[BIP-37] Approve B.Protocol Partnership for Liquidity Backstop


This proposal suggests approving a new gauge for a baoUSD liquidity backstop managed by b.protocol. In exchange for implementing and managing a baoUSD and later a baoETH backstop they will receive 5m BAO tokens, vested for 1 year with a 1 year cliff and 5% of all loan revenue generated by each synth.


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 will receive 5m BAO tokens which are vested for 1 year on a 1 year cliff. In addition 5% of all baoUSD loan revenue will go to b.protocol, resulting in a 95/5 split of loan fees between veBAO holders and b.protocol.

By approving this proposal you are signifying your expectation that the 5% of loan revenue given up will be made up by additional baoUSD minted to take advantage of the “real yield” available from liquidating positions, which previously would be extracted by MEV hunters and now will be allocated to baoUSD holders who stake into the backstop gauge.


  • 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.

Proposed Solution

  • Deploy a gauge that accepts bbaoUSD (b.protocol deposited baoUSD) and one that accepts bbaoETH (b.protocol deposited baoETH)
  • Create a new revenue distribution contract that can split baoUSD revenue between multiple destinations.
  • Set up a 5m BAO token lock with 1 year cliff to a b.protocol wallet address
  • Configure revenue distribution contract to send 5% of loan revenue to a b.protocol wallet.


  • 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
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The agreement details between b.protocol and Bao have been updated since the concept was posted. We will no longer distribute a % of tokens that would have gone to the gauge, instead we will use a much simpler approach of locking 5m BAO tokens under similar terms.

There are around 240m BAO tokens emitted in year 1. 5m represents around 2% of emissions for 1 year, a similar amount that would have been received by b.protocol if the gauge weight was on average 10%. This is on the low end of our expectations and why the additional 5% of revenue was agreed upon. At a 2% loan interest rate, 5% of revenue represents $1k per year for every $1m baoUSD or baoETH minted via vaults.

This agreement is much simpler to implement and means not all of the incentives b.protocol will receive are BAO tokens.