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For 2023: Smarter Liquidity Operations at Inverse Finance

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Edo

Risk Working Group

transparencyRiskTreasuryFedInv

4 min

Cover Image for For 2023: Smarter Liquidity Operations at Inverse Finance

Background

Inverse’s Treasury Working Group in collaboration with the RWG has driven multiple liquidity strategies for the DAO since April in order to support and strengthen DOLA. This initiative began with entering the so called Curve wars for liquidity incentives, forming a partnership with Yearn to launch the Yearn Fed, and has since progressed with the launching of the FraxBP Fed, migration of INV-DOLA liquidity to Balancer, the launch of a Velo Fed (Velodrome Finance) and an Aura Fed (Aura Finance). 

If you are new to liquidity operations or if any of this is news to you, you might ask: Why should the DAO care to keep and maintain deep DOLA liquidity?  Put simply, there are 2 main reasons: 

First, to facilitate large amounts of borrowing on FiRM without undue price movement as some borrowers sell their newly acquired DOLA. This requires deep liquidity to absorb any sell pressure and allows for efficient stablecoin swaps. And second, as a result of the exploits on now depreciated lending markets earlier this year, it is essential for there to be deep liquidity along with high circulation in order for the impact and risk to DOLA holders to be minimized. 

2022 Liquidity Operations

To sustain deep levels of liquidity, the TWG began making use of bribing platforms such as Hidden Hand, StakeDAO’s votemarket, Paladin’s Quest, and Votium; “bribing" 3rd party holders with INV tokens in order for them to vote for assigning incentive emissions to DOLA pools. Directing emissions towards DOLA pools on these platforms creates yield opportunities for users, which in turn creates demand and deepened liquidity for DOLA. Our efforts in managing DOLA’s peg despite our bad debt predicament did not go unnoticed.

Three months ago, Proposal #70 titled: “Proposal to grant TWG allowance for the purchase of emission-controlling tokens” was drafted and ultimately voted through Inverse’s governance process. This proposal was created with the overall intention to migrate away from use of INV tokens as our currency for liquidity incentives and instead acquire more economically efficient native bribe tokens which over time awards more votes per invested USD than INV.  

2023 Liquidity Options

In the months since the proposal was executed, the DAO has successfully acquired and made use of emission-controlling tokens such as $CVX, $AURA, and $VELO. These tokens are continuously re-locked into vote escrow, which grants Inverse Finance increased voting power for controlling which way LP emissions on their respective platform are sent. At the time of this post, Inverse’s treasury holds 66.7k $vlCVX, 130.1k $vlAURA, 153.2k $CRV (soon to be sdCRV) and 7.1M veVELO. The treasury is also soon to receive 500k $veTHE, equivalent to 1% of the token’s initial supply thanks to our partnership with Thena, a soon-to-launch AMM on BNB Chain. 

The TWG intends to continue building positions in these tokens over time in an overall effort to reduce the reliance on INV emissions to support DOLA. These tokens have the added benefit of being insulated from one another, as they are spread across four platforms (Curve, Balancer, Velodrome, Thena) and across three chains (ETH, OP, BNB Chain).

As you might imagine, we are gradually building towards a future where 0 INV emissions will be required for supporting DOLA liquidity operations and DAO operations will once again be sustainable for the first time post-April 2nd exploit. But where does this leave us in the present? 

The TWG will soon be enacting a new policy for INV that includes updated liquidity operation strategies better suited for the current market. Inverse is in a favorable position in that not only does the DAO hold sizable positions in these emission-controlling tokens, but the DAO also has protocol owned liquidity via Feds and deployed treasury funds in the various LPs. This means that we can enact a positive feedback loop, where we recycle generated rewards back into bribing, which, together with emission-controlling tokens owned by the treasury, will create sufficient depth for DOLA in the LPs without having to rely on INV emissions. 

Effectively, a large portion of the estimated sell pressure on INV will be removed. This proposal will be released for DAO review imminently and  once enough discourse has taken place and any changes are enacted, it will be published in our governance process. Stay tuned for more updates on this.

Implications of This Liquidity Strategy

As a stablecoin issuer and lender, Inverse Finance DAO is in a position to profit significantly from owning emission-controlling tokens. We are currently enduring a “crypto bear market”, with the majority of token prices, especially DeFi tokens, having declined significantly from previous highs. Having accumulated high-quality emission-controlling tokens during the “bear” the DAO is well poised to produce high returns for our liquidity pools along with future revenues of notable size when we enter a new “crypto bull market”.

At this stage, it is of critical importance to enact a more defensive approach in our liquidity operations. As the liquidity incentive bribes are related to INV’s price movement, supporting a more positive price action for $INV at this time will prepare us for entering the next crypto bull market in full stride. 


Edo
Edo

Risk Working Group


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