the staying power and demand diversity of the stablecoin, making it more stable.

I agree with these reasonable proposals.

2 Likes

@ezaan love the formatting here and an overall enjoyable read.

Great to see the three outlined proposals and TFL’s continued dedication to bringing UST across chains (and willing to spend LUNA to do so.)

I feel as if Proposal 3 is being ignored in comments above - concentrated liquidity is invaluable as is the community being developed by the Tokemak team. Is this due to the cost in proportion to Proposal 1 and 2? Or is this due to a general lack of knowledge of the Tokemak product and community?

Votemak, linked above, is “bribing” users to vote using their $TOKE and is a testimony to the value a reactor can contribute to a project. Terra must capitalize on this new dynamic

I am excited by the quote below - mind dropping us a hint? :eyes:

Look forward to seeing more strategies to expand UST across networks.

3 Likes

Idea for proposal 3 is to build a relationship with the Tokemak team, and they’ve suggested we start off with a LUNA reactor, with the goal of getting UST added as a base asset shortly after. Similar teams have structured in the same way (FXS added first, then FRAX)

1 Like

I agree. I think buying CVX directly AND accumulate CVX along 6 month period should be a better strategy.

Holding CVX does not mean cost, it should sustain its value.

Actually, with more and more stablecoin launch, I suspect CVX can increase its value.

Why are we focusing on Eth instead of building a framework to incentivize the 70+ projects that are supposed to launch on terra post col-5??

I’ve edited the post to provide more clarity on this front. The multisig will be controlled by 3 members: Jeremy Ong VP of BizOpz @Delphi (@JeremyDelphi), a member of the TFL Finance team, and myself (@ezaan).

Additionally, to keep the community informed, I plan to post bi-weekly updates on our pool size, the CVX/CRV we have farmed, along with a couple other helpful metrics.

The CVX will be vote locked into vlCVX and will need to be used every 2 weeks during the gauge votes, it would be infeasible to do the voting process to vote in gauge votes every 2 weeks thus the multisig team will take on the onus of doing this bi-weekly. However, of course, the vlCVX is technically owned by the Luna staker community and therefore if the community decides they would like to do something different with it in the future then that can definitely be done.

1 Like