LP Finance Grant Proposal - Leverage staking yields and grow mSOL dominance

[LPFinance]

Hi Chefs! I am Eric Lee from LP Finance. LP Finance is a synthetic asset issuance protocol getting prepared to launch our first synthetic asset, zSOL (Solana-pegged synth).


LP Finance expects zSOL to bring more adoption to mSOL with leveraged staking yields and allow mSOL to grow dominance among liquid staking protocols.

Intro to zSOL

Like all other synthetics, users can deposit collateral to mint zSOL. zSOL can be minted/borrowed at 1.5% APY stability fee, which allows users to create strategies such as:

1. Leverage liquid staking yields (mSOL - zSOL loop) up to 42%

2. Short sell (Using UXD as collateral)

3. Insurance on zSOL (Short zSOL advancing Solend Pool)

These strategies already exist and are mostly done via lending protocols, but LP Finance allows users to borrow at the lowest interest rate. However, in this case, immense selling pressure might cause zSOL to depeg from SOL.

Here are mechanisms which allow zSOL to maintain peg and scale better.

Incentivized Liquidity Providers

The most straightforward method to enhance peg-stability and scalability is to attract LPs. However, as CLMMs usually have low swap fees (≈0.01%), therefore liquidity mining rewards are provided. This is not a sustainable way to scale.

LP Finance rewards LPs with the collected stability fee from borrowers. In lending protocols, borrowers and lenders are counterparties. Therefore, borrowers pay lenders interest. In synthetic asset issuance protocol, there are no lenders. In this case, the counterparty would be LPs, which risk IL and provide liquidity to allow users to advance zSOL in different strategies.

Therefore, 1.5%/y stability fees are rewarded to LPs to secure peg-stability and allow both positions to proportionally scale. If the staked LP value is 5% of total zSOL debt, LPs will earn 30% APY on top of trade fees.

Treasury Management with mSOL (PDV)

Treasury management for the zSOL vault is done via mSOL to maximize treausry revenue. On LP Finance, there is a treasury vault, which is called Protocol Debt Vault (PDV). The basic concept is to acquire profitable debt positions, where mSOL as collateral and zSOL as debt. As zSOL stability fee is lower than the staking yields, this position would allow treasury to stack up yields continously.

PDV acquires debt positions via liquidation, typeless repayment, and peg-stability-module (PSM).

Details on how LP Finance DAO acquires profitable debt position to maximize revenue while incentivizing users here.

PSM
PSM on LP Finance involves PDV rather than an isolated pool. Here is a brief overview on how PSM works.


Basically PSM swaps can be comprehended as

1. Adding mSOL collateral and borrowing zSOL on behalf of PDV
2. Repaying zSOL on behalf of PDV and redeeming collateral

Details can be found here

How LP Finance Benefits Marinade Finance

LP Finance is highly dependent on liquid staking protocols like Marinade Finance and Lido to maximize protocol revenue and users’ yields. With leveraged strategies along with scaling solutions for zSOL, LP Finance would enhance mSOL adoption on Solana.

Additionally, LP Finance does accept stSOL (Lido staked SOL) as collateral, but treasury management program solely advances Marinade Finance. This would allow mSOL to grow dominance over other liquid staking protocols.

Grant Details

LP Finance is requesting 200k MNDE to boost the growth of LP Finance at the initial stage.

The cost is broken down into two components

• 30k MNDE: LM to staked zSOL-mSOL LPs
• 170k MNDE: Locked as NFT. Used for gauge votes and governance

LP Finance might experience high demand on leveraged liquid staking, which means zSOL sell pressure would be too high for initial liquidity to absorb. As zSOL is minted, staked LPs earn APR as follows.

lpStakingApr = (zSolBorrowedValue * 0.015) / stakedLpValue * 100

If $500k worth of zSOL is borrowed and staked LP value is $25k, the APR would be 30%. This is enough to motivate users to provide zSOL-mSOL liquidity, but borrowers could have a hard time until this happens.

Therefore, 30k MNDE (≈$2,000) would be provided to staked zSOL-mSOL LP on LP Finance for 2 months, which could bring initial boost to the pool, allowing more liquidity to access zSOL without large price impact after launch.

The zSOL-mSOL LP would be Nazare Finance’s LP, which rebalances Orca’s price range position to maximize capital efficiency and yields.

Conclusion

• LP Finance allows users to leverage staking yields (10x leverage) at better rate than lending protocols
• With Incentivized LPs, zSOL liquidity grows linearly with demand (low risk of depeg)
• LP Finance’s treasury management system (PDV) allows mSOL to grow dominance over other liquid staking protocols

[Durden]

LPs will earn 30% APY on top of trade fees.

Where does this 30% come from?

[LPFinance]

From this formula.
lpStakingApr = (zSolBorrowedValue * 0.015) / stakedLpValue * 100
I assumed net staked LP token value is 5% of total zSOL debt.

Therefore
lpStakingApr=(5*0.015)/100*100=30
Stability fee is paid out to “staked” LPs. Of course, as staked LP increases, APR would decrease.

[Durden]

lpStakingApr=(5*0.015)/100*100=30

I think it’s 7.5%, not 30%.

[LPFinance]

Wrong calculation. Check this
zSolBorrowedValue=100
stakedLpValue=5
lpStakingApr=(100*0.015)/5*100=30

[LPFinance]

Initially, incentives would be provided to only zSOL-mSOL pair on Nazare.
Our plan is to allow to add zSOL-UXD and distribute stability fee with pre-defined ratio (not oracle value based). This way we can easily adjust and incentivize LPs that lack liquidity.

