Sep 1, 2022
Under the Hood: Savers Vaults & Protocol Owned Liquidity
Savers Vaults (or Single Sided Yield, or Single Sided LP) and Protocol Owned Liquidity on THORChain: how will these new features work?
First, we need to understand how THORChain Synthetics (or Synths) work. Lots of resources (e.g. https://medium.com/thorchain/activation-of-synthetics-5064e0f43301), but tldr: minting a Synth essentially deepens the respective liquidity pool (LP) to an equal value, split into 50:50 Asset:RUNE.
Before this, only arbers were holding Synths since there was no yield. But the Savers Vaults design will create a mechanism where users can deposit native gas assets (auto converted into Synths) to earn yield, which would be 50% of the earnings earned by the respective LP.
Savers Vaults:
- are backed by the respective LP
- earn a part of the yield from swap fees using THORChain LPs
- always redeemable (with slippage) to the native coin
- no RUNE price exposure
- no impermanent loss exposure
Here is an overview/example of depositing & withdrawing from Savers Vaults:
Protocol Owned Liquidity (POL)
The expectation is that Synths may quickly reach their utilization limit (currently at maximum 30% of asset or 15% of total LP depth), as users mint Synths to enjoy the Savers Vaults.
Thus, the other side of the equation is Protocol Owned Liquidity (POL). The Reserves will contribute RUNE into the LPs if the Synth utilization for each pool is reaching the current max of 30%. This will deepen the pools, and thus reduce the % of Synth utilization per pool allowing for more Synths to be minted.
At the start, the amount of POL RUNE contributed will be limited to a small % of total Reserves, and will be gradually increased over time to battletest these features. In theory, the amount of POL will be limited by the hard cap (total pooled RUNE = total bonded RUNE by the lowest 67% of nodes). In practice, as POL grows the pools -> the Incentive Pendulum will favor the nodes over the LPs -> Synths yield decrease -> users redeem Synths back to native coins -> Synths % decrease -> Reserves remove POL -> equilibrium reached.
The flexibility of always creating space for more Synths (via the POL) is also a key enabler for the future Order Book feature, as pending limit orders are held by the protocol in the form of Synths.
FAQ:
1. Will the Savers Vaults be offered for all assets, including native RUNE?
No, Savers Vaults will only be offered for gas assets of each external blockchain (BTC, ETH, BNB, BCH, DOGE, LTC, ATOM, AVAX), and not for native RUNE. In the future, certain non-gas assets (e.g. stablecoins) may be considered for Savers Vaults.
2. Will Savers Vaults reduce demand for native RUNE?
No, Savers Vaults means minting/holding Synths, which will be split into 50:50 Asset:RUNE in the LP. Therefore, a user minting Synths with assets will drive buy pressure for RUNE.
3. Will Savers Vaults negate the 3x non-RUNE TVL deterministic pricing?
The additional dynamics of Savers Vaults and POL may mean the target Incentive Pendulum of 2 bonded RUNE : 1 pooled RUNE may not be the equilibrium anymore. However, the hard cap will ensure a minimum deterministic pricing of 2x non-RUNE TVL. Time will tell, but it could be that an equilibrium deterministic pricing will float between 2 to 3x non-RUNE TVL.
4. How does Savers Vaults benefit THORChain?
As depositors of Savers Vaults are technically holding Synths behind the scenes, this is deepening the LPs -> reducing slippage for traders -> increasing swap volume -> increasing fees collected -> increasing users deposit to chase the yields -> liquidity black hole.
5. What are the risks of Savers Vaults?
The main risk is protocol risk (code exploits, etc.) of the THORChain protocol itself. Also, risk of high slippage depending on the deposit/withdrawal size vs the liquidity pool depth.
Github:
Savers Vaults: https://gitlab.com/thorchain/thornode/-/issues/1342
Orderbooks: https://gitlab.com/thorchain/thornode/-/issues/1364
Feel free to hop into the LP University Discord to chat about this, or any other THORChain or Liquidity Providing questions that you may have.
