November 21, 2022
Liquidity is a constant challenge for DeFi protocols, and there are no exceptions. While the release of the Chicken Bonds pioneered a novel and efficient way to capture and grow liquidity, improvements are also possible at the root level: the DEX itself
Today, we’d like to highlight an interesting approach developed by PowerPool to create even more efficient stablecoin pairings on Balancer, including a new pool called LUCY involving LUSD.
Before we dive into what DeFi legos LUCY harness, let’s consider what it achieves. So far, LUSD holders have been faced with a difficult choice regarding yield sources to harness with their stablecoins: Stability Pool or liquidity providing? Each is a different compromise.
With LUCY, they will have to choose no more, as LUCY is doing both. At the base level, LUCY is a liquidity providing position of LUSD against USDC/USDT/DAI. Yet, it’s also rebalancing to yield producing opportunities depending on liquidity needs, including the Stability Pool (though B.Protocol).
Thus, LUCY can reasonably be expected to be the top performing LUSD LP position in terms of native yield, as PowerPool backtesting has shown and thus help densify and diversify the liquidity on LUSD.
Backtesting of LUCY’s performance against market data between Jan 01 and 30, 2022 (source).
Along with Curve and Uniswap, Balancer has been one of the longer-lasting decentralized exchanges. Initially, Balancer’s key innovations were its ability to support arbitrary weights (such as 98%/2% pools) and up to 8 different assets in a pool.
Similarly to Curve, Balancer now harnesses ve-based tokenomics, enabling BAL lockers to direct BAL incentives on the pools of their choosing. However, Balancer implemented several twists on the base model, the main and most fascinating one being that governance participants lock LPs tokens (80%BAL/20%wETH) instead of raw BAL tokens (like CRV->veCRV on Curve). It creates a positive impact for the liquidity of the base token, and brings a new dynamism to the Balancer races.
More recently, Balancer has been working on delivering a new type of pool called Boosted Pool. It enables a further increase in the capital efficiency of the DEX — as underlying assets of a Boosted Pool are harnessing a yield-earning opportunity, on top of the regular income generated thanks to commissions on swaps facilitated.
The Aave USD Boosted Pool (bb-a-USD) is currently the top pool making use of this new design by enabling swaps between three stablecoins — DAI, USDC and USDT — and their a-wrapped variants while also increasing the overall yield generated by the pool. The bb-a-USD is essentially three pools nested into one:
Each Linear Stable pool, such as bb-a-DAI (DAI/aDAI) constantly rebalances between the base asset (DAI) and the wrapped interest-bearing version (aDAI) depending on the needs of the pool. Thus for instance, in a period of low volume and therefore low liquidity needs, the pool will tend to maintain a larger aDAI balance (maximizing passive yields), while keeping just enough DAI to process swaps efficiently. Therefore the bb-a-USD pool is able to achieve a higher base yield than a normal stablecoin pool by leveraging a new revenue source uncorrelated from the DEX’s trading volume.
The pool has achieved significant traction since mid-October, achieving over $500M volume traded with about $130M TVL.
Now that the stage and context is set, let’s discuss today’s topic: LUCY, an upcoming Balancer Boosted pool built on top of bb-a-USD and involving LUSD. It's a stablecoin pool that pairs LUSD with a three-pool of USDC/DAI/USDT, similar to the LUSD-3CRV pool on Curve. The main difference is that the stablecoins in the pool also harness additional yield sources leading to enhanced native yields for liquidity providers.
LUCY is built by PowerPool, pioneers in DeFi automation, which developed modular vaults on Balancer V1, an infrastructure enabling advanced pools like LUCY. It is now being ported to Balancer V2 and will enable $LUCY’s addition to the other pools. PowerPool are also the developers and operators of the PowerAgent autonomous automation network, underpinning the automation of optimisation strategies like $LUCY.
In details, the LUCY pool consists of the following assets:
Thus LUCY is a 4 stablecoin pool — for each stablecoin, it involves the raw versions to facilitate swaps, as well as a wrapped yield-bearing variants to optimize LP’s returns. Thus, the LPs will be earning from 3 sources of income:
LUCY is a novel, advanced and unprecedented type of pool. To function properly, it requires automation in the background — as smart contracts cannot be triggered themselves. This is where PowerAgent v2 comes into play: it’s the generalized, autonomous, decentralized automation network handling recurring operations required by LUCY, such as calling the harvest or compounding the gains.
LUCY will go live in the coming weeks; stay tuned! We'll relay the launch announcement on the Liquity Twitter account. As soon as LUCY is released, anyone can supply it. However, considering the likely limited total liquidity at first, we'd advise the first suppliers to supply the pool balanced to minimize the risks of losing funds to slippage.
As said above, initially, only two of the potentially three yield sources will be available: trading fees and asset yields. The BAL rewards will come later, if the Balancer governance is successfully petitioned to add them to the pool gauge.
To deep dive into LUCY’s inner workings, we’re strongly recommending you to check out PowerPool’s informative blog that offers a couple of posts on the topic: