POO

POO is short for 'Protocol-Owned-Operator', which leverages Treasury assets to generate yield from multiple sources and provide liquidity.

Exploring POO

POO (Protocol-Owned Operator) is an improved version of PCV (Protocol-Controlled-Value), where dForce leverages treasury assets to mint USX and EUX, exchange them for the relevant paired asset or pair them with the relevant assets (i.e., USX/DF, EUX/USX), gradually acquiring and controlling most of dForce liquidity in the open market. This helps to reduce liquidity mining subsidies and allow the protocol to earn most of LP fees associated with protocol assets.

POO can also be combined with PDLP to generate yield from multiple sources for DF holders, increase organic use as well as protocol revenues through yield-carrying trades.

How does it work?

With PDLP tackling the liquidity problem, POO will focus on enhancement of capital efficiency as well as yield and revenue generation capability. POO will initially fulfill the following functionalities:

  • Provide liquidity to AMM pools for dForce assets (USX/DF, EUX/DF, USX/EUX, etc), building a sustainable path that will eventually remove liquidity mining subsidies.

  • Borrow directly from the protocol to earn a return via carry-trades (i.e., borrow ETH and convert to wstETH to earn staking yield).

  • Facilitate integration with a broader range of DeFi protocols (i.e., provide bootstrapping liquidity for protocols integrated with USX and EUX).

  • Facilitate cross-chain expansion (i.e., provide bridging liquidity powered by treasury).

Key POO Primitives

Protocol-Controlled-Staking-Assets

This strategy will significantly enhance organic and sustainable borrowing for underlying staking assets (i.e., ETH, ATOM, etc), introducing higher saving interest to underlying staking assets suppliers, and capturing staking yield as protocol revenue for DF holders.

Technically, it allows dForce to borrow underlying staking tokens (i.e., ETH) from dForce Lending, and convert to liquid staking tokens (i.e., wstETH backed by Lido, rToken backed by Liqee, etc) for immediate access to staking yield.

The interest rate curve ensures that the borrowing interest rate is always capped below the staking yield. The protocol will recycle the staking rewards minus the borrowing interest as revenue.

As long as the borrow interest rate is lower than the staking yield, the protocol will be able to generate protocol revenue (staking rewards minus the borrowing interest expense) and potentially, with leverages.

Protocol-Controlled-Treasury

This strategy allows dForce to lend, borrow, trade assets held by Treasury to seek yield and maximize protocol-controlled value.

For example, dForce can use treasury assets as collateral to mint USX or borrow from lending, and back liquidity provision denominated with USX as a base pair (USX/USDC, USX/DAI, etc) on DEXes. dForce can buy and sell to rebalance the pool algorithmically and collect arbitrage profits.

In the above example, dForce is able to acquire and control most of the liquidity for dForce assets in the open market, maintaining a sustainable growth without the need to over-incentivize liquidity supply with high APY. In addition, the protocol itself, not the user, owns the LP tokens, thereby generating transaction fees from the liquidity pool.

Protocol-Controlled-RWA

This is a pilot program, allowing USX to fund and own RWA with non-crypto correlated yields.

By partnering with EntroFi and NAOS, dForce is willing to provide both financing and equity capital for real-world assets, like sustainable green infrastructure projects, i.e., solar farm, wind power, ESG-compliant Bitcoin mining farm etc. The protocol earns interest income by providing financing, as well as good dividend yield by providing equity capital for these cash flow generating infrastructure assets. This also transforms DeFi from a service provider to a capital operator and more actively manages real-world assets.

We believe this is a big trend in the future for DeFi protocol to own a substantial part of real-world assets, like green infrastructure by leveraging its global liquidity.

Risk Mitigation

In order to adequately manage risk and reduce downside exposures associated with POO operations, we performed multiple stress-testing and have initially capped the POO limit at 50m USX through DIP022.

POO limit can be further adjusted to meet the protocol growth expectation through governance and jointly decided by DF holders.

Positive Feedback Loop

  • Protocol to own majority of the liquidity → less DF incentive inflation → less DF in circulation;

  • Liquidity buyout in the market will result in → less DF in circulation

  • Less DF in circulation to further boost Treasury allows → more USX Treasury minting

  • More liquidity buyout capacity → less DF circulating supply

  • More DF purchased → higher staking yield → higher staking ratio → more DF holders stake DF → higher staking yields.

Benefits to dForce and DF Holders

The implementation of PDLP and POO will unlock exciting opportunities for dForce and DF holders:

  • A lower cost to retain liquidity (removes the need to maintain a high APY on rented liquidity).

  • Earn LP fees for protocol-owned trading pairs on DEXes.

  • Facilitate more protocol-controlled liquidity and assets.

  • Generate more revenue for DF holders from multiple sources.

  • Reduce DF inflation pressure with the protocol owning most of liquidity in the open market.

  • All fee incomes captured by PDLP and POO will be distributed to DF holders through staking.

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