Towards protocol owned liquidity on Terra

As the Terra ecosystem scales and new protocols launch, the tri-issues of mercenary capital, reduced LM rewards, and recursive sell pressure loom over protocol teams. This places immense pressure on them as they work towards achieving their desired product-market fit.

The launch of a marketplace providing liquidity as a service or protocol owned liquidity, essentially “fixed income” vaults on Terra modeled on the Olympus Pro model, can help to better realign the interests of on-chain participants and protocols. This can be achieved by incentivizing market participants to trade in LP tokens for a protocol’s tokens which are offered at a discount to the market rate. In doing so, this provides users the opportunity to earn yield whilst paving an avenue for protocols to acquire and achieve sustainable liquidity for their native tokens.

1.1 The issue of mercenary capital

As the growth of the Terra ecosystem continues, protocols will begin to compete for limited on-chain capital. It has been observed that on-chain capital is fickle; users who are interested in providing liquidity do so to seek out the greatest yield opportunities and thus often “hop” from one liquidity pool to another. In doing so, significant volatility is observed in token prices as users sell-off tokens from LP incentives to recoup their invested capital or “exit” the strategy by selling off their full LP positions.

While protocols may experience a significant influx of capital upon launch, factors like the launch of other protocols, shifts in market narratives, or simply yields being competed away can result in an undesirable loss of liquidity.

1.2 The impact of lowered liquidity mining rewards

The issue of mercenary capital does not end even if protocols have so far managed to retain a healthy buffer of liquidity. While “blue chip” protocols can rely on core believers who are willing to stomach lower yields as anchor LPs, there will come a time where this calculus shifts: when protocols step-down LP rewards per their distribution schedules. This will resurface the issue of yield opportunity costs which may challenge even the most ardent of supporters.

1.3 The negative impact of recursive sell pressure

During periods of high market volatility, it is optimal for investors to exit LP positions into stablecoins or other “safer” crypto-assets like BTC. In such scenarios, the flight of liquidity from liquidity pools by individuals worsens pool liquidity and makes it less likely for other market participants to be able to “cash-out” at desired levels due to the increasing price impact from a shallower LP pool.

2 Liquidity-as-a-service via a primary bond “marketplace”

Drawing inspiration from Olympus Pro, it is highly desirable for a similar “marketplace” to be established on the Terra blockchain. In this “marketplace”, users interact directly with protocols via a smart contract: protocols agree to purchase specified LP tokens from users in exchange for protocol tokens. These protocol tokens are vested over time and are sold at a discount to prevailing market prices thus allowing users to achieve a yield on what is now essentially a fixed income instrument.

There are three main reasons why protocols might want to own their liquidity:

Firstly, if protocols were able to easily acquire LP tokens for their underlying tokens, they can essentially establish themselves as semi-“buyers of last resort”. This ensures that protocol tokens will remain liquid for market participants to trade regardless of market conditions.

Secondly, protocols that own their liquidity benefit from opening a new stream of revenues that DAOs or project teams can use towards different aims. This can take the form of incentivizing active governance and discussion, subsidizing critical protocol activities, or even using these yields to acquire other crypto-assets.

Lastly, protocols are freed from the enormous cost of renting liquidity from market participants. Current liquidity mining programs often take up over 20% of the total token supply of many protocols which is not a trivial amount. Utilizing the “marketplace” would allow teams or DAOs to first deliberate over the ideal amount of liquidity needed for smooth market operations and then allocate an adequate (and ideally) fewer number of tokens to acquire this liquidity. If protocols adopt bonds as a significant portion of their launch strategy, it is likely that they can secure significant liquidity from inception by taking advantage of high initial token prices (and therefore offer steep discounts via bonds) as usually observed in the initial weeks of a protocol’s launch.

3 The road ahead

While the use case of a POL marketplace is compelling for project founders, the founding of a DAO comprising ardent believers in the mission is critical to the project’s success. This can range from regular users participating in the bonding mechanism to community fanatics willing to spread the good word and not to forget, core contributors ready to push the envelope of what’s possible.

The DAO is truly at the core of what we hope to achieve which consists of:

  • Reimaging the rebasing mechanism with rewards skewed to governance and community participation using on-chain metrics
  • NFTs as citizenship
  • Deploying treasury funds to grow the presence of Terra on other chains and beyond the crypto-sphere
  • Leveraging cross-chain tools to seize yield opportunities elsewhere

4 Build our Choregiai

We are now looking to recruit for core positions in the team that will build out all of the features above. In particular, web designers, smart contract developers, marketers, community leads, and front-end engineers.

Familiarity with industry tools would be great and prior experience with building protocols on other chains/Terra will be a huge plus. Please reach out to @doraelus or @tzmyh on Telegram for a chat!


As indicated by some of my other recent posts, I fully support developing this idea further. I think Olympus is a pretty important innovation but also has some current risks (as outline in this short Twitter thread).

What I would like to see is something like this progress to a true DAO, not a DO. Many DAOs today rely on too much manual intervention. With Olympus I think the approval of listing a project is a choke point (which may actually be necessary, as I pointed out in the Twitter thread) but if we can find a way to create a productive treasury asset that essentially represents patient capital that is aligned towards the Terra ecosystem growth, we’ll see things really flourish! And, if done right, where the ultimate value of the bonds flows back to LUNA holders/stakers, LUNA would become an increasingly valuable asset as a result.