This proposal suggests approving a new gauge for a baoUSD liquidity backstop managed by b.protocol. The gauge will give 20% of its emissions to b.protocol in exchange for managing the liquidity backstop.
B.Protocols liquidity backstop detaches lending platforms from their dependency on 3rd party flashloan bot operators and DEX liquidity, letting their communities secure the platforms they use, while gaining from clearing risky positions from it and avoiding bad debt.
The Backstop AMM (B.AMM) enables users to deposit funds into backstop pools, and this liquidity is used to execute liquidations on integrated platforms. Once a liquidation takes place the smart contract pulls the needed funds from the backstop to facilitate the liquidation, and automatically puts the seized collateral for sale. Once sold, the return is deposited back to the backstop pool, and profits are accrued.
The flow chart above shows how b.protocol works. Instead of DAI, our backstop will use baoUSD.
In return for deploying the liquidity backstop and continuously monitoring its parameters, b.protocol requests 20% of emissions that go to the gauge. To clarify, if the gauge has a weighting of 10%, b.protocol would receive 2% of all emissions.
The emissions sent to b.protocol will be staked for 1 year by a new distribution contract written by core contributor zfogg. In order to prevent 100% of tokens earned over the course of the first year unlocking at the same time, the distribution contract will take 4 input addresses provided by b.protocol and create a new 1 year lock on one of the wallets every 3 months. In month 1, the first 1 year lock will be created and tokens earned by b.protocol for the first 3 months will be added to the lock. After 3 months have passed a second wallet will have a 1 year lock created and the next 3 months worth of BAO tokens they earn will be added to its lock. After month 6 a similar lock on the 3rd wallet will be used and after month 9 the 4th wallet will be used. This will result in BAO tokens earned by b.protocol unlocking in four batches every three months starting 1 year after the gauge goes live.
After 1 year it will be up to b.protocol to decide what they do with the BAO tokens that unlock.
- Reduce risk of bad debts on Bao Markets: B.protocol are experts in providing liquidity backstops. They perform this service successfully already for Liquity (LUSD), Vesta (VST) amongst others. Guardians believe that a liquidity backstop managed by b.protocol will significantly reduce the risk of bad debt for the protocol.
- Increase adoption of baoUSD: Liquidity backstops take a single sided deposit of baoUSD. On top of the gauge rewards, depositors will earn “real yield” by liquidating at risk positions on the protocol, profiting from the liquidation penalty. This will help adoption from multiple perspectives: the ability to earn real yield, a single-sided gauge deposit and improved legitimacy as a stablecoin that takes security seriously.
- Deploy a gauge that accepts bbaoUSD (b.protocol deposited baoUSD)
- Direct all emissions for the gauge to a new distribution contract
- Configure the new distribution contract so that gauge depositors can collect 80% of the emissions and anyone can distribute the remaining 20% to a b.protocol wallet address adding them to its 1 year veBAO stake, or creating a new 1 year stake depending on whether more than 3 months have passed since the lock was created.
- b.protocol will receive quite a large share of BAO tokens. Although a 1 year stake has been negotiated, after this period what will happen to the tokens is unclear.
- The use of a liquidity backstop will dis-incentivize other liquidation bots from securing the protocol