Preface: The Best Way To Learn Is Participation
Over the weekend, our team sent our members a sneak peek at a proposal we just published on one of our investments, PowerPool’s community forums. Today, I’ll be sharing a follow up to that proposal where I’ll discuss some of the areas we think are important for the community to think through before moving forward. Additionally, I’ll share some additional ideas we’ve had after receiving a lot of great feedback from our own team as well as some of our readers!
One reason I love being able to send these proposals to all of you is because it’s a great way to get a lot of unique perspectives to think through a proposal or project they might have not necessarily been focused on before. As all of you know, we have a consulting division where we work with a wide-array of projects to engineer rational and balanced network economies that promote organic ecosystem growth. This includes early stage projects aiming to integrate a token as well fully functioning token economies looking to fine tune their structure.
We’ve seen an important shift over the past two years since we started Delphi in how our consulting process with these projects has evolved. Now we aren’t simply presenting our proposals to a few members of the team. Instead, we publish our analysis and findings for the community to factor into the decisions that they will ultimately make.
We’ve seen this first hand time and time again. Whether it was Synthetix engaging our team to help assess the liquidity of cryptoassets on their exchange or the recent proposal we published for DXdao. We are strong believers that our active participation within these communities helps our analysts think deeply about the mechanisms at play here and betters our research for you.
That being said, I think the impact of our team sharing these proposals with Delphi members goes beyond just that. Given the comoposability and open source nature between these protocols, we don’t have a monopoly on any of these ideas. By walking through our proposals, we also provide deep insight to our members about how we’re thinking about the space. Any of our members (who may or may not hold the token who the proposal is for) can hopefully be inspired by some of the thoughts we share through our proposal to help the crypto ecosystem in one way or another.
This week, our team will be releasing proposals for a few different communities (stay tuned for more info). We can’t wait to see how they react and will be sure to provide summaries / links to our members as we publish them. If you have any thoughts or feedback after reading any of these proposals, please don’t hesitate to connect with our team!
With that, let’s move on to my follow up to our PowerPool proposal.
Disclosures: Delphi has taken a position in CVP. This is intended to disclose the potential conflict of interest and should not be misconstrued as a recommendation to purchase CVP. Delphi Digital did not take part in the Alpha or Beta rounds but has been admitted into the Gamma round. Participating in future liquidity mining programs comes with risk, which people should evaluate based on their own risk tolerance.
A liquidity mined DeFi ETF with layer 2 meta-governance on top. PowerPool could be the incentivized fusion mechanism for the top DeFi projects in the space.
My partner Medio and I were really excited to share our tweaked vision for PowerPool over the weekend. That being said, there was a bit of pressure from a timing perspective for us to get the community to start thinking through our new idea. The anonymous team had plans to launch the project with a lending/borrowing focus within the next two weeks. An audit was already underway. And people had started to get behind PowerPool’s initial idea. Meanwhile, we were still trying to understand how the protocol could best leverage it’s liquidity incentives to become more than just a fad and have staying power within Ethereum’s ecosystem.
One hurdle that PowerPool and most projects are currently facing with all the attractive yield farming initiatives popping up every week are being able to develop a sticky base. For example, you could see a scenario where the attractive yield from CVP rewards does a great job of having a lot of the DeFi governance tokens chosen added to its pools while PowerPool is the farm of the week. That being said, once rewards inevitably go down and are not as attractive as a new farm that pops up, some liquidity providers would most likely pull their assets from the pool to farm with.
If the liquidity for those governance tokens gets pulled, PowerPool’s influence can severely diminish, if not disappear entirely. Given how fluid we’ve seen liquidity be, as people chase the hot new yield farm each week, this is a serious concern.
This is a difficult thing to combat for the long term so Medio and I started brainstorming ways we could protect / hedge against this. Here are a few ideas below. These can be modified, combined, or even just leveraged as inspiration for what the community thinks will help PowerPool be successful long-term.
A Permanent Part of PowerPool
This is expanding on an idea from Medio’s original proposal for PowerPool two weeks ago.
Let’s face it. In the near term, the fees from trading leveraging PowerPool will be negligible. For the near term, most LPs for PowerPool will not be providing liquidity for the fees. They’ll be providing it for the rewards. ~80% of the total CVP supply is set to be distributed during their liquidity mining program (something we’ll comment on later). This should be more than enough yield to attract deposits even with no fees being paid out.
