Use UMA's Success Tokens to Create Protocol Owned Liquidity

Objective

Daniele has mentioned several times recently that as Abracadabra grows, the protocol will look to reduce SPELL emissions to zero. At present, SPELL is used to incentivise liquidity across chains. A total of 495,636,388 SPELLs ($7,330,462.17) are emitted per week according to the Tokenomics entry in the docs.

Abracadabra can reduce SPELL emissions by using UMA Protocol’s Success Tokens to create protocol-owned liquidity for the treasury. Using Success Tokens to acquire SPELL-WETH SLP positions would allow the protocol to acquire liquidity while aligning incentives with Success Token holders. The recent approaches to acquiring liquidity have required protocols to sell their governance tokens at a discount to acquire SLP or LP tokens. This may provide long-term value, but it results in short-to-medium term downside for existing token holders and reduces the value of a protocol’s treasury holdings.

Success Tokens

Success Tokens mature at a designated point in the future and don’t require a protocol to sell tokens at a discount in the present. Instead, each Success Token an investor receives would also include an embedded call option. The investor would only receive their bonus if the protocol is successful in achieving growth. Using Success Tokens to acquire liquidity would be an ideal way for Abracadabra to begin reducing emissions, while giving Success Tokens holders a reason to contribute and ensure Abracadabra continues to steadily increase protocol growth.

Olympus Pro is the perceived leader in creating POL for projects today and offers a marketplace for protocols to sell treasury assets for SLP or LP tokens. While this marketplace has proven to be effective in creating POL, it also requires sell pressure in the short term (as well as a 3.3% fee taken up front), as the bond markets on Ethereum mainnet can be difficult to navigate for the typical user. The PoolTogether Treasury Working Group conducted an analysis for the 30-day performance on the Olympus Pro bond sale, which has had lackluster results. Many participants were bots that participated to benefit from the discount offered and subsequently sold POOL. While this is a unique approach to acquiring protocol-owned liquidity, it does not align incentives between participants and the protocol.

Potential Framework

There’s a direct correlation between token price performance and token emissions. One approach to reduce SPELL emissions is to reduce the SPELL emitted on a weekly basis as Abracadabra acquires protocol-owned liquidity. We propose that Abracadabra buy 20% of SLP tokens in the first iteration with the intent of buying more throughout the course of the year to eventually have 100% of the SLP be POL (Protocol Owned Liquidity). Based on current Sushi liquidity on the SPELL-WETH pair this would require raising approximately $14MM USD in value to cover the first 20% of Liquidity to be purchased… Raising $14MM would require $28MM in SPELL collateral which will only be paid out as the desired growth is achieved.

The below table reflects the resulting payouts to investors based on various growth outcomes including some of the downside scenarios for the investors…

Spell USD Price on Redemption Date Payout Per Success Token Investors value in USD on $14MM investment
0.005 1 SPELL $4,666,666
0.008 1 SPELL $7,466,666
0.01 1 SPELL $9,333,333
Sale Price 0.015 1 SPELL $14,000,000
0.018 1 SPELL $16,800,000
Strike Price 0.02 1 SPELL $18,666,666
0.021 1.1 SPELL $21,560,000
0.022 1.2 SPELL $24,640,000
0.023 1.3 SPELL $27,906,665
0.024 1.4 SPELL $31,360,000
0.025 1.5 SPELL $34,999,999
0.026 1.6 SPELL $38,826,665
0.027 1.7 SPELL $42,840,000
0.028 1.8 SPELL $47,039,999
0.029 1.9 SPELL $51,426,665
Max Bonus 0.03 2 SPELL $56,000,000
0.031 2 SPELL $57,866,666
0.032 2 SPELL $59,733,333

As demonstrated in this table the investors were able to nearly double their upside exposure in some scenarios based on the success of the SPELL token.

Success Tokens would allow the protocol to proactively reduce emissions and create an incentive for community-driven growth.

Abracadabra has had a lot of success and Success Tokens can help the protocol continue to increase and expand within existing networks and expand to new chains. Protocol-owned liquidity will help build a more robust treasury, while providing additional flows of non-operating revenue with yield farming rewards.

Potential Risk

UMA Success Tokens run no risk of liquidation, though SPELL held in UMA’s smart contracts are exposed to the typical smart contract risks. UMA has never been exploited and is secured by UMA’s Optimistic Oracle, which is designed to ensure any attack would be more costly than any value that could be gained. If Abracadabra used Success Tokens, the protocol could use a decentralized insurance solution like Nexus Mutual to hedge against any smart contract or technical risks.

Summary

The above posted numbers of this Success token proposal paint a picture of how Success tokens can be used. Success tokens are very customizable and there are several decisions to be made by the community if this proposal is to go forward including term, strike price, and amount of SLP to be purchased. These numbers should be carefully selected so that both the community and the investors can both benefit from Abracadabra’s success.

I look forward to having further discussions on the forum or on discord.
Discord handle: TheRealTuna | Across#1036

5 Likes

So in this scenario, people are selling their SPELL/ETH SLP to the protocol for success tokens? Is that how the protocol gains the liquidity?

1 Like

That’s correct. Investors would only receive bonuses if the price growth has been achieved which is the main advantage over other alternatives. I have personally seen the sell pressure and dumping of tokens that occurs with other alternatives. Investors goals will be aligned with the community and this would be a pathway to zero LP emissions. Gradual reduction of LP emissions should coincide with the purchase of LP tokens. If you are an investor who is bullish on SPELL the bonus would be very appealing.

2 Likes

wow, this is a really well thought out post ser, well done. As someone who is a recent LP/holder i’d love to see emissions reduced and i like the flexibility that the success token offers. Thanks for posting ser, would love to see this catch on.

Inalittlewhile here from the SuperUMAn DAO. Wanted to show support for such a well thought presentation on Success Tokens. Happy to help answer any questions that may arise.

This is the usual way big market makers operate. For example I believe when Alameda took on Spell to market make they asked for a call option on the Spell , probably few x higher then the price at the moment.

Market makers tend to have good algos, especially in sideways markets to “push” the tokens prices upwards, and rarely loose on those call deals.

I see this as a similar type of product. Not against it, it is interesting, but I just did a comment on that option protocol proposal Catpul, and I would much rather see that, as its more flexible and approachable way of doing this.