Authors
Gabriel Bianconi and Alvin Hsia
Summary
- Goldfinch enters a partnership with Ondo and Frax to bootstrap DEX liquidity for the GFI token
- Currently, the only DEX liquidity for GFI is GFI/WETH on UniswapV2, and it only has $170k in total liquidity, which is insufficient for any meaningful trade size (~19% price slippage on a $20k swap)
- Goldfinch to provide $2.5m GFI to be paired with $2.5m FRAX at a fixed 5% APR on Uniswap V2 for 90 days, totaling $5m of GFI/FRAX liquidity
- This partnership costs significantly less than Goldfinch incentivizing liquidity through token emissions
- Goldfinch will earn trading fees in exchange for taking on impermanent loss risk
Background & Motivation
Today, the GFI token has very limited liquidity on DEXs. The GFI/WETH pair on Uniswap only has $170k in total liquidity, which results in very high price slippage for users (~19% price slippage on a $20k swap).
This means GFI is basically untradeable on DEXs. We want to bootstrap DEX liquidity for GFI in a cost-effective manner (e.g. without conducting a highly inflationary GFI liquidity mining program).
Ondo Finance has a product called Liquidity-as-a-Service (LaaS) that enables DAOs to take out a low interest rate loan from a stablecoin protocol (e.g. FRAX, UST, FEI) to deposit into one side of a liquidity pair, along with their native token (which is provided by the DAO). This allows DAOs to bootstrap liquidity on DEXs without needing to conduct highly inflationary liquidity mining programs.
Ondo has successfully conducted several LaaS programs with other DeFi protocols such as SYN, NEAR, FOX, UMA, GRO, and MTA over the last couple of months.
Note: The diagram above shows FEI as the stablecoin used for LaaS, but Ondo has entered partnerships with other stablecoin protocols (UST and FRAX) as well since the post was published.
Specification & Requirements
Vault specifications
The basic mechanics of LaaS are:
- Goldfinch takes a 90 day loan from Frax of FRAX (a stablecoin pegged to $1 USD) at a fixed 5% APR
- Frax sends the FRAX loan amount to an Ondo vault, forming one side of the liquidity pair
- Goldfinch sends an equivalent amount of GFI to an Ondo vault, forming the other side of the liquidity pair
- Ondo deposits GFI and FRAX into UniswapV2 as a liquidity pair for 90 days
- At the end of the 90 days, Goldfinch pays back the FRAX loan with interest
- Goldfinch keeps all trading fees on the LP, and assumes any impermanent loss that occurs
- To account for impermanent loss:
- If the price of GFI goes up during the 90 day period
- Goldfinch will end up with more FRAX and less GFI
- Goldfinch can buy back GFI with excess FRAX
- If the price of GFI goes down during the 90 day period
- Goldfinch will end up with more GFI and less FRAX
- Goldfinch can sell GFI to pay back the FRAX loan
- If the price of GFI goes up during the 90 day period
Liquidity pair improvement
With the proposed $5m in total GFI-FRAX liquidity, we would expect price slippage on a $20k swap to improve from the current -19% price impact to a much more acceptable ~1% price impact.
If a user would like to swap in and out of GFI with a token other than FRAX (e.g. USDC or ETH), Uniswap and DEX aggregators will auto-route through FRAX pairs with other assets.
Example scenarios
Below we examine two extreme price scenarios for GFI over the 90 day LaaS period.
Example: GFI price doubles from $2.50 to $5.00 during the 90 day period
- Total value: $5,000,000 → $7,071,100
- Impermanent loss: -5.72%; total value would have been $7,500,000 if no LP
- GFI balance Δ: -292,900 (-29.29%)
- FRAX balance Δ: +1,035,550 (+41.42%)
- GFI buyback with excess FRAX: 207,110
- Ending GFI balance Δ: -85,790 (-8.58%)
Example: GFI price halves from $2.50 to $1.25 during 90 day time period
- Total value: $5,000,000 → $3,535,550
- Impermanent loss: -5.72%; total value would have been $3,750,000 if no LP
- GFI balance Δ: +414,200 (+41.42%)
- FRAX balance Δ: -732,250 (-29.29%)
- FRAX buyback with excess GFI: 517,750
- Negative loan balance: -214,500 FRAX
- Ending GFI balance Δ: No change
These numbers reflect the hypothetical performance of the GFI-FRAX LP position. At maturity, Goldfinch will additionally make a small interest payment to Frax for the loan, and assist with rebalancing the assets as needed.
Benefits
- Goldfinch bootstraps DEX liquidity for GFI in a cost-effective and low-commitment manner
- After this 90 day period, Goldfinch can evaluate whether to continue rolling over the LaaS vaults or explore other liquidity solutions for the GFI token
Downsides
- Goldfinch will pay $31,250 of loan interest in FRAX over the 90 day period
- Goldfinch may incur some impermanent loss, although these costs are still relatively small (compared to a liquidity mining program) as seen in the extreme scenarios illustrated above
Voting
YES – Enter the LaaS program with Ondo and Frax, with terms outlined in this proposal.
NO – Do nothing.