Rather than paying out the fees generated by the trading from the PowerPool, why not redirect it to a reserve owned by PowerPool, with the key stipulation that the assets are never sold. This way even if people pull their liquidity in the future, PowerPool has some way to maintain its influence in perpetuity to some degree.
One thing that can also be done is to have a dynamic fee structure. Where for a certain amount of time while CVP rewards are enough to incentivize liquidity to stay in the PowerPool, 100% of fees are siphoned off to the Permanent Pool. If all of a sudden fees are generating some amount of value and the CVP rewards we’re paying out aren’t attractive enough, CVP holders could potentially vote to pay out a certain % of fees to help incentivize liquidity to stay. How would we adjust the fees paid to this PowerPool? This brings me to our next point.
Leveraging Balancer’s Smart Pools
One thing we’d probably want to leverage from Balancer are their smart pools. There’s the possibility that not enough people will want to trade in their exposure to a specific DeFi gov token they’re bullish on to an equal exposure to a portfolio of them. If that’s the case, perhaps the community can not only vote on which tokens are included – but once voted in, they can vote on what % of the pool each token is. For example, if YFI SNX AAVE are voted in. One of them could be voted as an outsized portion of the pool making adding liquidity to the pool an easier pill to swallow. Also, Smart Pools have other attractive features such as adding or removing tokens, pausing swaps, and of course adjustable weights/fees.
Another thing that potentially mitigates this concern is that there are definitely a lot of investors in the markets who probably hold popular DeFi governance tokens like YFI, LEND, SNX, etc. in their portfolios already. Now these investors can deposit them into the pool, receive similar exposure, and yield farm those assets.
If you want 100% YFI exposure and the pool is only 70% or less YFI – then you’ll either not participate, or use a smaller part of your portfolio for the yield. The good thing is that investors who choose not to participate will simply boost the APY investors who are okay with this exposure will receive from CVP.
In addition to the CVP rewards they’ll receive, farmers can now take part in fast, cheap governance proposals all in 1 place across their entire portfolio, boosting engagement that wasn’t there before.
With PowerPool, you can actually build cross protocol synergies and loyalty.
Accompanied With a yVault Strategy
In the current market environment, YFI’s importance can not be understated (full disclosure: Delphi holds $YFI). The protocol is able to send flows to essentially any project of its choosing which can help bootstrap supply / demand while potentially bringing a portion of its strong community with it.
Because of this, our team has been thinking of how we can use YFI’s influence to help bootstrap protocols launching. PowerPool particularly. Here’s a vault strategy we believe could be attractive for all three parties: YFI holders, PowerPool Liquidity Providers/Farmers, and long-term CVP holders.
As we mentioned before, trading fees generated become permanent liquidity in pool. So PowerPool should want to take in as much trading volume as it can – and we leverage our liquidity mining rewards to incentivize year.finance to direct volume towards it because of this.
Take the PowerPool LP shares which represents a pseudo DeFi ETF and throw it into a vault strategy farming PowerPool’s CVP. Yes, the vault strategy sells the CVP it earns, but you keep the permanent liquidity and the yield from the vault will only keep making it deeper over time also being reflexive.
Then you keep the assets in the pool, like with the yCurve strategy, but you get that yield from farming out the LP shares. Thus, the value generated from the vault strategy selling CVP = the amount of new permanent liquidity added to the PowerPool.
This is an example of really embracing the open-naturedness of these protocols as well as the composability that has been able to be established over the past few years.
Using CVP’s Current Distribution as an Advantage
To be clear, our team was not a big fan of the initial distribution between Alpha / Beta / Gamma rounds of CVP. But this was set before we got involved into the project, so the proposal we’re suggesting is essentially a thought exercise of how we could help PowerPool succeed despite this drawback while potentially allowing us to use that distribution as a benefit.
One advantage that their initial distribution has was that it has led to a small circulating supply of CVP in the market while ballooning the FD market cap. It’s circulating market cap sits just above $20M, while it’s fully diluted market cap is close to $500M. This is clearly a lot for an early stage project that hasn’t even really launched yet, but the value of a liquidity mined DeFi ETF with layer 2 meta-governance on top should not be underestimated. Anyway, I believe we can use that high FD market cap to CVP’s benefit.
The PowerPool idea has a reflexive mechanism built in where, if the scarce supply and 1/8th target threshold for fees keep driving price higher, APY from the liquidity mining rewards also rises with it, potentially allowing us to taper this longer over time.
