Optional Proof of Liquidity

Summary
Providing users an option of receiving a proof of liquidity token in exchange for their deposit into any BarnBridge pool.

Description

We are accustomed to receiving liquidity proofs when depositing into most protocol pools, this proposal suggest we make it optional.
Upon deposit to any BarnBridge pool, users are given the option to receive a proof of liquidity token in their wallet. If the user accepts, the deposit is made and exchanged for their specific proof of liquidity token (Ex: Depositing into Uniswap and receiving an LP token). If the user declines, the deposit is made and their liquidity proof is held in contract and no proof of liquidity token is provided to the users wallet (Ex: depositing into pool 1 with Barnbridge). Both users are able to view, withdrawal and interact with the protocol in the exact same way, only the user who declines a liquidity proof will be unable to provide this collateral proof to another protocol.

Motivation

  • Tax efficiency: Many taxing authorities view token swaps as a disposal, exposing depositors to potential tax liability. Consider the transaction of depositing into Aave and receiving their corresponding aToken as a disposal. Should BarnBridge retain proof of liquidity within the contract it could eliminate this potential liability.

  • Swaps between BarnBridge Pools: - Ideally BarnBridge grows its product offerings to allow exposure to the bulk of the crypto market, while simultaneously allowing targeted strategic positions. These options mean you will be moving between pools and adjusting your exposure overtime. Its feasible you could swap between pools/positions without any token wallet transactions and have potentially no tax exposure. Gains would only be realized when funds are withdrawn from the pool.

  • Sticky Capital: If users are able to manage their positions and avoid tax consequences its possible capital will be reluctant to leave, leading to higher revenue for the protocol.

Technical details
The goal is to provide users the option to avoid any transactions that would qualify as a swap/disposal. Sending tokens to a pool is typically not seen as a taxable event if you don’t receive a token in exchange. An illiquid protocol currency, USDb, could be used to manage users credit balances within the protocol.

Useful Links

Argumentation

For

  • Tax efficient
  • Improved UX via optionality
  • More efficient asset swaps

Against

  • Added complexity
  • User surrenders their ability to provide proof of liquidity to another protocol
  • Regulatory scrutiny.

DAO Vote
N/A

2 Likes

Are we certain that this optionality allows for the tax efficiency? Even if the deposit token isn’t “claimed” isn’t the token still made? I think the tax laws are too unclear to be sure this is worthwhile vs other opportunities.

Assuming it is more tax efficient, the gains would always be taxed at your standard income rate (in the USA). With this in mind, I believe this proposal would make capital less sticky and be a net negative for the protocol. It will be easy for people to withdraw their funds and only pay tax on earnings, unlike when they have a deposit token and are incentivized to use it as collateral to avoid taxes.

1 Like

While I think the idea is interesting and definitely a great user experience improvement, I’m personally against this proposal because:

  • There is already enough liquidity in the BarnBridge pools, deploying time an resources to develop this tool isn’t worth it. Why “fix” something which already does the job perfectly well?
  • Smart Yield is launching soon, and all the development focus should probably be on its release, deployment on Optimism and next up Smart Alpha. Time is money.
  • Given the very vague crypto regulations in most countries, it will probably not benefit liquidity providers that much, we are still way too early for that in my opinion.
5 Likes

I’m FOR this idea, but only the DAO – and ONLY if the OPTION is part of the structure. The other pools will be gone by the time this is worked out. I think we should discuss the nuances quite a bit deeper, but won’t be worthwhile until there is some momentum around the fundamental concept. I’ve been pretty vocal on Discord about my desire for capital efficiency and to keep BB from being a dead end for DAO participants. I say “dead end” only in that once you lock your funds in, that capital is no longer useful outside of the DAO. Right now, the argument is that you can earn ~100% APY, but that program is finite.

@maxdesalle I am in the camp of separating prioritization & value. Basically, I agree that other things need to be prioritized for the DEV team, but I disagree that we should ignore it for that reason.

Happy to continue the conversation if there is more agreement on pursuing this.

Smart and useful proposal OP. Though. I’d agree with the priority being separate than this. The code is still with the core developers. These changes are more in line with a source code open to changes by the community itself.