Proposal to setup protocol owned SPOT - USDC liquidity on Bill Broker

Ampleforth Governance
1

I propose the Forth DAO provide SPOT/USDC liquidity to the Bill Broker (Billy). This will be protocol owned forever liquidity, which will not only generate revenue but also support both AMPL and SPOT by acting as a counter-cyclical player.

Background

SPOT V2 has been live for a few months and we have been slowly observing its impact on AMPL. That the rollover vault now enables 2-way arb between AMPL <> SPOT. SPOT can thus be viewed as an AMPL derivative which inherits its mean reverting price volatility but has none of it’s supply volatility. This allows for rational actors to trade SPOT counter-cyclically.

“Billy is an on-chain buyer and seller of SPOT and USDC that uses knowledge of the SPOT system to provide efficient quotes for users. Broadly, it employs a simple buy low, sell high strategy that capitalizes on SPOT’s mean reverting characteristic.” Billy is owned and controlled by the Forth DAO time lock contract. A small share of the swap fees it collects goes to the DAO treasury.

Last year the DAO treasury was capitalized with 500k USDC which can be paired entirely with SPOT and added into Billy.

Proposal

Roughly 500k dollars worth SPOT (~463k SPOT) are required to be paired with the treasury USDC balance. The DAO can create {SPOT/stAMPL} by tranching 1.3m treasury AMPL. The SPOT and USDC can be paired and added into Billy.

This is a dynamic system with multiple moving pieces and thus the following sequence of operations would have to be executed through kennel club multisig.

  1. We first tranche 1.3m AMPL into As and Zs .
  2. The As will be used to mint SPOT.
  3. The Zs will be held to maturity and redeemed for AMPL and be used to mint stAMPL.

(Note: Billy’s asset ratio is dynamic and can change quickly before the on-chain execution of this governance action, in which case at the end of this operation the DAO might end up with a remainder of either SPOT or USDC. In case of excess SPOT, I propose the DAO just hold onto it as a treasury asset. In case of excess USDC, we can put forth a follow on proposal on-chain to go over the same steps and mint more SPOT and pair it with the remainder USDC).

(Note: By minting both SPOT/stAMPL, the DAO can roughly maintain it’s AMPL exposure and generate revenue through enrichment and LP trade fees)

7 Likes
2

The proposal is favorable, and I understood it correctly: it will allow additional revenue streams to the DAO and support and stabilize the AMPL/SPOT market/prices.

However, I have a few questions and considerations:

  1. Minting Capacity: Can we mint that much SPOT at once, or will this happen in a few steps due to mint caps? Understanding the minting process and any associated limits is crucial for planning the execution timeline.

  2. Utilization of USDC: The 500k USDC currently loses value sitting idle, so it’s prudent to put it to work and gain LP/enrichment fees. What are the advantages and disadvantages of putting it into Billy compared to providing liquidity in Charm?
    Specifically:

  • How does the risk/reward profile compare between Billy and Charm?
  • What are the historical performance metrics for liquidity provided in Billy versus Charm?
  • How quickly can Billy’s asset ratios/bands adjust to market conditions? Is there a mechanism for real-time or near-real-time adjustments to mitigate risks?
  1. AMPL Exposure and Market Fluctuations: While AMPL exposure is maintained, price fluctuations and extended negative rebates can affect the asset position in the DAO, primarily through stAMPL exposure. Conversely, if we experience a prolonged positive rebase cycle, the DAO might capture much of the network value, benefiting FORTH holders. Do we have any projections or historical data to gauge the likelihood of these scenarios?
  • What are the potential impacts on the DAO’s balance sheet under different market conditions?
  • How does the DAO plan to manage risks associated with significant market fluctuations in AMPL prices?
  • Are there any contingency plans in place if the market conditions turn unfavorable for an extended period?
  1. Execution Plan and Monitoring: Given Billy’s dynamic asset ratios, what measures are in place to ensure the accurate and timely execution of the proposed operations?
  • How will the DAO/team monitor and respond to real-time changes?
  • Is the code adjusting all these on the fly?
  • What are the fallback options if the initial execution does not go as planned?
2 Likes
3

I can try to answer some of these.

