yAxis & Protocol Owned Liquidity

7 min readNov 11, 2021

Shifting from Liquidity Pool emissions to Protocol Owned Liquidity

Summary

yAxis proposes to allocate 250K YAXIS tokens to launch a Protocol Owned Liquidity (POL) bond program in partnership with Olympus Pro.
The goal is to test the Olympus Pro bond program whilst continuing to incentivise the Uniswap LP.
If successful, yAxis will sunset LP emissions in the future to focus on Protocol Owned Liquidity. YAxis would no longer be required to pay out 250K tokens per quarter, saving 1M YAXIS tokens over a calendar year.
An additional benefit of POL: yAxis would create a new revenue stream in the form of Uniswap fees.

Introduction

In 2020, an ecosystem of smart contract-powered financial products operating on blockchain networks exploded into the public consciousness.

Welcome — Decentralized Finance — DeFi

DeFi boasts a myriad of products and services, from applications (DApps) and exchanges (DEXs) to autonomous organizations (DAOs), all of which aim to improve upon different aspects of the traditional financial sector.

In the past year, DeFi has seen unprecedented levels of growth. TVL or Total Value Locked has risen to over $270 billion and the powerful subversive capabilities of the sector continue to expand and astonish.

Yet this success story is far from perfect. Recognized DeFi economic models have imperfections, with many suffering from unsustainable token emissions and the negative effects of mercenary capital.

How is the crypto space addressing these issues? DeFi 2.0 anyone?

DeFi 2.0

Although consistent definitions for DeFi 2.0 are difficult to find, most commentators list economic sustainability and protocol longevity as key components to this nascent movement.

In fact, there are already projects actively exploring ways to balance incentives that generate crucial liquidity for teams, without having the hazards of most yield-farming schemes. There are also teams focusing on post-emission revenue models that aim to negate the very real and potentially damaging spectre of ending emissions.

That said, for some, DeFi 2.0 is nothing more than a meme. For others, including yAxis, it represents a concrete path towards sustainability and one that we think needs to be examined very carefully.

A necessary problem — Liquidity Providers

Liquidity Providers are essential to the operation of almost every project in the DeFi landscape. Simply put, liquidity providers are decentralized exchange users who fund a liquidity pool with tokens that they own (for example ETH and YAXIS in the Uniswap pool YAXIS-ETH Pair). Without healthy liquidity pools, selling and buying of native tokens (e.g. YAXIS) on the open, decentralized market is almost impossible.

In return for providing liquidity in the form of their digital assets, LPers are typically compensated with both trading fees and a participating protocol’s native tokens.

NOTE: yAxis currently incentivizes the YAXIS-ETH UNISWAP V2 LP Pair with 250K YAXIS tokens every three months.

For Liquidity Providers, this level of incentivization can be incredibly lucrative. However, for many projects this mercenary capital or “mercenary farming” is nothing but an accepted downside, which results in rewards being continuously dumped in order to realize yield.

As noted above, a major focal point of DeFi 2.0, is how teams address the finite nature of LP incentives, and what happens when all the capital (and triple-digit yield) simply evaporates.

These are not easy problems to solve, and they require teams to fundamentally rethink how they approach their tokenomics.

Thankfully though, crypto innovation continues to break established moulds, and as we will see, there are already real world functioning economic solutions for teams to assess and to trial.

Protocol Owned Liquidity (POL)

An example of a project that firmly fits the DeFi 2.0 narrative and one that is looking to solve the issue of mercenary capital is Olympus Pro.

Olympus Pro is the new industry-standard platform that is helping DeFi protocols acquire their own liquidity (Protocol Owned Liquidity — POL) through the sale of “bonds”.

Olympus Pro enables projects like yAxis to purchase liquidity from users.
Users deposit liquidity (Liquidity tokens) into Olympus Pro, and are paid a premium for this liquidity in the form of “Bonds” or more accurately, discounted tokens. As a project purchases liquidity, and the owned liquidity grows, the need for emissions decreases to a point where LP emissions may no longer be required.

As mentioned, these bonds are offered at a discount to the market price, essentially giving Liquidity Providers an incentive to sell their LP tokens to the project. Projects ultimately get to keep the liquidity, and the LP’er make more of a profit. Win-win.

In addition, protocols also get to decide how they want their bonds to vest. Typically, this is set linearly with higher price discounts coming from longer vesting periods. Again, this helps deter mercenary capital from turning a quick profit. At the completion of the vesting period, the bond holder can claim all of the accrued tokens.

NOTE: It is also worth noting that bonds are freely available to anyone, and are not just limited to existing liquidity providers. To newcomers, these bonds represent an opportunity to acquire tokens at a discount. You can find the Olympus Pro Bond Marketplace here: https://pro.olympusdao.finance/

As with most endeavors, both pros and cons exist.

For the yAxis project the pros include:

yAxis would effectively purchase liquidity, removing the need to incentivize the Uniswap YAXIS-WETH liquidity pool with YAXIS rewards. As project owned liquidity grows, the need for emissions decreases to a point where emissions may no longer be required.
yAxis would earn Uniswap fees through the purchased LP tokens, resulting in an additional income stream for the protocol’s treasury.
This would represent a saving of roughly 1M YAXIS tokens over the course of a calendar year.
This prevents mercenary capital from farming YAXIS, dumping YAXIS, and then leaving the project as they see fit.

Cons

May reduce liquidity pool depth during the transition from the current Uniswap LP Emissions to the Olympus Pro bonds program, resulting in potentially higher slippage during this period.

For Liquidity Providers the pros include:

Less risk of impermanent loss and variance. With farming, users wait weeks or even months to accrue the expected APR from farmed rewards, taking a risk of impermanent loss and APR’s dropping. With bonding, users can accrue all of the expected value within a much shorter period, which helps to reduce those risks.
Receive YAXIS at a discount to spot market prices.
Opportunity to leverage capital in support of the project, with incentives aligned to ensure the project’s overall health.

Cons

LPs will likely realize lower yield on their capital.
One-time liquidity event (over the course of the vesting period) vs a continuous emissions schedule.

YIP-13: Olympus Pro POL Bond Programme

Participation in the Olympus Pro program would be a significant undertaking for both the yAxis team and community, as it represents a bold move away from established ecosystem practices.

Naturally, before any move towards POL, the community would need to give its blessing through a successful DAO vote. If community approval is received, yAxis would allocate 250K YAXIS tokens to Olympus for the purchase of YAXIS-WETH LP tokens.

The Olympus Pro team, in conjunction with the yAxis dev team, would create the requisite smart contracts and bond marketplace and bond sales could begin as early as the next available Olympus DAO launch window.

NOTE: Uniswap LP emissions were recently topped up with roughly 250K YAXIS tokens. These tokens will support Uniswap LP emissions through until the end of 2021, providing a natural overlap, while Bond allocation kicks in.

YIP-13 will seek to approve a similar 250K YAXIS allocation to fund the Olympus Pro POL Programme. This allocation can be debited against the next Uniswap LP emissions top-up.