EOI From Ondo Finance: Fei TCR Vault

Summary

Justin Bram, from Ondo.finance has approached Tracer with a proposal to create a TCR vault on Ondo Finance’s platform. They call this Liquidity as a service as described below:

Ondo’s Liquidity-as-a-Service (“LaaS”) Overview

The Ondo + Fei LaaS program lets DAOs unlock liquidity in their native governance tokens without needing to borrow or raise capital in a base asset to trade their governance tokens against. The service involves a DAO providing its governance token into an Ondo variable tranche, while Fei invests FEI into the corresponding fixed tranche. The DAO pays a fixed yield to Fei and the partner DAO receives all excess yield that accrues to the underlying liquidity pool.

Proposed workflow with Tracer DAO

The Fei DAO will provide FEI then invest that into an Ondo fixed tranche pool. Tracer DAO will invest TCR in the variable tranche pool from its DAO. The Ondo Vault will then provide this liquidity together to create a FEI-TCR liquidity pool on Sushiswap or Uniswap v2. After a fixed duration, Ondo will withdraw this liquidity then pay back the Fei DAO its FEI plus a predetermined fixed yield. Finally, TCR will receive the remaining assets paid out in TCR.

If the LP yield more than covers the fixed yield for FEI then TCR earns a positive yield on TCR. Even if trading fees are near zero and the underlying LP is not incentivized, then TCR is effectively just paying for liquidity for its users — and it may be able to lower its liquidity mining rewards while preserving the same level of liquidity.

About Ondo:

Ondo is a decentralized risk marketplace that lets different sets of investors pool assets together to provide liquidity with different risk profiles. The Ondo protocol manages this risk transfer through vaults with multiple tranches. Ondo vaults exist in isolation from each other to prevent the mixing of risks. Each vault has a fixed tranche and a variable tranche, each of which deposits a different asset that is ultimately invested into a single AMM pool. The fixed tranche seeks to deliver a stable yield with mitigated downside risk, whereas the variable tranche seeks to maximize returns by using leverage.

Ondo users can make “subscription” requests to the fixed tranche and variable tranche during the open subscription window. At the close of this window, the Ondo protocol will accept an equal value of fixed tranche and variable tranche subscription requests and provide these assets to liquidity pools on AMMs. After a preset duration, the protocol will withdraw assets from the liquidity pools, then pay back fixed tranche depositors their original principal and preset yield, after which variable tranche depositors will receive the remaining assets.

Ondo has been audited by Quantstamp, Peckshield, and Certik. You can read more at https://docs.ondo.finance/


Consideration

Ondo is proposing the following allocation:

  1. We propose Tracer DAO provide $2mm worth of TCR across all four vaults, $500k Worth of TCR per Vault. Fei will provide the matching amount in FEI.

Deliverables

Duration and Fees

We will start with four vaults with the following durations: 90 days, 83 days, 76 days, 69 days.

Fei will accept a fixed yield of 5% APR for each of these vaults (1.23%, 1.14%, 1.04%, and 0.95% for the 90d, 83d, 76d, and 69d durations, respectively).

The purpose of launching with vaults of different durations is to stagger the redemption of these vaults. At redemption, the liquidity from one vault is removed, then the Ondo smart contracts will either buy TCR with FEI or sell TCR for FEI in order to obtain exactly the amount of FEI owed to the fixed tranche investors. To minimize the market impact on the price of TCR at this redemption, we want to ensure that no single vault represents too large a percentage of the total liquidity in the pool.

Fei TRIBE Incentives

Fei has also approved for the first three months of the program TRIBE incentives for participants. These incentives will be on the variable tranches specifically — so the TCR variable tranche in this case. The incentives scale with liquidity provided, at 10 AP per $1mm in liquidity provided by Tracer DAO. There are 2500 AP total in the Fei TribalChief rewarder. Based on current prices (as of November 18) this amounts to ~50% APY in boosted yield.

This AP is set based on the contribution from Tracer DAO, and does not scale based on later contributions from Tracer DAO community members. There are no specific plans to renew TRIBE incentives after this three month period. The total AP provided for this program is capped at 500 AP.

Community Participation

After deploying these four vaults, we can spin up new vaults at any time where Tracer DAO’s community can participate as well. We think this pool size can scale substantially in the future, particularly as Tracer DAO’s community participates.

Perpetual Vaults

Ondo vaults we deploy in ~6 weeks time or later can be of the “perpetual” variety. Perpetual vaults simply take the proceeds obtained at maturation of one vault and re-invest them automatically into another vault. This rollover occurs in the same block so that much less liquidity is ever removed from the liquidity pool. We will share more details on the precise mechanism of these perpetual vaults closer to their formal release. After these launch vaults mature, we foresee the vast majority of liquidity managed through our liquidity-as-a-service offering being in perpetual vaults, so that participants do not need to manually re-invest in new vaults.

