Breaking down Angel Vaults
It’s been a wild crypto summer, with tons of innovation around liquidity & treasury management. OlympusPro, Tokemak and Curve wars have been all around crypto twitter, and DeFi 2.0, protocol owned liquidity and bribes were common terms we frequently heard.
An uprising liquidity management service named Angel Vaults delivered by ICHI DAO, is gaining traction and is worth a bit of deep dive for anyone interested in the latest innovation in DAO liquidity management.
Want to know how ICHI has withstood all market corrections since the end of November?
Let’s dive in
Part 1 — Introduction to Angel Vaults
The goal of this article is to give an overview and basic understanding of ICHI Angel Vaults (AV). Follow up articles will expand on how branded dollars are converting Total Value Locked into Protocol Owned Liquidity and how that benefits the project.
- What Angel Vaults are 🤷♂️
- How do they work ⚒️
- What problems do they solve — benefits and value proposition to the various angel vaults stakeholders
- Risks
- Modeling the risk / opportunity
- Summary
Part 1.1 — ELI5 –Angel Vaults protecting token projects from market wide volatility
Crypto markets introduce high correlation between crypto assets and BTC & ETH. The main reason is that most assets are traded on AMM’s, where ETH Is the dominant asset — when ETH drops in value, and in the absence of active buy side pressure on the paired assets, arbitrage opportunities arise that drive arbitrage players to sell the assets paired with ETH and take profit.
A token price embeds various risk factors. It’s enough to look at 2 main risk factors making the biggest impact on a price of a token:
1. Market risk — Beta (at various levels- from global economic condition, to sector specific, to domain specific).
2. Project specific risk
Angel Vaults fix this.
Angel Vaults are Uniswap v3 liquidity position managers that provide BUY SIDE liquidity to a token. They are dynamically managed, so in a way you can think of them as autonomous market makers that optimize the capital deposited to the vault to achieve this goal, earn fees and save LP’s all the hassle of managing a uni v3 position.
Part 1.2 — How does an Angel Vault work?
When a project launches an angel vault, they choose a stable token to pair with their native token. (in our example ICHI-oneUNI* case study). That stable token will be used to seed buy-side liquidity underneath the project token spot price. liquidity providers will deposit this stable token and grow the Angel Vault TVL (single token deposit). The project will just need to seed initial tokens liquidity — as low as $20K (in this case $oneUNI & $ICHI)
* oneUNI is a stable dollar, a token backed by $USDC + $UNI, always redeemable 1:1 to USDC. At this point in time it’s enough to assume the angel vault simply used USDC as the pair (absolutely a viable option), but if you find this interesting and read on to part 2, you will better understand the reason to use a branded dollar and the benefits of it). For now — just assume we used a stable coin of your choice.
In the below screen, The red bar represents the spot price of the native crypto asset, and the tall blue bars to the left represent liquidity in the deposit token (stable asset) concentrated underneath the price as buy orders for the crypto asset. At and above the spot price, the Vault will place liquidity in the native asset as sell (take profit) orders.
Let’s run 2 scenarios:
ETH price drops, arbitrage players looking to sell $ICHI will sell it into this buy wall — these players will have to sell an entire bar’s worth of ICHI in order to bring the price down a single tick (a single tick in this example represents a 20 cent drop. $ICHI price will not be impacted by the dump. Without an AV, on a standard AMM (XY=K), ICHI price will drop at a similar rate to ETH, usually much more due to the way liquidity in a normal Constant Product curve is spread out.
The pool will now hold a wall of $oneUNI and $ICHI which is then distributed above the spot market, so when ETH price spikes, take profit orders will be matched converting ICHI to $oneUNI which is redeposited into the vault to grow the buy wall. Afterwards, the vault can be re-balanced.
Note that the Vault is constantly being monitored and if an exceptional dump took place, and the mix of $oneUNI-$ICHI has drastically changed, the Vault will re-balance it’s position, and the Buy wall will adjust to a lower ICHI price point.
To conclude
Angel Vaults help soften market-wide volatility, so token price is only exposed to the project specific risk. This caps the impact of market down pressure, but continues to capitalize on the correlation to ETH when the market goes up.
Of course, Angel Vaults do not eliminate all market risk as that depends on the strength of the vault (TVL in comparison to project’s market cap) — but it can surely reduce volatility, give token holders piece of mind in uncertain markets, and build confidence in a token price by decorrelating it from the market.
References:
Demonstrating previous ETH market crush, and ICHI’s price:
Part 1.3 — What problems do Angel Vaults solve?
In this section I will cover the problems addressed by the Angel Vaults, and the benefits for the various stakeholders:
Benefits for projects:
DeFi projects have to define a strategy for their token liquidity. They face questions like “how do we ensure there is enough liquidity for our token?”, “how do we manage that liquidity?” (which pools to seed, how much rewards they should provide, should they have a protocol owned liquidity pool or provide incentives for LP’s to do that etc..), and “do we have to hire a market maker to help with all of the above?”
Market Making
Angel Vaults serve as your market maker — The key benefit is that unlike traditional market makers who earn trading fees for others (the exchanges they trade at), Angel vaults earn trading fees for you and your community.
I will elaborate in the next part on the use of Branded Dollars — stable tokens minted part with USDC and part with your native token. The highlight of this is that while market makers deposit your token on exchanges, where it is sold, Angel vaults accept branded dollars as deposits. These dollars are minted in part with your token which means your token is net purchased rather than net sold.
