Last week, we rolled out significant upgrades to the Soul Protocol. The primary upgrade involves a new mechanism for minting SOUL, which enables users to bond an LP in an innovative manner.
We have allocated a total of 40% of SOUL emissions towards a bonding model that requires users to provide the Protocol with permanent liquidity in exchange for Soul Power (SOUL).
In this article, I will compare competing models of liquidity incentives and clarify the key components and differentiating factors utilized in our innovative Protocol-Owned DEX Liquidity model we recently adopted.
The Double-Edged Sword of Liquidity Mining
Last year, during the onset of “DeFi Summer 2020”, Compound created the traditional ‘Liquidity Mining’ model, which enabled them to quickly bootstrap the protocol in its early stages. This same model has been replicated by the likes of SushiSwap, PancakeSwap, and many others as a means of acquiring consistent liquidity for a protocol.
In the case of a DEX, liquidity is especially vital as it is the lifeblood of the protocol. As a result of the flashy APYs that come from DeFi 1.0 ‘Liquidity Mining’ operations, people rush into projects that boast high annual percentage rates eager to became a ‘Yield Farmer’ by earning profits (‘yield’) from being a liquidity provider on a seemingly-endless array of protocols that are in desperate need of liquidity, but lack the resources to maintain the liquidity themselves and therefore must ‘rent out’ these highly sought-after opportunities.
However, this liquidity mining model of renting out liquidity may, in fact, be a double-edged sword.
Although liquidity mining may help bootstrap protocols in the early stages via a combination of community building and user acquisition, the downside is abundantly apparent — as the compensation for liquidity is continuously released, there’s selling pressure, making the model unsustainable in the long-term.
This is why many users complain about ‘farming tokens’ as having deteriorating value and are therefore turned off by the concept of holding onto a such tokens, because of the realization that holding onto these token is penalized since rewards are being poured out daily towards those either staking or providing liquidity in return for additional governance tokens.
In order to compensate for liquidity mining, DeFi services attracted users with high APY, and high inflation of circulating tokens eventually resulted in a drop of token prices. This is also complemented with an ever-expanding supply, which, in most cases, is truly never-ending. This has a result of either requiring protocols to constantly find new ways to add value to each token — that is oftentimes extrinsic to the mechanics of the system itself — or the protocol paying out even more of its precious reserves to buy back and burn there assets only to go back and mint them right back into existence. This model is unsustainable and ultimately devalues the governance token as result of a never-ending requirement for paying to rent your liquidity.
We Are Innovating Alongside DeFi 2.0
In contrast with the existing methods where liquidity providers are more than welcome to walk away with protocol assets AND the liquidity they rented out,
We require users to pay for what they walk away with.
This flips the script from a traditional rental-model to one where the protocol actually owns the liquidity in perpetuity, thereby enabling us to arrive at becoming the very first fully-sustainable DEX (as a result of a bonding mechanism). The one exception that comes to mind (requiring the parenthetical qualification) is Uniswap, where the sheer volume is sufficient to pay for liquidity providers to provide liquidity even without the presence of a reward token like SUSHI or CAKE, etc.
We plan to arrive at enough liquidity held by our DAO that we will no longer need to give out more SOUL and the protocol will continually benefit from the ongoing trading volume as even more fees are built up and kept within the DEX itself as the DAO has incentives aligned with what is best for the protocol, whereas, on a micro-level, individuals are interested in what benefits them the most. Shifting ownership from self-interested individuals to a collective enables decision-making from a policy-orientation and not from a personal perspective, which avoids the many errors we make as individuals — subject to our emotions and competing need to be the first to sell in anticipation of others selling before us.
Ultimately, this prevents immediate selling pressure from liquidity providers and enables users to have the assurance that we will maintain a reliable infrastructure and are no longer subject to whales who may come and go without consideration for our longevity.
Unlike existing methods where liquidity providers can stop supplying liquidity at any time and protocols receive liquidity, our innovative bond structure can create ‘Protocol Owned Liquidity (POL)’ by tying LP tokens into the protocol in the form of bonds to maintain liquidity for all eternity. Additionally, similar to ‘Olympus Pro’, we will be able to help new protocols jumpstart their own POL strategy via our reserve asset — Luxor — utilizing a hybrid-model or a traditional bonding model — whichever fits their needs.
As these new protocols lock their liquidity onto our exchange, this enables a mutually-beneficial environment wherein which both we as a DEX and they as a protocol rise together in a sustainable manner with lasting results. This is especially notable for projects that start strong with tens or hundreds of millions in liquidity that then fade out of relevance as newer projects with higher APRs become more attractive.
Owning Liquidity for Long-Term Sustainability
Existing protocols are more or less married to the notion that in order to facilitate their decentralized needs another party must be incentivized to play along and stay around for things to work out, but what happens when that party ends and users want to go home and cash out on their gains or move on to another protocol?
In the traditional model, they pack up and leave, except packing up means withdrawing the liquidity and leaving with not just 100% of what they came in with but ALSO a large share of either authority over the protocol itself or value extracted from the protocol via cashing out on the protocol’s governance token, which has a cascading effect on the existing participants as they do not want to lose out to “more savvy investors” who sell or exit before they do.
