Junior Pool + Max Senior Maturity Proposal

Summary

The BarnBridge core team is recommending two updates to the current SMART Yield platform. The purpose of these changes is to introduce new avenues for TVL and attract new users to the protocol. The proposal will be put up for a vote in the DAO unless there is a strong indication from the community against it.

Description

We are proposing the following:

  • Raise max maturity parameter for SMART Yield senior tranches to one year
  • Launch a 10,000 $BOND / week Junior Tokens incentivization program for an initial period of 6 months

Motivation

  • Raising the max maturity parameter: Currently, SMART Yield senior tranches are capped at a maximum duration of 30 days. Given that these tranches would be locked in somewhere between 5-8% annualized APR, the likely expected yield on any senior SMART Yield tranche issued would amount to 0.4-0.7% (monthly number not annualized). For this to make sense considering the gas costs associated with minting and redeeming, a user would need to be depositing a principal well over $1,000,000 for the decision to make sense.

Extending the maximum maturity to a year would reduce the implied burden of gas costs, as well as attract risk-conscious entities who would be enticed by the idea of the first truly annualized product in the DeFi ecosystem. The risk of not moving to do so is that the protocol would face a dearth of senior tranche SMART Yield TVL, limiting the amount of risk available for sale to junior tranches.

  • Weekly 10,000 $BOND Incentive for Junior SMART Yield Stablecoin Tranches: While senior tranches compete against relatively few other alternatives for fixed income products in DeFi, junior tranches must compete against the entire universe of other variable rate products in DeFi. Subsidization of junior tranches will attract TVL away from those other opportunities, raising the ceiling for potential senior tranche TVL with the captured liquidity. It would also provide new entrants to the BarnBridge ecosystem a way to earn voting power in the protocol. As we are planning to add a new Compound DAI pool soon, bb_cUSDC and bb_cDAI originated juniors would be eligible for deposit.

Technical Details

Both the raising of the maximum maturity for senior SMART Yield tranches and setting up the junior SMART Yield tranche incentivization program can be executed within one DAO proposal. For the junior tokens incentivization program we would deploy pools using our already audited contracts.

Useful Links

Argumentation

The primary items that could be up for debate, as we view it, are:

  • What is the risk of rolling out one-year maturities today?
  • Is 240,000 $BOND over six months the right sum and duration for incentivizing SMART Yield juniors?
  • Do we need to further incentivize seniors?

As a reminder, it takes twelve days for a proposal to go from initiation to implementation through the DAO.

DAO Vote

N/A

13 Likes

Full support. Pavlo’s Loop, baby!

6 Likes

This is the way. :grinning:

9 Likes

team is running @ 110%

4 Likes

4RC is in full support and will vote to pass! Thanks team!

7 Likes

Would love to see any feedback or criticisms on any points. We spent a lot of time debating the fine points internally so we think its a solid proposal, but we welcome the debate on ways it could be improved.

5 Likes

Full support. This gives us a much better chance of converting pool 1 users to Smart Yield. Once pool 1 ends it might be worth discussing giving BOND rewards to senior tranche as well

3 Likes

I like your thinking on the incentive. I would just make sure that any incentive’s (eg giving Bond to Juniors) do not inadvertently discourage liquidity in other Barnbridge products being launched in next six months. I.E. To make sure everything is in balance.

3 Likes

Great proposal, and definitely on board with these changes! Couple of questions:

  • Why are senior tranches capped at 30 days now, and why stop at increasing the cap to 1 year? If we’re comfortable moving up to 1 year, then shouldn’t 5 years also be on the table? Just trying to understand the tradeoffs here.

  • Weekly 10,000 $BOND rewards seems high, especially given that junior tranches natively earn yield on their own. Is the goal here to hope that 100% of liquidity from Pool1 migrates to junior tranches? I thought we were taking a slow-and-steady approach to SMART Yield, but rewards at this level should attract $100M+ of TVL almost immediately (seeing that Pool1 has $450M+ on 32,000 weekly rewards). Is it instead possible to have a dynamic reward such that junior tranches are guaranteed 30% APY for the first 6 months (or something like this)?

2 Likes

On second thoughts I would actually wait and see where the pool is at on April 1st before considering introducing incentives. Yes I agree to increase lock in time for seniors. But lets see if the product can sell itself without incentives. If anything incentives could take sting out of gas fees, but I don’t think you need them. As the platform grows so will interest.

1 Like

I think it’s more important to get TVL early imo so the future incentives don’t cost as much.

2 Likes

bootstrapping liquidity is something even tradFi does. I think we have time tested examples of understanding how this works at scale after watching SNX flip to cash flow positive.

1 Like

Bullet 1: The longer the maturity on senior the more likely someone can flash loan and blow it up (albeit we put protections in place). Longer maturity in nascent = easily exploited.

