SWIP-07: New Balancer Pool and Bond Issuance Proposal

Authors: BigMike & SHA256orBUST

SWIP-07 Vote Here: Snapshot

Simple Summary

This SW Improvement Proposal aims to create a Balancer Pool for SWD token liquidity, establish which assets will be included in said pool, and permit the issuance of Bonds via previously allocated Liquidity Mining tokens.

Abstract

‌We propose to deploy a new open-source Balancer Pool contract which seeks to address all the shortcomings that we experienced following the initial passage of SWIP-05. This unique pool, named SW Index, will replace all existing token liquidity that sits on Uniswap, Sushiswap, and Quickswap at the time of publication, for a blend of 40% USDC, 30% SW Yield Fund, and 30% Quantum Momentum Ethereum for use in the SW Index Balancer Pool. Our final proposal in SWIP-07 is to permit the utilization of previously allocated Liquidity Mining tokens, 6% of our total supply, to that of Bond issuance supporting our new Balancer Pool liquidity.‌

Motivation

The deployment of our original Balancer pool solved the issues it sought to address, but it came with another set of problems that outweighed its benefits. Within our current liquidity solution, our products require constant manual price balancing to avoid creating arbitrage opportunities, and with quarterly redemption periods on products like SWYF, overall profits on the product were cut. Additionally, the liquidity for all our assets (including SWD) is split among many different pools.

The original Balancer pool sought to fix these issues by combining all of our liquidity into a single pool, thus improving price stability and liquidity efficiency. However, the assumption was that Balancer’s default pools would maintain their balances using price oracles. Not only was this not the case, but the default balancing method led to continual arbitrage opportunities at the expense of the DAO. For example, a purchase of SWD would lead to a drop in price for SWYF.

Additionally, liquidity issues arise when DAO investors attempt to purchase or sell large sums of SWD tokens that are not readily convertible into their desired assets at “fair” rates. This often happens in new markets with few buyers and sellers, as with the SWD token. As a result, prices can become inflated or collapse heavily, making it difficult for investors to purchase or sell their assets at a “fair value.” Our new bond issuance platform seeks to address this concern by providing deeper liquidity for all investors by offering an attractive yield to those who stake liquidity on our modified DEX market.

Specification

Overview

The vote will appear as such:

Do you approve of the following changes to SW DAO?

Regarding Balancer Pool creation:

  • All existing SWD liquidity, ~$46,000 at the time of publication, will be moved from Sushiswap, Uniswap, and Quickswap to Balancer.
  • The Balancer pool will include the assets SW DAO token, SW Yield Fund, Quantum Momentum ETH, and USDC.

Regarding the makeup of the Balancer Pool:

  • The initial makeup of the balancer pool priced against SWD will be 40% USDC, 30% SWYF, and 30% QME.
  • Category weights are set by the Governance Community, and individual token weights are to be set by the Founding Team.
  • 60% of the Balancer Pool will be SW DAO’s products, and 40% will be currency.

Regarding the use of Liquidity Mining funds for Bond issuance:

  • The previously allocated 6% of the total supply for Liquidity Mining will be assigned to Balancer Pool Bond issuance.
  • The term for the Bonds issued will be 24-months with interest linearly unlocked.
  • The Bond interest rate will be a maximum of 40%, with the initial rate set by the Founding Team and changed based on market demand.

All changes outlined above will be approved or denied in a single vote. ‌Governance participants will select one of the following two options:

  1. Yes
  2. No

As per standard governance operating procedures, 20% of the circulating supply must take part in the voting, and the outcome will be decided based on which of the two options receives more than 50% of the vote.‌

When a 50% majority winner is determined, the DAO Treasury will, or will not, implement all changes highlighted above.

Rationale

By implementing our custom logic into a new Balancer pool, we can retain access to Balancer’s DEX liquidity while ensuring that our products are appropriately priced according to our unique needs. Additionally, the need to keep ETH or USDC within the pool is reduced as total pool liquidity increases. Exposure to our products gives us the best of both worlds: exposure to market uptrends, with greater price stability in downtrends. While USDC will initially make up 40% of the pool, this percentage can be reduced over time.

Our goal is to promote deeper liquidity for our products by issuing SW Index bonds. This will allow traders to buy more considerable sums of tokens on the market with less of a price impact, an issue that many currently face. Additionally, we believe that by offering an attractive yield on our bonds, new market participants will purchase our SW Index token, boosting our TVL while also increasing SWD token price. By issuing bonds, we are able to provide a deeper level of liquidity for our products, which will benefit all of our market participants.

Technical Specification

Balancer Pool:

Our custom Balancer pool implementation makes significant changes to the standard pool behavior. Its functions better align with SW DAO’s strengths – namely, that it has plentiful access to professionally-managed, structured products.

The custom implementation makes the following changes:

  • SWD gains special status within the pool, allowing for price discovery against a basket of assets.
  • SWD can waive specific trading fees when a user’s balance reaches a certain threshold. This works through Matcha and 1inch as well.
  • Tokens are weighted by value in USD rather than raw balances, and these weights are maintained by offering small bonuses to trades that bring the pool back into balance.
  • Tokens are priced consistently, maintaining a fair value regardless of balances within the pool. Additionally, the pricing maintains a gap between buying and selling prices, minimizing arbitrage between the pool and TokenSets’ minting functionality.
  • Tokens can be added and removed from the pool at any time.
  • Target weights can be changed at any time.
  • The pool has flashloan protection and draws its pricing information from Chainlink and the DAO’s product pricing oracle.

Bonds:

Bonds are our unique approach to liquidity mining, and they differ from the standard mining model in several ways:

  • Liquidity is purchased rather than rented.
  • Users receive a flat bonus for their sale rather than an APY on a deposit.
  • SWD is credited to the user immediately but is released linearly over a period of time.

More information can be found in the Github repositories located here:

Test Cases

Using the Foundry toolset, all custom smart contracts have been thoroughly tested in a “forked” environment. A “forked environment” means that the entire chain was duplicated into the testing session, which includes all currently deployed contracts on that chain. The custom contracts can be tested as if they were actually deployed on Polygon’s mainnet. A combination of fuzz and unit testing was utilized. Unit testing is more targeted – testing specific functionality and checking the results. Fuzz testing is generalized – it calls functions with thousands of random inputs and ensures that specific vital facts don’t change. Although Foundry doesn’t have built-in code coverage measurements, the best effort was made to cover all possible code paths. All testing has confirmed that the functionality matches expectations and intentions.

The precise details of this testing can be viewed in the Github repositories located here:

Copyright

Copyright and related rights waived via CC0.

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