[Durden]

As zSOL is minted, staked LPs earn APR as follows.

In what asset is this APR provided?

[LPFinance]

The LP tokens will earn zSOL. We would initially start with only zSOL - mSOL LP on Nazare (Rebalancing Orca price range). @Hao can better explain this.

As we scale, we will allow any LPs involving zSOL to be registered. Just like MNDE gauges, LPFi would be used to vote for pools and determine the percentage of stability fee to be distributed for each pool.

[Hao]

I believe the APR presented here only captures the zSOL/mSOL nLP staking rewards being paid out in zSOL coming from the 1.5% interest rate being charged. In addition to that the zSOL/mSOL nLP (Nazare LP) token price appreciates with the trading fees that Nazare is automatically compounding back into the position.

[LPFinance]

Yes, with extra zSOL paid out, it would allow zSOL to scale better and more sustainably as stability fee volume is proportional to total zSOL debt issued and no fake yields (LM) are involved to attract LPs.

[Hao]

I’m very supportive of this proposal overall btw. Being able to leverage up mSOL yield with zSOL will drive net additional SOL being staked to mSOL. The principle is very similar to the cUSDC/cUSDT vaults on Hedge, which have been contributing a significant amount of USDC/USDT deposits to Solend in a similar manner, while delivering attractive yield to the users.

[btuck]

Interesting proposal, thanks for thinking of us. Given LP is pretty new, can you describe a little bit about safety at LP Finance? Is it open source? Is there a code audit yet?

[LPFinance]

LP Finance has not launched yet. We are raising funds from IDO this month, which would cover the audit. And yes, contracts should be open source.

For risks excluding LP Finance’s smart contract risks are as follows

1. Inherits mSOL and stSOL smart contract risk
2. When using too high leverage (mSOL-zSOL) loop, price impact might cause users’ loss. This would be solved once zSOL liquidity stabilizes.
3. PSM attack. User can mint zSOL without limit, regarding mSOL deposits. If zSOL is sold on market, zSOL price can theoretically fall to 0. This does not impact LP Finance itself as the program assumes zSOL price = SOL price. However, if implemented at lending protocols, there is a risk for liquidators, as zSOL collateral cannot be sold properly.

[maradona]

Your posts are contradictory, please clarify:
“30k MNDE (≈$2,000) would be provided to staked zSOL-mSOL LP on LP Finance for 2 months”
vs
“Initially, incentives would be provided to only zSOL-mSOL pair on Nazare”

So are incentives planned on LP Finance or on Nazare? This is important to determine, as the Marinade community needs to know if it is voting to set up a gauge & donate MNDE to Nazare, or to LP Finance?

Either way I don’t see the point of this grant, especially when 85% of it is just going to LP Finance to use to vote on its own gauges. Why not just buy it like many other individuals and protocols did who wished to add value to Marinade and mSOL?

If you start a gauge and add value, then it will attract votes. If you buy MNDE you can even vote on your own gauge. I think that’s the way to go in this case.

[Hao]

I believe he means 30k MNDE will be provided to users who stake the zSOL-mSOL nLP (Nazare token) on LP Finance, and initially only that token will be eligible for those rewards (as opposed to other pairs and/or other LP tokens).

Not to open this can of worms again, but based on discussions that have been happening the last few weeks, grants are exactly for this purpose, and a committee has specifically been formed to grant rewards under 250k for protocols and use cases like this.

[Soju]

@maradona

Either way I don’t see the point of this grant, especially when 85% of it is just going to LP Finance to use to vote on its own gauges. Why not just buy it like many other individuals and protocols did who wished to add value to Marinade and mSOL?

where were u a few months ago

[LPFinance]

For the usage of MNDE, there might be the following options

1. Sell MNDE for USDC to cover development expense
2. Set up liquidity mining to distribute MNDE
3. Use MNDE for gauge/governance votes for the protocol’s benefit

The third option would be best for both mDAO and grantee as

1. MNDE would not be dumped instantly
2. Grantee can utilize MNDE more efficiently (Maximize grant efficiency)
3. With MNDE gauge votes, it is likely for grantees to attract users continuously rather than instant boost by spending MNDE for LM

And for the part,

@maradona

Why not just buy it like many other individuals and protocols did who wished to add value to Marinade and mSOL?

Any grant requesters might want to buy more MNDE. Even us.

The simple reason is that the funds should be used in development first. Without a proper program, MNDE is useless for that protocol.

I believe MNDE grant should be given to protocols that have a huge potential to bring more mSOL adoption but needs initial support. That exactly matches the grant details for LP Finance.

[PlayerOfBits]

@LPFinance

And yes, contracts should be open source.

To elaborate on @btuck’s question, one of the requirements for grants is that:

• The end result must be in the community’s control after it is created, to ensure continuity - that is, it must be open source and cannot rely on a closed server that the grantee runs.

(From the original proposal)

While I expect you will control the contract upgrade authority, so it won’t literally be under the community’s control, you could argue that the contracts being open source provides continuity if you went to go poof.

Are there any parts of this system that will depend on a standalone service and/or will not be open sourced?

[LPFinance]

@PlayerOfBits

While I expect you will control the contract upgrade authority, so it won’t literally be under the community’s control, you could argue that the contracts being open source provides continuity if you went to go poof.

I want to know more about what “community’s control” means. Does it mean LP Finance cannot be an independent DAO but should be under mDAO and completely controlled by veMNDE to receive a grant?

[PlayerOfBits]

The idea is the community should be able to provide continuity if the grantee were to go dark. It’s up to the committee to decide if a project qualifies or not, but something where a key component is closed-source would likely be right out.