‘Miracle’ GRO, A Protocol Overview
Balance Your Risk and Earn Easily with New DeFI App
Disclaimer: this article is based on a bunch of changes soon to be implemented with the GRO protocol increasing the yield of PWRD and Vault as well as the collateral and protection of PWRD.
A stablecoin backed by DAI, USDT or USDC that yields 4–6% annually right into your wallet is a potentially lucrative proposition worth unpacking. DeFi often requires some skepticism and 4–6% yield on a stablecoin is one of those things whose dynamics are worth investigating further. How does a stablecoin maintain stability and how safe are deposits in comparison to normal stablecoins without yield?
Perhaps the most compelling thing about web3 is the sheer rate of innovation. The speed with which new applications with completely novel concepts are churned out is hard to comprehend. As someone who learns about web3 all day, I struggle to keep up with new projects and concepts that come out on the regular.
Gro offers two main strategies: PWRD and Vault; each impacting the other to provide both safety and yield. PWRD is the safe, low yield option based on a stablecoin and Vault is the riskier but higher yield strategy that lets users choose based on their personal risk appetite. A very basic intro is given in this short clip:
If DeFi is in need of one thing, that is making it easier to use by offering services in one place. While writing this piece I downloaded the Argent app to see where Gro was positioned within the app and I’m impressed how flawless the whole process of creating a wallet, buying some stablecoins and then deploying them into Vault to collect ~14–20% yield is. All of this on zkSync with little to no gas fees. Almost anybody should be able to use services like these.
The protocol is set up with Vault and PWRD as major strategies and Labs as an experimental strategy for stablecoin investment. Additionally Gro is governed by a DAO which has its own token with staking options. The diagram below gives an overview of how the different parts of Gro interact with each other (a zoomable version can be found here).
The Vault and PWRD strategies work in a way that users deposit stablecoins (DAI, USDT, USDC) into either strategy and a risk balancer decides where to deploy the stablecoins to achieve yield and to have a diversified exposure. Deposits in each strategy complement the other strategy. PWRD is used by Vault to leverage the investment and achieve a higher yield. Vault in turn bolsters PWRD against exotic risk such as loss of funds through protocol or stablecoin failures with a target of $2.25 collateral for every $1 of PWRD, although usually this would be more ($2 is the minimum possible) depending on how much leveraged Vault is. When investment strategies go sideways, Vault deposits will take the hit first, protecting PWRD deposits (the Gro docs have an example on how this protection works). Poor yield from the strategies, however, will impact the yield of both PWRD and Vault.
- Deposits for Vault and PWRD are tokenized, meaning when a user deposits stablecoins into Vault, he will receive an equivalent amount in Vault tokens ($GVT) or $PWRD for deposits into PWRD. The yield accrues within the GVT token and when users want to withdraw stablecoins, the equivalent amount of $GVT tokens gets burned.
- Deposits in Vault are then used by the risk balancer to deploy the stablecoins into the various strategies.
- Withdrawal from Vault charges a HODL contribution fee of 0.5% that is distributed to remaining depositors and intended to stabilize the protocol.
- Depositing one stablecoin will give users one $PWRD token. The yield of $PWRD does not accrue in the token (the purpose is to have it stable i.e., pegged to 1 USD). The yield is added to a user’s wallet via a rebase mechanism as new $PWRD tokens. The supply of PWRD tokens thus is dynamic. Rebase simply means the supply is adjusted dynamically, in this case based on the amount of stablecoins in the PWRD pool.
- The third investment strategy, Labs, is for experimental strategies with an even higher potential yield (and risk). The currently available investment option deploys stablecoins cross chain on Alpha Homora — a leveraged yield farming protocol — on the Avalanche Blockchain. Gro plans to offer more experimental strategies within Labs.
- Stablecoins will need to be bridged to Avalanche to use this strategy.
- GRO takes care of all the heavy lifting, calculating exposure and positions, ensuring they don’t get liquidated, opening and closing positions, claiming reward tokens and much more you can read about here.
For Vault and PWRD a risk balancer chooses from multiple DeFi protocols where to deploy the deposits. This involves checking the correlation between different strategies and avoiding putting all eggs in one basket. These are the current sources of yield (details can be found here):
- Lending Income from Aave and Compound.
- Liquidity fees from decentralized exchanges like Curve.
- Protocol Incentives from DeFi protocols like Convex (providing liquidity in form of governance or liquidity provider tokens).
The risk balancer is the actual innovation of Gro. You could, after all, take your stablecoins and put them into the above strategies without Gro but the risk balancer will distribute the investments and enable tranching of risk across different protocols, making this accessible to anyone.
Once the yields have been generated a profit-sharing mechanism distributes it to Vault and PWRD. Both deposits in Vault and PWRD could earn the same yield but PWRD essentially buys protection from Vault and pays with some of the yield generated on PWRD deposits. The exact distribution is based on the utilization ratio ($ in PWRD / $ in Vault) and the docs have a great example of how this works in detail. Here is a short excerpt:
Imagine the protocol has $1M in Vault, $500k in PWRD, and a system yield of 10% variable APY (combining Vault and PWRD). Utilisation is at $500k/$1M = 50%. In one year’s time Vault holders could earn 10% on the $1M Vault deposits i.e. $100k, assuming the realised yield stays at 10% APY; on top of that, the profit-sharing mechanism means Vault holders will also earn 48.75% of the $50k generated from the PWRD deposits to arrive at a total gain of $124,375.
