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How to scale AMM liquidity with protocol-owned funds and PYTs

The first article about the vast range of PYTs’ use cases, whose mechanism can be applied to POL/AMOs and DeFi protocols to boost liquidity.

In 2021, Olympus stepped up as the first project to implement a bonding mechanism in the DeFi space: governance tokens bonds issued in exchange for AMM LP tokens. This breakthrough model aimed to address the limitations of liquidity mining, unsustainable in the long term due to continuous token selling pressure and low organic liquidity retention.

Protocols typically bootstrap AMM liquidity with incentives, but with no clear path to wind down those incentives. Ending liquidity mining incentives usually causes a substantial decrease in total liquidity. The Olympus Bond Marketplace empowers DAOs to retain control of their AMM liquidity, limiting the need to issue additional tokens in the future.

While bonding helps DeFi protocols scale their liquidity in a more sustainable manner, it opens the door to further improvements.

The main challenges to analyze are:

  • Negative ROI. When there is a high demand, the bond price goes above the market price and users are not incentivized to purchase bonds. When the payout asset is worth less than the bond, the system is paused. Users aim to profit from this market-making operation, thus the bonding mechanism works within upper and lower token price limits. This can cause an extension of the time needed to raise the targeted liquidity.
  • Bonding Campaign Scalability. The discount rate for bond programs is driven by market demand (higher discounts if there are no bids and lower discounts if there are bonders competing on ROI). While this mechanism helps early-stage projects without Protocol-Owned Liquidity (POL) to bootstrap their markets, the uncertainty related to the overall cost represents a barrier to scaling protocol-owned liquidity.

Idle’s Perpetual Yield Tranches (PYTs), initially designed to focus on risk tranching, naturally expanded into a product able to boost AMM APYs for the Junior Tranche to attract additional liquidity.

Each PYT is individually built on top of a specific protocol, for example, Convex, Sushiswap, Uniswap, or Balancer. Both Junior and Senior liquidity is entirely deployed in the underlying yield source.

Yields vary according to the Adaptive Yield Split (AYS), with Senior Tranche receiving at least half of the underlying yield when coverage is high (more than $1 on the Junior protecting $1 on the Senior), and Junior Tranche providing a yield higher than the AMM APY.

This open model allows DAOs to deposit POL into Senior PYTs built on top of their AMM pair to organically generate outperforming yields on Junior PYTs, incentivizing the market to deploy capital in that class.

This approach empowers DAOs to scale the liquidity onboarding phase over the limits imposed by POL, without sacrificing governance tokens via liquidity mining. By routing future cash flows (in this case, AMM fees) to Junior PYTs and incentivizing capital deployment, a DAO can lower slippage and improves the robustness of its oracle.

An eventual token price downtrend does not stop liquidity from flowing into PYTs, as DAOs allow LPs to increase their revenues and mitigate IL risks on the Junior side. With DAOs depositing into Senior Tranche, PYTs can amplify the outcomes of the Olympus Pro campaign.

Idle DAO recently released stkIDLE Gauges to foster liquidity provision in Senior PYTs via $IDLE incentives. New PYTs are eligible to receive this new stream, and the weights are decided by $IDLE stakers (stkIDLE owners).

Without using PYTs, a protocol/DAO would directly deposit POL into AMMs, reducing yields for other LPs. With PYTs, DAOs can deposit POL into Senior PYTs to receive the same yields (thanks to Gauges) while indirectly boosting Junior PYTs’ APYs. This yield parity is possible by locking $IDLE and voting for their own Gauge or via Voters Extractable Value (VEV).

In the scenario reported below, a DAO is able to attract 2x the liquidity initially provided via POL deployment and still generate a 50% APY increase on the Junior PYT. If the liquidity is lower, the APY is even higher — maintaining the economic incentive to onboard new liquidity.

Protocols/DAOs that are planning an Olympus Pro campaign can double AMM liquidity via PYTs.

Protocols/DAOs that already deploy POL into AMMs and plan to grow the liquidity can adopt PYTs to benefit from these nested mechanisms of incentives and meta-governance features.

This is just the beginning of use cases for Perpetual Yield Tranches, and we are eager to see further exciting developments.

We work closely with our partners to integrate and develop a reciprocally beneficial relationship to create value for both protocols. This is why we strongly believe that the value a DAO/protocol brings to the community, and the ecosystem, is more than just funds deployed in a strategy.

If your DeFi protocol or DAO wants to get involved in PYTs feel free to stop by our Discord and tag @Treasury League members to get more. You can also reach us via email at



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