Bullet 2: Slow and steady - we needed a few weeks and by the time this passes via a DAO vote (12 days) we’ll be 3 weeks in. We MASSIVELY audited this. I think we can take the training wheels off after 3 weeks.

3 Likes

Yes, I hear you. Also we are in a bull run in most financial markets, so good to drum up heavy interest now and strike whilst the market is hot.

1 Like

Great proposal Tyler, I like that the team considered the new Dai addition as well. I agree that its important to keep a positive momentum at launch. Overall I have zero concern about the quantity of BOND incentive as it seems appropriately sized compared to other pools. But it is odd that the product has less reward than DAO staking. Just my two cents. I guess I could say there is room available for a senior incentive down the road.

Is there any consideration for existing jtoken holders as you expand the available maturity options? The ABOND calculation could be pushed way beyond its existing parameters moving to an optional one year maturity. A plan on how to handle these maturity expansions now and in the future would be a welcome inclusion in this proposal. Full disclosure I am a jtoken holder.

2 Likes

If my math is right, 10,000/wk would incentivize $208 million in liquidity (at 20% APR for $80 BOND). Pool 1 has twice that much liquidity. Does the team know something about the liquidity in Pool 1 such that we’re only targeting half the liquidity? Or perhaps the team has an aggressive price target ($160)? I understand that jTokens should also generate their own yield but Pool 1 is full of “sure thing” investors chasing yield.

How will AAVE jTokens be incentivized—Added to this pool or will they get their own pool? Or no pool at all? Perhaps the other 10,000/wk is planned for an AAVE pool?

How long does it take to create a curve pool? Could we distribute rewards via a bb_cUSDC / bb_cDAI curve pool instead of staking in a BarnBridge pool? Or shorten this distribution to roughly the time it would take to get a curve pool going (would be nice to compile all jTokens together as suggested in the other forum post).

1 Like

There is definitely a lot to unpack here. Do we have an idea as to how long discussion on this topic is going to be open before being taken to a vote?

Adding Compound DAI pool
This is something I’m very excited about as having two asset pool better demonstrates how the protocol makes the market more efficient. I fully support this, but does adding assets require a vote? Is there anything that exists that delineates what situations require a vote v. what decisions the team can make unilaterally? Why would this not require a vote compared to a required vote on the investment horizon? Not being difficult, just looking for clarity as I fully support the concept of fast/slow governance matters so we can react faster.

Length of senior maturity
I think there is strong consensus that increasing seniors maturity to one year is a necessity and is well worth the risk. Also I see there being certain investors who don’t want an active investment that they have to revisit monthly. I vote we increase to one year for now with the addition of 3 and 6 month options. We should likely continue to keep evaluating increasing this time period as we have more data to evaluate.

Should seniors be incentivized
How far out is layer 2 scaling on the timeline for BarnBridge? Extending maturity to a year will reduce the required capital breakeven point by a factor of 12, but layer 2 would make senior a possibility for investors of all sizes. The length of time to L2 strongly impacts how I feel about the necessity to incentivize seniors.

Whether or not 240,000 BOND is the right amount over six months
I would be curious to see the analytics behind this number and the TVL we would expect to gain from it. Based on some very rough modeling I pulled together, I would guess we would capture somewhere between 200M - 300M in TVL based on a 10k BOND reward amount (variables being originator APY and BOND price). Whatever we do, I think we should target TVL of 500M+ as I would assume that is close to the point where the size of the pools alone will bring attention to and attract capital that is less dependent on rewards. Full disclosure - I will concede that we do not have much data to model off of so far and I could be making faulty assumptions which is why I would be curious to see the team’s model / assumptions supporting the 10k BOND amount.

I would enter into discussion the idea of creating separate pools for USDC and DAI that offer 10k BOND each which would bring us to a total reward of 480k BOND (roughly 5% of the treasury). I think it is important to allow each market to operate independently so even if the increased BOND amount is not generally accepted, I think 5k BOND per pool would be still be a valuable addition to the proposal.

One concern that I do not have the answer to is what happens when the 6 month reward period is over and the juniors revert to a lower yield. I’m trying to think through the implications of this cliff, but I could see some issues if we don’t capture a high TVL in this period and the “juiced” APY is substantially higher than the base APY resulting in an exodus from the jTokens. If we believe there could be a future problem here, but a possible solution would be to have a gradually reduced weekly reward to eliminate that cliff.

Consider a lock-up period of 1 month or so on the BOND rewards junior pools are getting? May discourage dumping the token to maximize yield and by holding the asset and seeing potential appreciation they might be inclined to hold

I support the max total lock-up period to a year although I believe this is more an ETH problem than a Barnbridge problem. Optimism testnet is live; if mainnet is for example 4 weeks away, it may not make sense to expand lock-up period.

On the second point. I fully agree that we need to have an incentive for Junior SMART Yield. This pool will ‘make or break’ the project. I agree with a 6 month program and I think the current amount is enough.