If the community decides to move forward with our overall proposal, we’ll also allocate time to help design the liquidity mining program for CVP. One key focus for us here will be flexibility. With the ability for PowerPool to be able to offer LPs dynamic fees via Balancer’s Smart Pools, we believe it will be important to keep some of our ammo (CVP rewards) for events we can’t forecast at the moment.
Additionally, as Medio teased in our last post – there is the possibility of the project being able to spin up multiple PowerPools (maybe one for other sectors in the future). If that’s the case, we definitely want to have a good amount of ammo set aside for the future.
The Utilization of Governance Tokens
One big challenge we were curious to get the community’s thoughts around specifically was how to think through the utilization of these governance tokens while they were in the pool.
You could lock the pool leading up to votes or use a reserve ratio type mechanism to lock a portion of tokens for longer periods of time if necessary for them to vote (e.g. x% of pool). CVP stakers can be locked for governance so that could also be counted too if the protocols were receptive and saw the benefits from the layer 2 scalability of the platform. The pool is designed for all the projects to benefit from their inclusion so perhaps certain exceptions could be granted? Strong partnerships with key projects could help PowerPool develop a stronger moat over time.
Either way, we believe time-based voting will become more and more prevalent across governance for these protocols so some further work here is needed. If anyone has any thoughts or insights here, feel free to reply here!
An Important Requirement: Strong Integrations
Getting the proper integrations in place will be key. Fortunately, PowerPool’s team has been able to execute better than most food-based meme coins on this end so far. They’ve already formed a strong partnership with Boardroom as well as xDAI for their Layer-2 capabilities.
More integrations are necessary though to really help PowerPool gain enough traction to make the move from exciting experiment to an innovative project with a lasting impact on the space.
An integration with exchange aggregators such as 1inch, Debank, and Dex.Ag could end up funneling some meaningful volume to PowerPool if it’s pools attract the depth some of these farming initiatives initially have in the past.
On the flip side, getting integrations with popular interfaces like Zapper, Frontier, and Debank will also be important. You could see a situation where if Zapper implements support for zapping in and out of the pool, PowerPool could get a liquidity boost without a major imbalance in a few assets.
“For example, I can go to Zapper and enter the PowerPool with an equal mix of all 8 tokens. But instead of individually purchasing them, I just tell Zapper how much ETH/DAI i want to sell to get into the pool and it sells my ETH for an equal amount of the 8 tokens. Extra points if Zapper can make it so i can choose any mix of the 1-8 tokens. This could skew deposits towards assets in the PowerPool that are lower than their target weight.” (cheers to one of our readers Ashwath for this suggestion btw)
Finally, Why This Experiment Is So Exciting For Us
One thing’s clear right now. There’s a lot going on in crypto right now. There’s an opportunity cost for everyone’s time. But there’s a reason why my partner Medio and I are so fascinated with the current state of DAOs and governance. It’s because with DeFi finding product market fit, there’s actually value to organize and govern.
What if PowerPool sucks up so much of the supply for these DeFi tokens that it effectively controls each protocol and has the deepest liquidity for each token. If they have the most liquidity, those tokens will trade there frequently generating a lot of trading fees. Then if you take the trading fees of the pool and lock them up forever, you essentially have 8 top DeFi protocols under the governance of 1 coin, where even trading for their token burns a piece of its supply (i.e. fees never sold). This creates a reflexive mechanism where the more in demand they become, the more their supply gets burned. This also instantly brings layer 2 governance capabilities to each of the composite members DAOs.
A liquidity mined DeFi ETF with layer 2 meta-governance on top. PowerPool could be the incentivized fusion mechanism for the top DeFi projects in the space.
Again, it might be too early for the space. One reason why our team started a research company in this space was to be able to learn as much as possible from all the experimentation that goes on. While some people point to the vast amount of projects created in the space as a bad thing, I see it as a positive. Of course a majority of the projects you see in crypto today won’t last long-term and most are just money-grabs. But not every part of even these projects is bad. There are a lot of experiments playing out in front of our eyes and some aspects of these actually have attractive attributes which can be leveraged in a promising protocol’s design in the future. It’s up to us as a whole to pay close attention.
I hope this Daily is helpful for all of you to get some unique insights into how our team is thinking about the space. We’ve essentially open-sourced our team’s due-diligence and thought process when working on a token design for all of you and are excited to interact with all the strong communities coming together in crypto.