  1. The current minting regulation logic allows minting up until the minting tranche represents 50% of the SPOT collateral base. Whether the target amount of spot can be minted instantly depends on the collateral state and minting behavior of other market actors. There isn’t a guarantee that everything could be minted at once, but I would say it’s very unlikely to take more than two bond cycles. If the DAO wanted to minimize market impact, it could wait until the end of the weekly bond period and use up whatever minting amount is left before the next rollover.

  2. The Bill Broker design does have some nice benefits related to risk mitigation:

  • The parameterized fee curve limits the prices that it can buy and sell assets for. In a regular AMM pool, if one asset goes to 0 you lose both assets. Not the case with BB.

  • BB is smart, but there is still no dependence on realtime market prices. USDC is treated 1:1 as a dollar, but a chainlink oracle is used as a circuit breaker. BB calculates an FMV for SPOT using onchain knowledge about its collateral-base. A healthiness factor is also used as a circuit breaker. So if BB ever determines that its pricing is unreliable, it simply closes its trading desk. The downside of this philosophical approach is that BB doesn’t guarantee 100% uptime in the market, but the upside is that it guarantees that it will only make healthy trades and it never needs to “catch the knife” or make improper IL-producing trades that AMMs do by trading when it’s not beneficial.

  • Since BB is new, there is no meaningful track record of performance that we can compare to Uniswap & Charm. However, I would say that the failure mode of the DAO placing assets into BB is simply that… the assets sit idle in the BB rather than sit idle in the DAO treasury wallet. So, barring smart contract bugs or novel market attack vectors that are omnipresent in DeFi anyway, I view it as a low risk way for the DAO to potentially help the SPOT market health and activity while possibly get some revenue along the way.

  • The BB configuration is controlled by the DAO, so it can only change according to down governance timelines–typically 1-3 weeks.

  1. It’s difficult to predict future market movements. This move will try to maintain AMPL exposure, but it will likely be trading some small amount of that away in exchange for fixed income stream through it’s BB position due to the SPOT/stAMPL minting ratio.

  2. Contract logic and configuration changes are only controllable by the full FORTH governance system. However, there is a limited-capability “Keeper” role, controlled by the DAO Kennel Club multisig, which has the ability to pause and unpause BB operations. This is the only lever that can be pulled in extenuating circumstances.

3 Likes
4

I think it is worth the risk. LFG!

5

Apologies out on a paternity break so couldn’t respond sooner. I hope Brandon addressed the issues you raised.

One thing I’d like to add is that LPs on “dumb” AMM pools which aren’t aware of SPOT’s internal enrichment are susceptible to “permanent loss” (as described by Manny in this essay Permanent Loss Part 1: Liquid Staking Tokens are Crypto's Treasuries | thinking.farm). The Charm SPOT-USDC pool gives us great capital efficiency though liquidity concentration thus low slippage swaps for traders, however from the LPs perspective it is still sub-optimal.

There are some promising avenues on the horizon though. Balancer V3 finally supports yield bearing assets. Poolside V2 launching in a few weeks natively supports yield bearing assets with concentrated liquidity.

Additionally, we’ve been working with the Charm team to develop a custom WAMPL-WETH vault. This auto manager controls the active liquidity levels in the charm vault by looking at the delta between the AMPL’s current market price and target (if the deviation is high, it removes liquidity and when the deviation is low it adds liquidity; simulating how mms operate on cexes during periods of high/low volatility). We could very quickly replicate this logic for SPOT-USDC to add and remove univ3 liquidity based on it’s price deviation from the FMV. And this could give us a nice balance between capital efficiency and IL mitigation.

3 Likes
6

The Bill Broker has been live on chain and operating successfully for a few weeks, and seems to be working as intended.

I think its a no brainer for the DAO to have Protocol Owned Liquidity, and it seems the Bill Broker will have pretty good yield, further enriching the DAO reserves.

This proposal will also deepen Spot liquidity, making the arbitage between Spot and Ampl more efficient

I am in favor of this proposal.

1 Like
7

I’m in favor of this proposal.

1 Like
8

Snapshot was positive. Will trigger an on-chain vote shortly.

https://signal.ampleforth.org/#/proposal/0xea9d11319dc7f195719d17e48038c0f5cef6fd89e29de769eaba557d16a6725b

9

As per the updated execution plan, SPOT-USDC liquidity was added to bill broker and the rotation vault. The LP tokens and remaining assets were returned to the DAO timelock.