[TEMP CHECK] GHO Liquidity Pools

Governance
1

title: [TEMP CHECK] GHO Liquidity Pools
discussions: TBA
shortDescription: Initial liquidity pools supporting the GHO launch
author: @TokenLogic
created: 2023-06-13

Summary

This publication presents the community with initial GHO liquidity strategy for discussion.

Abstract

With GHO expected to launch in the near future, this publication presents the community with an initial liquidity strategy.

The strategy consists of primary and secondary liquidity pools, with the potential to included some pools in the Aave Safety Module (SM) at a later date.

At a high level, the primary liquidity pools at launch are shown below:

  1. GHO / bb-a-USD - ComposableStablePoolFactory
  2. LST / GHO (80/20) - Weighted Pool Factory
  3. GHO / LUSD - ComposableStablePoolFactory

With veBAL support from beyond Aave DAO expected, we believe concentrating effort across several pools will best serve the DAO launch strategy. A later proposal will detail pool sizes, yield estimates and how this could after the $1 peg.

Introduction

When shaping the liquidity strategy for GHO, we assessed various options with three main considerations:

  • Trading Pair
  • Decentralised Exchange (pool type)
  • Holistic Business Strategy

The largest trading pairs in Defi are ETH and USDC. For this reason we favour creating a USD stable coin liquidity pool and a LST / GHO liquidity pool.

  • USD stable coin liquidity pool
  • LST liquidity pool

Deep stable coin liquidity helps GHO to retain it’s $1 peg. Arbitrage trading is profitable with small price variations at large trade sizes. Therefore it is important to create a liquidity pool sufficient in size to facilitate large trade sizes with minimal price impact.

At launch, it is reasonable to expect volatility and minimal integrations in place at launch. As a result, the initial bootstraping phase is to be heavily dependent upon incentives to sustain liquidity and create peg resilience. When a spot price based oracle becomes available, we expect more sophisticated peg arbitrage strategies to become more readily available as yield strategy for various collateral types.

The Aave DAO and friend’s veBAL holding is expected to play a material role in bootstrapping liquidity. Based upon our initial conversations, we believe Aave DAO will receive support in the form of veBAL to bootstrap GHO liquidity pools on Balancer.

  • Aave DAO
  • Reallocation of Protocol Fee Vote Incentive (PFVI)
  • Balancer Community Members
  • Aura Finance Community Members
  • Potentially Liquity
  • And Others

Although gauges take some time to deploy, we anticipate the gauges being in production within as little as 1 week after launch.

Safety Module Considerations

The most dominant stable coins in Defi have centralised dependencies such as multisigs and off-chain counterparty risks etc… These centralised dependencies are less suitable for inclusion the SM. Similarly, any pool that includes an Aave Linear Pool, or aToken, shall be excluded from the SM due to systemic risk.

The following types of pools and assets are excluded from the SM:

  • Aave Linear Pools
  • USDC

Adding GHO liquidity tokens into the SM helps achieve the following:

  • Sustain GHO liquidity
  • Diversifies the SM assets
  • GHO revenue slightly offsets SM costs

LUSD is immutable and the most decentralised stable coin making it ideal for inclusion in the SM. More on this later.

Sustainability

A key benefit of Aave Linear pools is that they deposit liquidity in Aave v3 and growing the Aave Boosted Pool on Balancer offers strategic benefit to Aave. A portion of yield derived from Aave Protocol is used attain BAL incentives, 32.5%. Lido DAO and Rocket Pool have both grown liquidity pools that can be mostly sustained by veBAL votes attained from Balancer’s PFVI flywheel.

There is also the ability for Balancer DAO to redirect protocol fees used for bribing from the Aave Boosted Pool (bb-a-USD) towards the GHO/bb-a-USD or LST/GHO pool. The bb-a-USD pool currently has $28.2M of liquidity.

Naturally, TokenLogic can work with the Balancer community to redirect Balancer protocol fee funded vote incentives to preferential pools.

Given the DAO’s veBAL holding, our preference is for the primary pool to be on Balancer where BAL incentives will exceed the trading fee revenue generated on other DEXs. Curve and Convex are further progressed along there inflation schedule relative to Balancer and Aura. Therefore, whilst minimising dependencies on non Aave DAO voters, Balancer is a relatively better option than curve. We do support the CRV/sdCRV position be used to support GHO on Curve Finance.

With respect to the 80/20 pool, by having a larger allocation to an Yield Bearing Token (YBT), more yield is generated to fund vote incentives via the PFVI mechanism. Aave will have the option to incorporate this pool into the SM and the emissions will lead to reduced SM expenditure over time.

Primary Liquidity Pools

We propose the following primary liquidity pools for GHO:

  1. GHO / bb-a-USD - ComposableStablePoolFactory
  2. LST / GHO (80/20) - Weighted Pool Factory
  3. GHO / LUSD - ComposableStablePoolFactory

Of the three pools, pools 1 and 2 qualify as core pools on Balancer with >50% of the pool generating yield.

With the SM integration being very unlikely at launch, we view adding BPTS to the SM as a longer term GHO growth option for the community to consider. The Aave SM budget is expected to be the main source of incentives for sustaining the GHO/LUSD pool which contains no YBT and does not qualify as a Core Pool on Balancer.

Upon completing the SM upgrade, the PFVI and SM budget can be reallocated. For example, pool 2 PFVI could be redirected to pool 1 because pool 2 and 3 are sustained from the SM budget. The SM integration has the potential to create long lasting and sustained liquidity for GHO. It also could lead to additional assets being sustained within the SM using the same budget.

