Cue the music!
Sit back, relax and close your eyes. Let your imagination flow free. Imagine the future of DeFi. Imagine a futuristic DEX. Super capital efficient. Innovative, sustainable revenue generation. Interconnected liquidity!
Ah, a DEX Beethoven himself would be proud of! This needs no imagination, music maestro, for it is closer than you think! Prepare yourself for new vibrant forms of music; composed by new exciting players. Let me introduce you to our musical, technological prodigy: The updated metastable pool!
So, what is a MetaStable pool?
This pool type is an extension of the stable pool but differs slightly in the way the two tokens correlate. Instead of containing two pegged assets, such as USDC and DAI (both pegged to $1), the pool includes two highly correlated tokens. Often this incorporates a base token and a staked derivative such as ETH and rETH, however, it can also include any token integrated into a yield-generating market.
This pool construct ensures that DEXs have ample liquidity for traders to fluently trade between a base asset and its interest-bearing derivative as well as open up multiple new avenues for exploration. Before we break down the changes, let’s first go back to the basics of why these pool types are so pivotal.
Maximum Capital Efficiency
Maximum capital efficiency is a phrase constantly ushered around the DeFi space, but, what does it mean?
Capital: “wealth in the form of money or other assets owned by a person or organization or available for a purpose such as starting a company or investing.”
Efficient: “achieving maximum productivity with minimum wasted effort or expense.”
Capital efficiency means that you are putting your assets to use most productively with a minimum amount of effort. When it comes to investing in assets, let me ask you a question:
Would you prefer to hold an asset that only changes in value due to market conditions or an asset that changes in value due to market conditions while also naturally appreciating?
Naturally appreciating tokens such as staked derivatives are a great example of capital efficiency in DeFi. As a user, there is little to no effort required to generate additional value. Pairing these tokens with their base token into a liquidity pool, allows users to earn additional yield due to swap fees, on top of the underlying yield from the token.
If Capital efficiency is key, then Metastable pools are one of the most capital-efficient versions of this pool type. This all comes down to a clever piece of tech, Let’s explore!
A pivotal function that sets MetaStable pools apart from the “average” stable pool is a specific contract that accounts for the slow appreciation in the value of Interest Bearing (IB) tokens. Take the mic please, the renowned Rate provider!
In a stable pool without a rate provider, the pool contract ignores the daily increase in the ratio between the base and IB asset. What does this mean? Tokens such as ETH/stETH trade at 1:1. Arbitrage traders can utilize this incorrect ratio and benefit from the price discrepancy. Liquidity providers lose out on the yield, as it is leeched out due to the activity of arbitrage traders.
Beethoven X and Balancer navigate this problem by integrating a rate provider contract that constantly updates the ratio between the two assets. Instead of assuming a 1:1 ratio, the rate provider queries the blockchain and constantly updates to the correct ratio. This removes the possibility for the yield to be taken by arbs. The yield from these IB tokens is now actually flowing to you, the liquidity provider!! BOOM.
The story evolves -the rate provider doesn’t only benefit users…
IB protocol fee
Sometimes evolution occurs due to miraculous events. A technical oversight by Balancer on the initial Metastable pool logic resulted in an unexpected innovation. Balancer Labs noticed that the protocol fee collector contract was amassing unusually large amounts of wstETH from the wstETH/wETH metastable pool. Upon investigation, Balancer discovered that due to the rate provider, the contract was collecting a fee based on the Interest Bearing token’s natural appreciation.
Part of the yield of the IB tokens was mistakenly collected as a protocol fee. The contract assumed that the difference in value between two joins/exits was due exclusively to swap fees. The accidental discovery by Balancer unlocked an innovative source of revenue generation. Instead of relying on revenue generated via swap fees, Beethoven X can utilize this IB fee to ensure a protocol revenue source purely as a function of how deep the liquidity in the pool is. This is HUGE!
So, how does the protocol ensure deep liquidity? Incentives. Incentivizing MetaStable pools is a must. Luckily, Beethoven X has a funky flywheel mechanic to do this. On both Fantom and Optimism, a portion of all protocol fees that Beethoven X generates are directed to users as gauge incentives.
As these incentives increase, the votes that these IB pools receive subsequently increase and drive the APR of the pool higher. This flywheel has the potential to not only drive incentives for these pools but increase TVL, reduce slippage, and increase protocol revenue
Beethoven X is a platform for ultimate flexibility and composability. There is free reign for pool construction with various combinations and forms depending on specific liquidity needs. With the apt name of Composable stable pool, the newest iteration of metastable pools leverage phantom BPTs to allow for increased composability through a process known as nesting.
Leverage phantom BPTs? What are these? Pools that utilize Phantom BPTs, mint a portion of the total possible supply of BPTs on creation. This creates a gas-efficient pathway that allows a user to swap to join/exit a pool, rather than the more gas-intensive mint/burn mechanism. Leveraging phantom BPTs, it’s possible to nest BPTs inside other pools and efficiently swap through the nested structures.
The super-efficient Vault structure, phantom BPTs, and nesting allow a fluid and seamless route for swaps on the DEX. Instead of requiring multiple pools that fractionalize liquidity, trades can flow through an interconnected pathway within pool constructs. This allows capital-efficient metastable pools, such as stETH/ETH to slot inside additional pool types. Damn, sounds cool! How about an example?
Let’s say we want to create the ultimate Interest bearing Ethereum pool.
- We pair lido staked ETH with aave-boosted ETH.
- We have this pool construct: wstETH / (wETH / aETH)
- This pool allows efficient trades between ETH and wstETH, but what if we would also like to have stable coin exposure?
- We could then pair the BPT of this pool with the BPT of the bb-a-USD pool (bb-a-USDC/bb-a-DAI/bb-a-USDT)
- This includes (USDC/aUSDC) (DAI/aDAI) (USDT/aUSDT) (all earning external yield)
- This forms a BPT-stETH-aETH / bb-a-USD 50/50 weighted pool.
- Liquidity providers reap the rewards from the underlying yield of the tokens as well as additional swap fees. This final pool also allows for efficient trades between ETH, stETH, USDC, DAI, USDT.
Liquidity providers gain exposure to a super-capital efficient pool type with multiple tokens that naturally appreciate all while earning swap fees. Traders can then leverage the interconnected liquidity and low gas fees. All the while, the yield capturing mechanism of the protocol ensures a sustainable revenue source that filters back to users as gauge invectives. *Mic drop*
Sheesh. A lot was covered here, good work on getting to the end! There is a lot to unpack with these new pool types. If there is one takeaway, it is this: The updated metastable pools combined with new innovative infrastructure, are ushering in an exciting future for the DEX. Super capital efficiency, interconnected liquidity, ultimate composability, and sustainable revenue generation. These new metastable pools are a vivid and vibrant new tune and the music is only just getting started.
Hit it, maestro!