Which Strategy to Choose?
Even when all there is to do is choosing an investment strategy to deposit funds into, it can still be difficult to decide how to allocate. I like to think of it as a spectrum with high yield, high risk on the one side and low yield, low risk on the other.
Yield is easily quantifiable by Gro as % return, but risk is more difficult to pin down. Risk could be the failure of the protocol or stablecoin the strategy is investing in (PWRD protects against that) or it could be the general volatility. One could get really sophisticated and use modern portfolio theory and run an efficient frontier calculation, but maybe let’s stay simple.
PWRD yields between 4% and 6% and has the same volatility on yield as Vault. The benefit is the protection against failure of protocol or strategy and it is currently protected up to 163% by Vault deposits.
Vault yields between 15% and 20% and has a 1.32x leverage on the returns. The volatility on yield depends on how the investments perform.
Labs strategies yield on average between 30% to 35% (but are more volatile on the dashboard here).
At the end of the day it comes down to how much risk you can sleep well at night with and how much you can afford to lose. Young people might be ok to take on more risk and allocate more to riskier strategies. 4% on a stablecoin is better than holding cash, but still doesn’t beat inflation which sits at ~ 7% in the USA.
As of writing Gro is aiming to become fully decentralized via the Gro DAO. The goal is to have a governance process in place, allowing Gro DAO token holders to vote on the implementation of new strategies.
The DAO features some interesting concepts, among them a Gro marketing team that gets a certain allocation of Gro DAO tokens and works on increasing the protocol TVL and the size of the community on twitter, discord etc. (read the intro to the marketing team here).
The Gro DAO token $GRO is mainly used for governance, but has some other areas of use like liquidity mining, offering a bunch of different ‘pools’ to provide liquidity and farm $GRO and other tokens. Have a look at the Gro app here for details on how to earn.
You could take your VAULT or PWRD and stake it in one of the pools for additional GRO yield.
A rewards program includes vesting of $GRO, whether it has been airdropped or earned via the above liquidity mining program. The idea is to drive long-term engagement in the community by encouraging token holders to keep their tokens and reward them for locking up the tokens in a vesting bonus plan. The longer tokens are vested, the higher the payout. A bonus can be claimed every four weeks and holders wishing to exit their vesting positions will contribute to the bonus pool of the remaining vesting community. Some stats on $GRO token reward metrics can be found in this dashboard.
Gro DAO voted to charge a performance fee on yields from strategies: 5% on PWRD and Vault and 10% on Labs yields. This is an income stream of the DAO which is used to buy back $GRO from the market. 10% is distributed to the treasury and 90% goes to the vesting bonus program.
Additionally Gro is partnering with Olympus DAO and Fei-Ondo to deepen liquidity for the $GRO token even further.
It’s amazing to see what protocols like Gro come up with in terms of usage mechanisms for their tokens to encourage participation. Many traditional corporations could learn from the innovation happening in this space.
Protocol Token Supply
The token supply for $PWRD and $GVT is dynamic. $PWRD is based on the amount of stablecoins deposited and the yield earned on PWRD. The $GVT supply relies on its price per share and $GRO has a fixed supply of 100 million allocated as follows:
Team & Advisors’ as well as Seed Investors` Gro tokens are vested over 3 years with a 1 year cliff/lockup starting Sep 28, 2021.
Argent and zkSync
To make the application really easy to use involves tearing down barriers of entry for users and that means making it as easy as possible. By partnering with Argent, a mobile Ethereum wallet with great security and social recovery features, Gro is now embedded right into the Argent app. Users of the app can directly access Gro investment strategy Vault from within Argent, making saving really easy.
The other barrier of entry is gas fees and Gro uses Argent running on zkSync to offer Vault on layer 2. Layer 2 means running a bunch of transactions outside of layer 1, in this case the Ethereum blockchain, and then summarizing them back onto Ethereum at a later stage. A lot of transactions can be executed with low transaction fees, but can keep the security of the main chain (read about zkSync on Argent).
Growth on the Horizon
Aside from yield, safety and innovation the thing that is probably most required in DeFi is ease of use. This is the ability to give normal people access to novel technology that otherwise only professionals can benefit from. One can get really nice yields in DeFi, but it requires a lot of knowledge of the protocols used, strategies to manage risk and timing. E.g., most people have no idea how to provide liquidity and then use the provided LP-tokens to optimize yield across different protocols.
Gro takes care of all this, creating a wrapper of simplicity around the complexity of DeFi yield farming strategies. All the user needs to do is decide whether he wants higher or more protection.
This delivers innovation on so many levels. All these other lego pieces come together to make a protocol like Gro work. Gro itself is a great example of utilizing so many things that have been already built and innovating on top. This is made possible by the very few boundaries that exist. It’s the wild west out there and that is great for the ecosystem as a whole.
Unconstrained experimentation leads to more great innovation. Gro brings simplicity into the space of stablecoin investing and on the way might even innovate some completely new ways of managing risk via its two strategy model or create an entirely new way to bond stakeholders to the protocol by rewarding them for vesting tokens.
Florian Strauf is a technical writer exploring and visualising the tokenomics of various Web3 projects. Interested in collaborating on tokenomics and discovering new protocols? Join the tokenomics discord channel.
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This post does not contain financial advice, only educational information. By reading this article, you agree and affirm the above, as well as that you are not being solicited to make a financial decision, and that you in no way are receiving any fiduciary projection, promise, or tacit inference of your ability to achieve financial gains.