PoL & Governance Proposal #5
What is Protocol Owned Liquidity?
The concept of yield farming could be attributed to being one of the most influential factors behind the explosion of decentralized finance in 2021, otherwise known as DeFi 1.0. However, a new trend has recently been observed making promising waves in the DeFi sector. And that trend is none other than DeFi 2.0, brought upon by the Olympus protocol with its revolutionary paradigm shift to protocol owned liquidity (POL)!
We are all familiar with the concept of yield farming. The idea that by providing liquidity and staking LP tokens investors can earn an income in protocol tokens in exchange for providing that liquidity and taking on the risk of impermanent loss. Liquidity providers rent liquidity to a protocol in return for being paid rewards in that protocol’s token.
Enter Olympus DAO, which flipped this idea on its head! Rather than renting liquidity from “mercenary” providers, the Olympus protocol takes matters into its own hands by constantly purchasing its own liquidity. Over 99% of all liquidity for $OHM (the governance token of Olympus) is owned by Olympus itself! How is this possible? That’s a great question!
Instead of the traditional yield farming model where the protocol perpetually pays rent (rewards) to liquidity providers, Olympus designed an alternative model known as POL. This is how POL works; Olympus offers to sell its governance token, $OHM, at a discount. Great! But, there is a catch. The discount is only valid if a user first creates eligible LP tokens (i.e. $OHM-$DAI) which the user may then exchange for $OHM at a discount rather than straight up buying the $OHM token on an exchange. Let’s consider an example to understand this better:
Jimmy wants to invest $1000 into $OHM, he has two choices:
- Choice 1: He can purchase $1,000 worth of $OHM on an exchange.
- Choice 2: He can purchase $500 worth of $OHM and $500 worth of $DAI and create $OHM-$DAI LP, he can then trade $OHM-$DAI LP worth $1,000 with the Olympus DAO and receive $OHM at a discount of 10%. Over 5 days, Jimmy will receive $1,100 $OHM. Getting $100 extra worth of $OHM because he chose to bond liquidity!
In other words, rather than constantly paying mercenary liquidity providers to stake their LP tokens and maintain a healthy level of liquidity, Olympus DAO offers to buy $OHM-$DAI LP tokens from investors on the market through a process termed “bonding” to accumulate its own liquidity. On the users’ side this benefits the users by allowing them to purchase $OHM below the market price. Over time, as many users continue to bond as well as arbitrage $OHM, the Olympus DAO continues to accumulate greater liquidity while continuously earning trading fees. In time, the accumulation of LP tokens leads to price stability for the $OHM token, price appreciation, and investor trust in the Olympus DAO protocol.
How Could Crystl Finance Benefit From a POL Model?
The biggest benefit of the POL model is the potential to accumulate a massive amount of LP tokens that are permanently locked in a smart contract and guaranteed not to leave the protocol treasury. Not only is this highly profitable for the protocol, but by permanently locking tokens in liquidity, a POL model is able to guarantee minimal price slippage as well as maximize price stability for the protocol’s token.
As in the previously mentioned example, Olympus is known to possess over 99% of their own $OHM-$DAI liquidity. With such a vast share of the liquidity pool Olympus captures nearly all the trading fees that occur when investors buy or sell the $OHM token. This very fact serves as a powerful revenue stream for the Olympus protocol. What about the Olympus users? How do they win? Well, not only can investors purchase the $OHM token at a discount and maximize their holdings or perform arbitrage, but they also get the comfort of knowing that they will be able to sell their holdings with minimal price slippage at any time because the strength of the Olympus treasury guarantees the presence of a high degree of available liquidity.
We believe that transitioning Crystl Finance from a liquidity renting model into POL model is the best possible move that we can do to guarantee the stability, price increase, higher liquidity, and low price slippage for the $CRYSTL token. That is why in the coming week, another Governance proposal will be put to vote for the community. A number of benefits for users and the protocol are summarized below.
- Purchase $CRYSTL at a discount by bonding $CRYSTL-$CRO LP, maximize their $CRYSTL holdings or arbitrage the discount
- Enjoy lower price slippage and the comfort of permanent on-chain liquidity
- Enjoy price appreciation for $CRYSTL as POL grows, more $CRYSTL is in liquidity and less $CRYSTL is in circulation
- Easily move from $CRYSTL-$CRO LP revenue sharing feature by bonding to $CRYSTL & moving to single staking $CRYSTL when Pools present a income opportunities
- Use bonded $CRYSTL they receive at a discount to pair with $CRO and earn dividends from the revenue sharing feature
- Grow their capital in other tokens using Vaults, while benefiting their $CRYSTL investments
- Obtain permanently growing on-chain liquidity for $CRYSTL-$CRO, leading to the possibility of capturing a large majority of the trading fees
- Encourage price stability for the $CRYSTL token while building investor confidence and trust
- Posses a scalable model for growing protocol owned liquidity on other chains down the line
$CRYSTL Governance Proposal #5
After some consideration and analysis, we would like to put forward an additional 5th proposal to the community to decide what to do with the remaining emissions that are being moved to the Cronos network.
Move To A Protocol Owned Liquidity Model:
- Option A: Use the remaining $CRYSTL emissions to fund on-demand bonding for $CRYSTL-$CRO under the DeFi 2.0 protocol owned liquidity model based on Olympus DAO.
- Option B: Do not use the remaining $CRYSTL emissions for bonding protocol owned liquidity.
With Option A, Crystl Finance will implement a dedicated feature where users may bring their $CRYSTL-$CRO LP tokens to exchange for $CRYSTL and redeem at a discount over a few days. The $CRYSTL-$CRO LP tokens accumulated this way will be locked in a treasury and will serve to provide permanent liquidity on Cronos. As more investors continue to bond for $CRYSTL, the treasury is expected to eventually accumulate a high degree of liquidity. With deeper liquidity, the conditions will become favorable for the price of $CRYSTL to increase. Furthermore, the volatility of the $CRYSTL token will be reduced and price impact even for large trades will become negligible as the liquidity continues to grow.
With Option B, we will not proceed to implement a bonding system. Instead, we will proceed by obtaining input from the community on how to best use the remaining $CRYSTL emissions on Cronos.
- Friday, December 10: Governance Proposal #5 Published
- Sunday, December 12: Reddit AMA
- Monday, December 13: Live Telegram AMA
- Wednesday, December 15: Proposal #5 Voting Begins, Snapshot at 22:00 UTC
- Friday, December 17: Proposal #5 Voting Ends at 17:00 UTC