How Our Bonds Innovate
The onset of the new wave notably referred to as DeFi 2.0 began with the advent of OlympusDAO, in which creator “Zeus” ushered in what he refers to as ‘Protocol Owned Liquidity’. In contemporary DeFi, liquidity is supplied by users and subject to the users, whereas in OlympusDAO, the protocol itself takes liquidity and control. We realized this is a great idea. I personally took interest as Wonderland grew and eventually even overcame the Treasury of even Olympus DAO itself.
In pursuing this interest in the notion of POL and later adapted as “PODL”, I created Luxor Money to be co-opted by the Soul Protocol as the native reserve asset.
Given the popularity and quick adoption by users I came to wonder whether perhaps the best use case for a bonding mechanism exists in the case of a DEX.
I sought to find a way integrate this notion of bonding with a more familiar activity most are actively using daily — ‘farming’ or ‘liquidity mining’. This resulted in a somewhat hybrid model, which we will now review for anyone interest in replicating the concept or participating in the new model. Please do not consider this investment advice and always continue to ask for clarification until you fully-understand your investment endeavors.
How Soul Bonding Works
Soul Bonding requires users to provide an LP token in exchange for variable rewards paid out in SOUL emissions. We are now allocating 60% of our emissions towards those who deposit their liquidity into our bonding mechanism.
Each pool is rewarded 600 allocation points, with the exception of SOUL-FTM, which is allocated 1,000 points.
There are 9 pools, with a total allocation of 5,800 Allocation Points. The table below demonstrates these key statistics to keep in mind as we review the bonding mechanism.
| PAIR | AP | Daily |
| ----—----- | ---- | ------- |
| SOUL-FTM | 1K | 25.86K |
| SOUL-USDC | 600 | 15.52K |
| SEANCE-FTM | 600 | 15.52K |
| FTM-USDC | 600 | 15.52K |
| FTM-DAI | 600 | 15.52K |
| FTM-BNB | 600 | 15.52K |
| FTM-ETH | 600 | 15.52K |
| FTM-BTC | 600 | 15.52K |
| USDC-DAI | 600 | 15.52K |
Below is a bullet-pointed list containing the key considerations for bonding:
- In order to participate, users must deposit their LP and they are able to “Mint Soul” once they find it opportune to do so.
- When you “Mint Soul”, you turnover (exchange) your LP to the DAO Treasury in exchange for the Soul you are eligible to mint.
- Minting sooner than at least your invested LP means you are effectively donating liquidity, which you’re allowed to do, though this certainly works against you if you plan to profit from this structure, so we do not advise doing so. Please ask if you are unsure about the minting process.
- In other words, we expect users to mint SOUL only after they have recouped at least the deposited amount, which you can identify on the interface (see pictured).
- Of course, most will likely decide to stay a bit longer to accrue additional gains on top of the deposited LP.
- Since gains are only realized after one bonds, this incentivizes users to hold onto their pending SOUL for longer than ordinary farms, which means less frequent and haphazard withdrawals.
- The pending “Mint Soul” amount increases over time in a manner akin to traditional farms, so you may expect a higher APR with a smaller pool size and a smaller APR in a larger pool size.
How Protocol-Owned DEX Liquidity Benefits Soul Protocol
- Bonding means more liquidity held by the DAO, which means less need for providing SOUL incentives in the future.
- Our ultimate goal is self-sustainability and a removal from a rental model (paying to rent liquidity) and this is a step in that direction.
- Fee-removal will incentivize more participation in the liquidity mining (farms) as we will no longer deter fee-antagonists.
Please use our forum to discuss your views, thoughts, opinions, etc. We would love to hear from you!
TLDR; Key Considerations
- When depositing, you are surrendering your deposit to the DAO Treasury upon minting SOUL.
- You are contributing to the ecosystem and are rewarded with variable gains paid out in SOUL.
- You may only claim once — it is all or nothing.
- You must claim before creating a new bond.
Side Note on Withdrawal Fee: 0% Withdraws from Farms
We removed the 14% withdrawal fee from the SoulSummoner in order to enable anyone to move freely out of the Summoner and into bonding, which will enable our most loyal users immediate access to this attractive alternative means of acquiring SOUL.
The secondary benefit of this move is it will provide us with more agility in terms of adjusting the rewards on the Soul Summoner to better align with volume without users feeling stuck behind a fee they are bound to. This opportunity cost was originally overlooked in our fee-structure.
We additionally want to note that users should be on the lookout for farms that will be phased out or reduced over the coming week as we align the incentives for the farms more strategically, such that those assets with a higher volume:liquidity ratio are provided with sufficient incentives.
OUR DISCLAIMER ON BONDS
Please ensure you fully understand these conditions prior to interacting with the Soul Bond contract. We are not responsible for any accidental losses and we are not advising you to invest in anything, so please do your research and ask us questions, if there is any aspect you do not FULLY understand.
The contract is unaudited, so please use at your own risk. We are not responsible for any financial losses or otherwise.