By using branded dollars as the deposit asset in an AV, rewards that a project may reward to LP’s can be partially or fully offset by the tokens locked inside the branded dollar treasury when those are minted.
Working capital
Capital efficiency for Projects (use community liquidity to market make vs your own treasury
Rewarding a Uni v3 position
Uni v3 is superior to v2 or other amm’s in capital efficiency, but since the position is minted as a unique NFT, the standard liquidity mining contract won’t work. Angel Vaults solve this, as LP’s can deposit their AV LP (an ERC-20 token) into a deposit contract and earn reward.
Token launch — the web 3.0 version of an investment bank taking a company public through an IPO
An interesting use-case for Angel Vaults could be providing buy-side liquidity (or a price floor) for an asset when it is first released into the market. This is similar to a company doing an IPO that uses an investment bank to support its listing on the buy side until price has stabilized. AV could be seen in a similar way.
The importance — if a token loses momentum for any reason, and liquidity providers (farmers) dump the token, a project cannot count on someone to pick up and “buy the dip”, as there’s always the risk of other people FOMO and dump their token too before the token becomes worthless, then it makes it hard for a project to recover, until sophisticated investors come in. If and until that happens, the projects risk getting into a spiral where the rewards are not attractive enough to attract liquidity providers, further emphasizing the loss of confidence in the project ability to recover.
Launching with an angel vault can be a good way to take care of initial liquidity, while providing incentives only to the BUY side — when a project provide liquidity rewards to a traditional Pool2, they incentivize both buy & sell liquidity for their token
Benefits for Liquidity providers:
If you are an investor looking to deploy your capital by providing liquidity, your biggest challenges are IL (impermeant loss) and how to optimize your capital and maximize it’s efficiency,
Liquidity providers lacking the time / knowledge to actively manage a uni v3 position — these LP’s can enjoy all the benefit of AV + earn optimal fees for providing liquidity — mainly because of ICHI angel vaults high capital efficiency (read more about uni v3 capital efficiency here)
Investors that are long on a token for the long run, but want to reduce exposure risk can use stables to provide AV liquidity — and risk at ending up with a different mix of stable/token, but as they are long anyway, it’s a way for them to get this position without needing to actively monitor the market and try to time when to buy the token. Furthermore, depositors will get the native token as liquidity rewards in addition to fees earned on Uniswap v3.
If you are seeking to do both — provide liquidity + get a long position on a token — Angel vault will serve both goals.
Part 1.4 — Risks
Although this sounds too good to be true (it is kind of), there is no magic here — In every economic system, an existing risk cannot be eliminated — it can be moved and contained if the different parties in this game have different needs and risk profiles. Let’s explore those:
- Liquidity providers give downside protection in exchange for trading fees and rewards. They take the risk that in an extreme case, they will end up with 100% of their position in the form of the native token (reminder — they have started with 100% token pair — in this example oneUNI (or any other stable coin). This is totally fine for LP’s who are long $Token and are seeking to get this exposure.
Another way to look at it is that LPs are option writers — they write a Call option on the price of the token, in exchange for a fee (liquidity rewards + trading fees). - Projects risk that if the buy wall is not strong enough, an angel vault could serve as an exit liquidity to current token holders. (Strength measured as % of the total market cap of the project). It is therefore important to consult and design the right structure that takes into account many factors specific to each token project
Part 1.5 — Modeling the risk / opportunity
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THIS IS NOT INVESTMENT ADVICE, and anyone using this tool should do their own research when considering using an AV.
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It’s a simple tool aimed at giving a directional sense — I’ve tried to model the risk/profit profile for someone considering if they should deposit into an AV, vs. just holding stables vs. just holding the token.
The way this model was built, is by looking at 2 risk levels
- Best case — The angel vault is capable of supporting market movements, and rebalance itself to stay at a 80%/20% mix of holding token/pair
- A Worst case scenario — Angel vault could not hold the level of sell pressure, and LP’s end up with the token + rewards
How to use this simulator:
- Insert your assumptions in YELLOW cells
- See the position value in different token performance as % change to it’s spot price when entering the pool
- See the performance vs. just holding 100% stablecoin or 100% the native
I invite the community to fork this and use more sophisticated tools to enhance and better model this.
Summary
Angel Vault introduces a unique opportunity for crypto projects to manage their token liquidity and remove market volatility. It also offers investors and liquidity providers a unique exposure that is usually only accessible for large market makers and sophisticated players.
This is not all — by using the concept of branded dollars — which I will elaborate in the next part, projects can build more protocol owned liquidity, retain more value that can further help them protect their token price and reward its community for supporting the token via liquidity provision.
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Author Bio
Living and working full time DeFi & DAO’s since 2018, I’ve been obsessed with building and helping web3 projects launch & grow. Active in multiple DAO’s, among them ICHI DAO, where I helped the project navigate through biz dev and partnership with other DAO’s in this space.
Today I’m leading the Collider Ventures platform, a team focused on adding value & helping portfolio companies with the most critical challenges they face — tokenomics, governance, growth, biz dev, hiring and fundraising.
About Collider ventures:
Collider is a venture fund dedicated to investing in the future of the internet, blockchain, web3, and decentralization technologies, We believe that in the world of ownership economy & web3 value will follow those who create it, and as such actively participate, contribute, and become an active part of the projects and communities we invest in.
Collider has been an early member of the ICHI community and we are excited about what ICHI is building and want to help educate the entire DeFi community
