The DeFi space has been constantly innovating to offer more efficient, decentralized alternatives to users that are unique from their centralized counterparts. One such innovation is Liquidity Pools. However, what if Liquidity Pools could get an upgrade?
The Problem at hand
Liquidity pools are at the very essence of DeFi. They facilitate swaps on Decentralised Exchanges (DEXes) and facilitate trades in a decentralized and tamper-resistant manner. However, liquidity pools, as they currently sit, are inefficient and lack capital efficiency.
In most cases, less than 10% of the liquidity deposited into a liquidity pool is actually used to facilitate trades at any given time. The other 90% sits idle and acts as a reserve fund — this model is capital inefficient.
This model is capital inefficient owing to liquidity deposited in the said pool exceeding the liquidity needed to facilitate such swaps. However, at the same time, an insufficient amount of liquidity at the same time can result in excessive slippage occurring on swaps.
While this problem has been solved via Curve for stables & Boosted Pools from Balancer, it still applies to the most widespread DEX, Uni V2, and its recent derivatives — Dystopia, Solidly, Quickswap, etc. In the case of Uni V2, capital efficiency is not yet solved. USDC, USDT, and DAI in Uni V2 are not working as they would in Balancer. Hence, the solution by Overnight is for the most widespread DEX and in doing so, also offers more returns than a usual boosted pool would; this is owing to its Yield-Farming strategies (that involve stable-to-stable liquidity pools),
The + that Liquidity Pools Need
Overnight’s stablecoin, USD+ is a yield-bearing asset generating rewards for its holders on a daily horizon via a rebase mechanism. These rewards are financed via Overnight’s carefully selected Yield-Farming strategies. Liquidity Pairs with USD+ have an advantage over other stablecoins like USDC owing to the APY generated via its Yields.
Think of USD+ as essentially USDC, it’s liquid, hassle-free, pegged to USDC but with an added bonus of passive income. When paired in Liquidity Pools, USD+ generates increased returns for Liquidity Providers. Over time, increased returns on Liquidity Pools can be increasingly rare and at often times, unsustainable — this gap is filled by USD+.
Performance in Liquidity Pools
Having Liquidity Pairs relative to an appreciating token means that all of the underlying assets supplied witness appreciation. A Liquidity Pool with USDC & USD+ respectively (50/50) would appreciate both of the supplied assets to the % of APY offered by USD+. For example, assuming 10% APY and the supplied assets having a value of $50 each would appreciate both of the assets to $55 each (a net appreciation of $10). For more information on this, visit this guide.
This brings it pros for both, Protocols & Liquidity Providers, which are explained below.
For Protocols: How does having an LP relative to USD+ benefit their native token
Since the Liquidity Pair is relative to an appreciating token, both of the underlying assets in the said pool appreciate. This generates a “net-buy” pressure for the protocol’s native tokens owing to the constant positive rebases from USD+.
Apart from the net buy pressure, protocols pursuing Quantum Liquidity (the act of the protocol itself actively farming in Liquidity Pools) can benefit from their appreciated USD+ balance and use it as they so desire.
In the case of Sphere Finance, this could potentially provide tremendous benefits to the protocol as it aims to pursue forced appreciation for its native token, Sphere. This complements the protocol’s aim of buying & burning back its native token as the USD+ side of the Liquidity Pool would passively increase. This process would ultimately benefit Sphere token holders as the token becomes more and more valuable over time.
For Liquidity Providers: Generating increased profitability via Yield-Farming
Liquidity Providers are constantly on the search for increased Yields. USD+ facilitates this and hence is more attractive for Yield-Farmers. They can now earn:
a) Yields from USD+
b) Swap fees
c) Rewards from gauge pools (if any)
On the other hand, a liquidity pool relative to USDC for example wouldn’t be applicable to earn yields from a).
Moreover, this makes stable-to-stable pools even more profitable! The following reflects balances for the Liquidity Pair: USD+/USDC pre-payout and post-payout after a rebase.
Pre-Payout
– [USD+] 202,262.6302
– [USDC] 203,405.5645
Payout
Current balances:
– [USD+] 202,307.1511
– [USDC] 203,405.5645
The end result is an increased USD+ balance. That’s the magic of Overnight: giving Liquidity Pools the upgrade that they deserve!