Autonomic Liquidity Provision
Liquidity backstop for Tenderize Ecosystem
Autonomous Liquidity Provision (ALP) allocates fees earned by Tenderize to a an on-chain treasury, where they are used to provision liquidity for the underlying tokens. It is a more automated version of Protocol Owned Liquidity (POL), as pioneered by Olympus DAO. TenderSwap ALP doesn’t solely depend on external market participants selling their liquidity at a premium to the treasury but rather utilizes the constant stream of revenue produced by the protocol.
Protocol Owned Liquidity is an innovative solution to the mercenary capital problem. Protocols which give tokens in exchange for depositing assets engage in a “race to the bottom” to provide more and more incentives. The incentive tokens attract liquidity providers but in-turn, dilute the value of the protocol via high issuance of tokens. Instead, TenderSwap’s Protocol Owned Liquidity ensures that the liquidity acquired is permanently allocated as part of the treasury. The assets in the treasury are yield-bearing and can provide intrinsic value to a protocol’s token.
👉 With Autonomous Provisioned Liquidity, protocol fees are used to permanently provision liquidity as part of the treasury
Legacy liquid staking protocols require a deep on-chain liquidity to maintain price parity and offer liquidity for the staked position. Tenderize does this in a cost-efficient way by permanently provisioning liquidity from the treasury so that a minimum amount of liquidity will always exist, regardless of market conditions.
This can greatly reduce liquidity risk, which is important for third-party protocols to build upon tTokens and Tenderswap. Borrowing and lending protocols are able to offer better liquidation thresholds with reduced liquidity risk.
The liquidity ratio indicates whether there is sufficient liquidity in underlying tokens for its TenderTokens in circulation. The liquidity ratio is the result of dividing the amount of underlying tokens for a particular asset in TenderSwap by the amount that is staked in Tenderize for that token.
👉 Example: If TenderSwap contains 100 LPT of unstaked liquidity and there is 500 LPT staked for tLPT, the liquidity ratio equals 100/500 or 0.20.
A liquidity ratio of one would mean that each underlying token staked through Tenderize is paired 1:1 with a liquid token in TenderSwap. This is the model adopted by Uniswap and Curve, which isn’t capital efficient.
Thanks to the ability to unstake, it’s unlikely that all users would want to sell their assets all at the same time, which would create a bank run. Instead, we can assume that liquidity only needs to be a fraction portion of what is staked in total. This fractional portion is called the target liquidity ratio. This target is set by WAGYU holders and is adjusted depending on market behavior. Generally, 20% during low velocity conditions and 50% during high velocity conditions is an ideal starting point. At genesis, the target liquidity ratio will be 25%.
If the current liquidity ratio for an underlying token is higher than the target liquidity ratio, fees will be retained in the treasury under the form of TenderTokens. Once there, they earn staking rewards and more resources are built up for when liquidity needs to be acquired.
Bonding is the process of a protocol selling a particular asset out of its treasury at a discount, in return for another asset it would like to add liquidity for. In most cases, a protocol would sell its native token at a discount to acquire an asset to pair it with (e.g. USD). At Tenderize, however, TenderTokens will be sold at a discount in return for their underlying counterpart, which can then be added as liquidity for the underlying tokens in TenderSwap.
If existing fees in the treasury aren’t sufficient to bring liquidity to desired levels, then Tenderize’s native token could also be bonded to users in exchange for tokens needed by TenderSwap. Such an incentive structure distributes only the minimal required amount of WAGYU to incentivize liquidity. Bonds mature over time through vesting and pay out a fixed rate over time until maturity.
The bond price is expressed as the price paid for the assets that are received from bonding and is determined by taking the market price for the asset and applying a discount or premium. If liquidity is needed in the system, then bonds will be offered to the public at a discount. This happens when liquidity ratio is less than the target.
In the case of a discounted bond, more tTokens + WAGYU would be received from the bond compared to staking tokens or buying on the secondary market. This results in users selling assets to the protocol to bring the liquidity ratio up to target.
When there is no liquidity needed and the liquidity ratio is above target, bonds trade at a premium. When trading at a premium, the user will elect to buy assets on the open market instead, not buying the bond.
Inverse bonding, as the name says, is the reverse of bonding. In the event of the liquidity ratio being significantly over the target ratio, the native token, WAGYU, will be redeemable for assets in the protocol’s treasury. This mechanism allows for WAGYU holders to extract value from the treasury without having to pay protocol dividends.