Discussions with Liquity relating to LUSD/GHO pool are promising. Liquity has a small vlAURA holding which can be used to support liquidity on Balancer. Gauges can be created when GHO is launched and then, if the Aave community supports the BPT being added to the SM, a new smBPT gauge can be deployed.

With the prospect of the LST/GHO pool being added to the SM, we are open to LST communities commenting below and volunteering initiatives that support growing this pool.

Secondary Pools

Every liquidity pool that contains GHO is positive for the Aave ecosystem. Therefore, we are open to experimenting and working with as many teams as possible.

To summaries, the following GHO secondary pools are being explored on a variety of DEXs:

  • GHO / FRAX
  • GHO / MAI
  • GHO / OHM

Several teams are keen to incorporate and support GHO liquidity pools. A GHO / FRAXBP pool is one example within the Curve Finance ecosystem and other early integrations could include Olympus, Sommelier, Mellow, Maverick, Uniswap, Swaap and MAI Finance (Qi DAO) and more.

We favour creating many secondary liquidity pools over time across a variety of protocols.

Future Considerations

The following considerations will influence the expected size of the liquidity pools:

  • GHO Supply cap (100M units)
  • veBAL support beyond Aave DAO
  • vlAURA support

Specification

GHO primary pools on Balancer v2 are shown below:

  1. GHO / bb-a-USD - ComposableStablePoolFactory
  2. LST / GHO (80/20) - Weighted Pool Factory
  3. GHO / LUSD - ComposableStablePoolFactory

Next Steps

After discussing and agreeing upon the GHO liquidity Pools, we will prepare a proposal for sizing the liquidity pools and present a plan for how to grow the liquidity.

We are hoping for comments below that indicate support from other communities which we will incorporate into the next proposal.

Disclaimer

@TokenLogic currently receives funding from the Butter Delegate Campaign and is a contributor @Llamaxyz. The publication falls within TokenLogic’s delegate platform scope.

Copyright

Copyright and related rights waived via CC0.

12 Likes
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Very exciting proposal! GHO’s launch will be another big milestone in the long and productive relationship between Balancer and Aave.

I’ve heard from many independent veBAL voters they are looking forward to GHO’s launch with a lot of anticipation. I think you’ll find ample support from voters and the Balancer community for the launch pools outlined in this proposal :slight_smile:

lets ghooooo

2 Likes
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Hello @TokenLogic, and thanks for this well-crafted proposal.

I am excited to see the Aave community consider how to harness LUSD’s unique advantages for GHO, and I think the path suggested by this proposal is relevant.

A LUSD/GHO pairing will provide a haven for GHO in case of a depegging event of major centralized stablecoins. As demonstrated during the latest USDC-related events, while all stables tend to depeg initially, LUSD quickly regained its peg thanks to redemptions.

Besides, LUSD’s immutability, preserved by the DEX supported to build the pool (Balancer), means the counterparty risks of the underlying LP token are minimized, a desirable property for an asset considered for de-risking the Safety Module exposure.

Just wanted to share a bit more context on this: an 80k vlAURA position is available to support all LUSD-involving pools on Balancer. So far, as the amount of pools concerned is minimal (baoLUSD/LUSD only, with soon LUSD/OHM & LUSD/GHO), the allocation process is manual.

We’re in the process of transitioning to a transparent and predictable framework enabling projects harnessing LUSD on Balancer to anticipate as much as possible the amount of support they will receive.

The main factor governing each pool’s allocation percentage is likely to be correlated to the volume processed by each pool during the previous period. Working on getting the framework live as soon as possible, ideally ahead of GHO’s launch.

Feel free to ping me for any Liquity or LUSD-related questions.

5 Likes
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Very excited for this launch.

This is a new account that I’ve made for the purpose of my current involvement as a contributor to the Aura Finance platform. Just in case anyone is wondering why this account is so new and the validity of my comments.

The general sentiment that I’ve been exposed to has been nothing short of welcoming for the new GHO pools. The potential synergy between Aave, Balancer, and Aura is quite apparent. I am aware of holders that will be supporting this pool and there are discussions with other contributors on how we can best ensure the successful launch of GHO.

6 Likes
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Hello, with the ACI we’re supportive of this TEMP CHECK on every part but one important detail:

we do not think GHO LP tokens should be included in any form in the safety module, but we are open-minded about streaming part of REWARD_VAULT safety incentives as “bribes” or “LM rewards” in a Safety Incentives budget/allocation rework but outside of the Safety Module.

We think this particular point is a topic on it’s own and should be discussed separately.

1 Like
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Hi @MarcZeller,

Thank you for the feedback and show of support for the proposal. As you mentioned, the inclusion of BPTs in the Safety Module (SM) falls outside of this proposal. The proposal does consider the potential of adding GHO to the SM via BPTs and if explored further, it makes sense to do so at a later date via a separate forum post.

We will now advance this proposal to Snapshot.

1 Like
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I would say I agree with limited exposure during the bootstrapping phase of a new asset due to emergent volatility and risk.

That being said, I am fully in support of LST/GHO pools. Especially wstETH (biased of course).

One of Lido DAO’s priorities in the medium term that aligns with GHO’s launch is bootstrapping long term, sustainable trade volume against Lido assets. While incentives would be helpful and needed in the initial liquidity phase, long term, an asset needs to have sufficient demand on its own with trading fees to be economically sustainable.

PSA: I am a contributor at Lido DAO

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