Introducing Options Liquidity Mining
Traditional Pool 2 incentives (i.e. liquidity mining) have proven to be a double-edged sword — while effective for bootstrapping, they lead to long-term inefficiencies and damage to crypto protocols. The reliance on rented liquidity leads to mercenary participation, resulting in a negative feedback loop: Liquidity floods in during the initial bootstrapping phase driven by high APYs, only to drain away once token emissions are depleted. The consequences? Thin liquidity, increased slippage, accelerated selling, and token price decline as participants rush for the exit.
Enter Options Liquidity Mining
Options Liquidity Mining (OLM) is our latest product that draws inspiration from Andre Cronje, TapiocaDAO, and Timeless Finance. OLM gives protocols the ability to permissionlessly mint and distribute ERC-20 call options called oTokens, which can be fully-tailored through configurations such as quote assets, payout assets, strike price, and the option eligibility window. Our focus is to offer unparalleled flexibility, so any protocol can maximize the effectiveness of their emission strategies.
OLM helps protocols preserve capital as they take in assets when oTokens are exercised within the eligibility window. This minimizes downsides of liquid token issuance, curbs mercenary farming, and achieves a sustainable equilibrium between user incentives and long-term treasury sustainability.
Leveling the Playing Field
Our OLM solution opens the door for all projects, regardless of their maturity and size. Unlike other implementations, ours breaks free from reliance on oracles, making it accessible to newer protocols that may not meet the requirements (e.g. high trading volume, large and stable liquidity, etc.) for obtaining a reliable oracle.
To further streamline the process and eliminate barriers to entry, we offer ready-to-use contracts for liquidity mining (auto-create tokens and issue), exercising, reclaiming, minting, and redeeming — making it a seamless process to adopt OLM.
The Inner Workings of OLM
When it comes to the inner workings of OLM, the process is straightforward:
- Exercising Options: oTokens can be exercised within the eligible and expiry dates, at a fixed strike price determined at issuance. In this scenario, the issuer recoups the quote asset strike price required for exercise, while the purchaser receives the upside payout (option price-strike price).
- Expired or Unexercised Options: In the case of expired or unexercised options, the issuer can reclaim the payout collateral initially provided to mint the oTokens. This means that the issuer does not have to pay out liquid incentive tokens. As a result, the upside is shared between the issuer and exercising purchasers, while the downside is not exacerbated by further farm/dump activity.
Keep3r Network’s OLM Success Story
To showcase the effectiveness of OLM, we’ll use benchmark results from the original implementation by Keep3r Network. The chart above illustrates their accumulated fees from OLM as they transitioned from the peak of the bull market in November 2021 to the present bear market.
The left-half of the chart displays that Keep3r captured substantial value during the bull market and how they maximized value retention while still incentivizing users through OLM. Even during the bear market on the right-half of the chart, Keep3r continued to utilize OLM and the fees captured continued to grow regardless of the challenging market conditions. The resilience of OLM is also portrayed through the relatively less severe decline in Keep3r’s token price during this timeframe.
Keep3r Network’s use of OLM empowered them to acquire significant value while incentivizing network participants. By adopting this innovative solution, protocols can achieve greater value retention and sustainable growth even in volatile market environments, eliminating the need for traditional liquidity mining approaches.
OLM Architecture
The system is largely similar to the existing Bond Protocol architecture, consisting of:
- Option Token (ERC20 Clone): instances of option tokens with specified parameters
- Option Teller: handles tokenization, exercising, reclaiming, and custody of payout tokens. Provides minting/redeeming functions that allow other protocols to permissionlessly mint options
- Option Liquidity Mining Contract: liquidity mining implementation that auto-creates option tokens and issues as rewards
OLM contracts are deployed from a Factory, enabling quick, easy, and permissionless deployment of OLM instances. Issuers can manually adjust the strike prices each epoch or let it roll over epoch-to-epoch (i.e. without an oracle). For autonomous management, issuers with a reliable oracle can specify a discount from price at the beginning of a new epoch.
Get Started
Distinguishing ourselves from other solutions in the market, we offer seamless composability with existing liquidity mining contracts, customizable oToken mechanics, and static pricing. We’re working diligently to bring Options Liquidity Mining to market, with a target date set for the end of July. If you’re interested in becoming one of our initial partners and gaining early access, we invite you to sign up here.
Bond Protocol is the permissionless on-chain bond marketplace. Our mission is to power sustainable treasury growth and support protocols to acquire strategic assets, including their own liquidity.
