Vector Reserve: an OHM-style reserve currency built on LP restaking
Thread1,259 words
Compares Vector Reserve with OlympusDAO, explaining why OHM bonding failed and how vETH, a VEC transaction tax, bribe-driven veVEC governance and superfluid staking aim to fix it, as a liquidity-as-a-service flywheel for LST and LRT capital.
Key claims
20% of vETH collateral yield accrues to VEC
VEC transaction tax funds LP bribes and widens the bond spread
veVEC holders direct LST and LRT liquidity allocation
Last cycle, DeFi 2.0 printed millionaires (e.g. @OlympusDAO)
This cycle, DeFi 3.0 will print millionaires (e.g. █████ )
We're talking OHM on Steroids. A protocol based on Superfluid LP (re)Staking and @eigencloud that could manage billions in LST/LRT liquidity
Alpha-🧵
1/ I spent months down the restaking rabbit hole.
I looked at 100s of projects to identify the ones that aim to build unique solutions on top of @eigencloud.
While I tend to focus on infra & tech, I have recently also looked into LRTfi, which bears enormous potential.
2/ DeFi use cases around liquid restaking tokens will be a significant sub-sector of the DeFi space.
As the spectrum and value of restaked assets continues to grow, innovation will flourish.
Identifying the first-movers on new concepts early, is how you will make it this cycle.
3/ Today, I want to introduce you to a project that could be the @OlympusDAO of this bullrun.
A protocol that could become a significant player in the wider DeFi ecosystem, potentially directing billions of dollars in liquidity.
But before we dive in, let's do a bit of history!
4/ @OlympusDAO kickstarted the DeFi 2.0 narrative last cycle and saw great success initially.
The protocol had two sources of revenue for the protocol:
✦ Selling bonds (discounted OHM)
✦ Fees from POL (Protocol Owned Liquidity)
In the bull, this was a money making machine.
5/ But the OHM model was flawed.
OHM's main premise was that the reserve backing and the market price would remain "soft-pegged" and there would be limited downside.
Unfortunately, Olympus failed to inventivize bonds well enough.
6/ With buying being incredibly easier and more familiar to users than bonding, and a rather conservative bond discount, bonding didn't take off compared to market buying.
This decoupled price from backing significantly.
7/ When bear market came, and on-chain volumes dried up, POL fees also decreased immensely.
Subsequently, the spread on the bonds decreased and demand for bonding dried up.
Both revenue sources effectively went to zero immediately.
8/ But let's talk 2024 and that means Vector.
@vectorreserve leverages optimized liquid staking and liquid restaking yields to introduce a diversified, risk adjusted reserve currency.
Built on ETH, and offering market leading yield.
9/ @vectorreserve maintains a diversified treasury of Liquidity Position Derivatives (LPD) in traditional ETH/LST or ETH/LRT LPs.
The result is a diversified, fully collateralized basket of optimized ETH yields in the form of Vector ETH (vETH).
10/ The liquid restaking derivative vETH accrues:
✦ Yield from the underlying LP positions
✦ Yield from the LSTs in the LPs
✦ Superfluid Staking yield, when enabled by @eigencloud
✦ Protocol airdrop points from partner LRT and LSTs
✦ EigenLayer points from underlying LRTs
11/ While most of these yield sources are rather straightforward, Superfluid Staking is where it gets interesting.
In the future, @eigencloud might not only allows you to deposit LSTs to restake, but also LST-based LP positions (like the ones that back vETH).
12/ The restaked LP tokens represent a share of the liquidity in a pool on a DEX such as Uniswap or Curve.
This mechanism enhances the utility and yield-generation potential of these assets.
Simultaneously, vETH ensures participants remain liquid with a yield-bearing ETH proxy.
13/ @vectorreserve will implement Superfluid Staking as soon as @eigencloud enables it.
In the meantime, the focus lies on other yield sources. Superfluid Staking is just one part of the vETH yield mix.
