EE06 - 3 Fantom protocols are starting to own their liquidity. Is that a signal to buy?

Introduction

SpookySwap (BOO), SpiritSwap (SPIRIT), and Scream (SCREAM) are three different protocols built on Fantom. SpookySwap and SpiritSwap are both AMMs, while Scream is a borrowing and lending platform.

As of today, all three are partnering with Olympus Pro in order to own and control their own liquidity. We'll be calling this protocol-owned liquidity (POL).

Olympus Pro is a platform that aims to help protocols acquire their own liquidity, based around the same mechanics that allowed OlympusDAO to do the same. For a fee, Olympus Pro provides bonds-as-a-service to a protocol interested in owning its liquidity. This done through a process through Bonding. Put simply, users can exchange their liquidity pool tokens for the protocol's governance tokens at a discounted rate. As the protocol never sells those LP tokens, the liquidity is now locked within its treasury.

Why wouldn't you want your users to provide liquidity?

The Problem with Liquidity Pools

Protocols have to incentivize liquidity providers via inflation to attract capital. This creates significant issues for the protocol, and the end user.

The OlympusPro docs does a great job of diving into this. I will paraphrase most of them here, and add my own thoughts.

1. Sell Pressure
   The high inflation that is provided to liquidity providers encourages users to sell off their yield as it is given to them. You can notice this behavior with almost every single farm tokens price.

2. The Benefits of Inflation Harms the Protocol
   Inflation is great, and enables wealth to be generated as the yield is continously used to generate more income. (Check out my post on PolyCubs treasury.)
   The issue with these high inflation rates, is that the inflation a protocol provides ends up in some other ecosystem. This means that the protocol almost never sees the benefits of the inflation it provides in the long-term.

3. Goal Misalignment
   The vast majority of users jump into protocols early for the initially high yield, sell it all off, and then pull their capital and move it elsewhere. Remember when $CUB spiked to above $8? That was because of users jumping between protocol and protocol, profiting off the yield, and then leaving.
   As I've mentioned in other posts, Cub is an exception when you look at the price of these farm tokens after this much time.

4. Impermanent Loss
   While I generally find IL to be mostly nonsense, I would much rather be incentivized for single staking. The only reason users provide liquidity, is for the incentives that come with it. We don't particularly enjoy the IL, even though it does save us when prices are dropping. Think about it this way: if Cub Finance owned their liquidity, the emissions could then be redirected to users in the $CUB Kingdom.

Benefits of POL

1. Liquidity Permanence
   Liquidity providers pull their capital as soon as the yield isn't as high as the next farm. POL avoids that completely.

2. Increased Revenue
   Protocols own their liquidity, including the fees that come along with it.

3. Price Stability
   As liquidity is now permanent, and ever-growing, it means that large shifts in price will occur less frequently.

What was this post about again?

I seem to have gotten ahead of myself talking about Olympus Pro, which I have found myself to be crazy bullish on. Unfortunately, I don't own any $OHM, but maybe that'll end up changing.

So, I have been engaging with Fantom a whole lot recently, and find the ecosystem to be some of the most 'fun' I've had in decentralized finance. I plan to write up a post soon about the types of interesting strategies you can utilize to compound yield multiple times over.

Olympus Pro aims to provide a solution to the problem with incentivized liquidity pools, and it is great to see some of Fantom's main protocols working towards fixing that problem.

Is this a signal to buy some $BOO, $SPIRIT, and $SCREAM?

$BOO

$SPIRIT

$SCREAM

With the exception of $BOO, each of these tokens have a good amount of ground to cover in order to reach their most recent local top.

I think these particular protocols owning their liquidity is especially bullish because of how Fantom operates.

I'll tap into this more in another post, but Fantom is a degenerate goldmine. As an example: you can put up $DAI in Beefy, which uses Scream and autocompounds the yield back into $DAI. You can then take your mooScreamDAI tokens, and deposit them on QiDao in order to mint $MAI, swap it for $DAI, and repeat the process.

This is one example of some of the many strategies you can deploy on Fantom. This is exactly what makes Scream owning its liquidity so great. These strategies employ a lot of swaps from the native farm token to some other assets, and now the protocol can collect all of the fees that come with that. True believes can stake their BOO, SPIRIT, and SCREAM to collect protocol fees, while degenerates can utilize the strategies they're already using. This all while incentivizes to liquidity providers can be reduced. Win-win-win.

Conclusion

As always, none of this is financial advice. I'm not even sure if I'll be dipping into any of these tokens right now. It is interesting to think about though: as protocols begin to take the steps to own their liquidity, what will that mean for price action in the long-term? How will protocols revamp their tokenomics when inflation to liquidity providers can be reduced, or non-existent? I am looking forward to seeing how it all plays out.

Icons used in these graphics are couretsy of Freepik and Eucalyp.

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