Benefits to Tracer DAO

  • Create a new liquidity pool in TCR to facilitate movement into dollar-denominated liquidity (i.e., FEI)
  • Integrate the Fei and Ondo communities into TCR
  • Increase overall liquidity in TCR without needing to provide liquidity mining rewards, sell any TCR for a base asset to trade against, or pay a third party market maker (e.g., with a loan and call option)
  • Earn yield on TCR if net LP yield (including SUSHI rewards if applicable) exceeds the fee charged to Fei (5% APR)
  • Pioneer single-sided liquidity provision provided by a DAO
  • No forced selling from liquidity mining
  • With greater TVL in TCR, there will be less downward price impact from selling from existing liquidity mining programs

Risks

The situation Tracer DAO probably wants to be most cautious about is ensuring that there is enough liquidity at maturation of a vault if the price of TCR goes down substantially during that vault’s life, such that a large percentage of the vault’s TCR would need to be sold for FEI to make Fei whole.

FAQ

Are we required to continue to re-subscribe into new vaults?
- As a reminder, at the maturation of an Ondo vault assets are rebalanced (FEI traded for TCR or vice versa) to make sure that Fei receives what they are owed. There is some market impact from this rebalance. This market impact is minimized the smaller any individual vault is relative to the size of the FEI-TCR LP. If 100% of the liquidity into the FEI-TCR LP is coming from Ondo vaults, then we generally recommend participants re-subscribe to ensure continual liquidity in the LP. If organic liquidity into the FEI-TCR LP emerges outside of the Ondo vaults then this becomes less of a concern.

The situation Tracer DAO probably wants to be most cautious about is ensuring that there is enough liquidity at maturation of a vault if the price of TCR goes down substantially during that vault’s life, such that a large percentage of the vault’s TCR would need to be sold for FEI to make Fei whole.

Is Ondo able to rebalance TCR through a path other than the brand new FEI-TCR LP?
Yes! We can rebalance through any path on the AMM where FEI-TCR LP is created today. In the future we will be able to rebalance through any decentralized exchange.

What if I want to stop re-subscribing, the price of my token goes way down (combined with insufficient income from trading or rewards to compensate), and decentralized exchange liquidity dries up?

This is the worst case scenario where the rebalance cannot be processed at reasonable slippage (3% by default, but that can be modified on request) through a path that the Ondo smart contracts can utilize and Tracer DAO does not want to add new liquidity through a new vault to provide that exit liquidity. In this scenario, after the liquidity from the vault is redeemed, the LaaS multi-sig can emergency rescue the tokens rather than have the rebalance occur. Tracer DAO could then repurchase its tokens at the price needed to make Fei whole (i.e., repay the loan to Fei). The multi-sig holders could also try to sell the TCR through any other venue. If Fei cannot be made whole, then all remaining assets in the vault (FEI + TCR) would be transferred to the Fei DAO.

If the rebalance should result in TCR being bought with FEI, can we simply choose to accept both FEI and TCR instead?
This is not currently possible but is something we are working on. This feature would allow
participants to gradually diversify into FEI as their tokens appreciate rather than buy back their tokens at maturity of a vault.

How do I receive my TRIBE incentives?
After your Ondo vault is invested, you can go back to the Ondo web application to claim your variable tranche tokens. Then, you can stake those tranche tokens on Fei in order to receive TRIBE. At maturity of the Ondo vault, you can redeem the tranche token on Ondo for your proceeds (paid in TCR).

Can I invest in the four launch vaults at the same time?
Yes! The subscription windows for all four launch vaults will be open at the same time, in a roughly 4 hour window that we can agree on in advance. The new FEI-TCR LP would be created right before this window begins and would be invested in with the Ondo vaults at the conclusion of the window.

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Should Tracer DAO engage Endo Finance Fei Vaults?
  • Yes
  • No

0 voters

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What is Tracer’s maximum downside risk in going forward with this proposal? What happens if the price of TCR goes up and how does that impact the buyback and does Tracer DAO benefit? What happens after the vaults expire?

Yeah risk reward here doesn’t seem great at this point in time - would love some further input from the Ondo crew as to how other Treasuries have performed with a similar proposal.

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@Jd0n3s if you can please have the Ondo team better explain the benefits of the proposal to Tracer DAO, that would be a big help. Right now, I get that the proposal would add liquidity but it seems to lack downside protection from what I read. Happy to be wrong…

Yea, flagged that with them on your Q’s.

Thanks for asking those :slight_smile:

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Hi Billy, thanks for your questions! You’re right that there’s no inherent downside protection with our vaults.

The purpose of Liquidity-as-a-Service is to establish deep liquidity for the TCR token.

Regarding risks, it’s possible for the Tracer position to lose value if impermanent loss is significant. In an absolute worst-case scenario if TCR loses roughly 80% of it’s value relative to FEI, Tracer could owe Fei it’s entire deposit.

As far as how LaaS has worked with other projects, we have worked with 8 other DAOs to deploy liquidity. Several projects have communicated how much they’ve saved compared to their traditional, unsustainable liquidity mining campaigns.

If you’re interested in learning more about the benefits of LaaS, this article should help.

Happy to answer any more questions!

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Thanks @JustinBram for the reply. It seems like utilizing the TCR Tokemak reactor at this point is more cost effective and less risky to achieve a similar goal.

As far as I know, Tokemak has not actually deployed liquidity yet. In addition, when it does, Tracer will have to ‘bribe’ Tokemak TOKE voters to allocate liquidity on a weekly basis to TCR.

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