14/ However, it is a particularly innovative and forward looking approach that offers an increase in yield.
Imo, this sets vETH apart from the competition and creates a USP for attracting deposits in the future.
@vectorreserve is the first-mover here.
15/ The second token in the @vectorreserve ecosystem is VEC, which acts as a value accrual token for the entire protocol.
VEC maintains a perpetually growing intrinsic value, similar to past iterations of "reserve currencies" (e.g. OHM) as it is backed by the treasury.
16/ However, unlike traditional reserve currencies, VEC accrues revenue from additional sources beyond merely bonding and POL fees.
This includes:
✦ VEC is backed by vETH/ETH LP positions - meaning the intrinsic value is perpetually growing with yield accrued
17/
✦ VEC sells bonds to acquire vETH/ETH LP - growing the backing & bolstering vETH liquidity
✦ VEC has a transaction tax that goes towards bribing for LP provision across various DEXs
✦ 20% of yield generated by the vETH collateral reserves goes towards the VEC token
18/ VEC token holders are also entrusted with governance rights.
@vectorreserve will introduce vote-escrowed VEC (veVEC) upon acquiring sufficient liquidity.
veVEC represents staked VEC within the VEC/ETH Liquidity Position (LP).
19/ Holders of veVEC tokens determine the allocation of LST and LRT liquidity that underpins the vETH Liquidity Position Derivative (LPD).
This ensures that the liquidity is directed in a manner that aligns with the strategic interests of @vectorreserve.
20/ Through a well-structured bribery mechanism, external protocols can offer incentives to veVEC holders to sway the allocation of liquidity in their favor.
These incentives are a way for other DeFi protocols to attract the robust liquidity provided by the @vectorreserve.
21/ This kind of bribe mechanism has often been applied to DEXs such as Velodrome, Balancer or Curve to sway incentives towards their liquidity pools.
However, it has never been applied towards an actual treasury of assets that can provide instant liquidity.
22/ This is insanely powerful anon.
@vectorreserve is able to generate market-leading yield.
This allows it to sell VEC bonds at substantial discounts (more shortly).
Transaction taxes further increase bond attractiveness & accelerate treasury growth (yield-generating base).
23/ This can turn into a flywheel, where @vectorreserve turns into a blackhole for LST/LRT liquidity (as yield attracts TVL).
Using the treasury to provide liquidity in DeFi & enable a bribery mechanism to sway governance basically turns this into a liquidity as a service model.
24/ In a future where @vectorreserve directs hundreds of millions or even billions of $$$ in liquidity, this is highly profitable with substantial LP yield and even more bribing revenue.
The demand for VEC will skyrocket as degens seek yield and protocols seek governance power.
25/ As hinted at above, VEC also acts as a key incentive mechanism to attract & retain liquidity within the Vector Reserve ecosystem.
VEC is issued at a discount, incentivizing liquidity & initiating the flywheel for protocol & users.
26/ This allows @vectorreserve to expand its backing and enables it to own its liquidity.
The protocol actively employs the (protocol owned) liquidity with the goal of achieving returns greater than the discount at which the assets were initially issued.
27/ In summary, bonding does three important things for the Vector Reserve ecosystem:
✦ It facilitates deeper liquidity for vETH across various DEXs
✦ It acquires quality assets for the VEC backing
✦ It increases the yield-generating base (POL)
28/ Okay cool, but does Vector really improve on @OlympusDAO's concept?
Yes! @vectorreserve has vETH, a buy-and-hold asset that can be used in any market condition that drives value to VEC.ƒ%
29/ @vectorreserve also addresses the problem of a lack of bond incentivization. It uses a transaction tax to:
✦ Create more rapid backing growth & higher yield for vETH, which equals more demand & treasury revenue
✦ Create a greater spread between bonding & market price
30/ The spread is exactly the key point here.
@vectorreserve makes bonding even more attractive because it not only comes with a market price discount, it also comes with circumvention of the transaction tax.
This results in a far wider cumulative spread than Olympus had.
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