[DISCUSSION] Support Leveraged LP Farming on UniV3

Summary

Ola Finance proposes to build a Leveraged LP Farming product for BitDAO featuring a custom UI aligned with BitDAO’s brand. This leveraged farming product will allow liquidity providers to use their BIT-WETH LP tokens as collateral to acquire an increased LP position. By doing so, the BIT-WETH pair on UniV3 will see increased liquidity while liquidity providers can earn boosted trading fees/farming rewards in a low-risk manner. BitDAO’s leveraged farming product would produce a steady revenue stream for the DAO and could later be expanded to add support for other token pairs in the BitDAO ecosystem.

Background

Ola Finance is a B2B provider of white-labeled, lending infrastructure products. Our v1 product - a customizable lending and borrowing pool - is deployed with 8 partners across 5 chains. Ola’s v2 product suite introduces a series of leverage products built on top of our battle-tested lending infrastructure. Each leverage product runs according to a specific strategy designed by the owner and receives ongoing maintenance, product development, and risk advisory support from Ola.

Gitbook : Introduction - Ola Finance
Audits: Audit Reports - Ola Finance

Product Specifications

Built on Ola’s lending infrastructure, the product uses under-collateralized loans to acquire the desired amount of leverage. First, a user deposits their LP tokens into the strategy and determines how much leverage they want on it. The strategy then borrows the necessary amount of underlying assets from the product’s liquidity pools and uses them to create more LP tokens. Finally, the strategy takes both the original and newly formed LP tokens and deposits them into the specified farming contract to start generating farming rewards.

Below is an example of a sample strategy that specifies the ETH-USDC pool on Uniswap:


This liquidity provider utilized the strategy to gain an additional $3,000 of LP token exposure against $1,000 of initial collateral. While the inital loan was under-collateralized, the position ends safely over-collateralized (ie. $4,000 of LP collateral against $3,000 borrowed). In addition, the price movements of the collateral and borrowed tokens are correlated so the risk of liquidation is significantly reduced.

Below, we examine the anticipated profits for a farmer with leverage in comparison to a farmer without leverage:

In addition to the extra revenue for the leveraged farmer, BitDAO can earn additional revenue by supplying idle BIT and WETH from the treasury to the strategy liquidity pools. Regardless of whether this is done or not, a percentage of the interest paid on open borrow positions goes to a reserve fund that gets split between BitDAO and Ola Finance, creating an additional steady stream of revenue. As the product owner, BitDAO determines what percentage of borrower-paid interest gets set aside.

The leveraged BIT-WETH LP strategy is one of many that can be defined by BitDAO. Each strategy comes with a deep level of customizability - from the white-listed smart contracts (ie. which tokens, DEX pools, etc.) to the risk mitigation parameters (ie. what leverage caps, borrow limits, etc.). As the owner, BitDAO will have the ability to add new custom strategies at any time, enabling endless use-cases on top of shared liquidity pools for maximum capital efficiency.

Benefits

  • Increased liquidity in the BIT-WETH pair on UniV3

  • Boosted farming rewards and trading fees for liquidity providers

  • Passive revenue stream for BitDAO from open positions

  • Extra income potential by using treasury assets towards strategy liquidity

  • Add value to other projects in the BitDAO ecosystem by supporting leveraged farming on their native token pairs

Next Steps: This proposal is to gauge interest on the Leveraged LP Farming product. After discussion, this proposal - if passed - will go to snapshot with any requested additional information. If the vote is still favorable, Ola will begin building out the Leveraged LP Farming product for BitDAO. An additional proposal will be made at that time to determine the inital parameters of the product, such as borrow limits, maximum leverage caps, interest rate models, etc.
Ola would provide their recommendation for the initial parameter tunings. After deployment, Ola would continue to service the product by providing technical upkeep, custom feature development, and risk advisory support.

Temperature Check Poll

Would you like to see this proposal go to vote?
  • Yes - and include the additional details requested in the comments
  • No
  • Needs Work

0 voters

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Thanks for reading the proposal! I’d be happy to answer any questions or provide additional details to further the discussion. Excited to hear everyone’s thoughts :slight_smile:

Intriguing proposal, any ideas how we can hedge increased market volatility in cryptocurrencies? The stablecoin element is there from USDC but thats a floor at somewhere between 25-50% only.

There are different ways to facilitate leveraged yield farming for a pair, such as:

  • Supply BIT, Borrow ETH against it → Provide Liquidity to the Pair
  • Supply ETH, Borrow BIT against it → Provide Liquidity to the Pair
  • Supply BIT-ETH LP, Borrow BIT and ETH against it → Provide Liquidity to the Pair

By supplying the LP token as collateral to borrow the underlyings, you create a price correlation between the two sides of the position (the collateral and the borrowed amount). This creates resilience against liquidation during times of increased market volatility.

4 Likes