[AlphaGrowth] Conversation for Implementing a Delta Neutral Vault for COMP Token

Ideas
1

Simple Summary

  • Introduction of a Delta Neutral Vault strategy for COMP token.
  • Goal: Increase Total Value Locked (TVL), utilization, trading volume, and user engagement for Compound Protocol.
  • Approach involves moving COMP trading from centralized exchanges to decentralized exchanges (DEX) and earning trading fees for the Compoud DAO.
  • Target audience: COMP holders and Compound DAO.
  • Plan to implement contracts, trading pool, money market, and rebalancing script.
  • Aim to achieve Annual Percentage Return (APR) for the Compound DAO through this strategy.

Background

Aerodrome, a decentralized exchange (DEX) operating on the Base chain, has approached AlphaGrowth with a proposition to create a bribed DEX pool to enhance liquidity for the COMP token on Base chain. While the offer to incentivize liquidity is valuable, a partnership in utilizing both the Compound Protocol and Aerodrome is more ideal. This proposal is in line with the objective of increasing Compound DAO’s presence and promoting the capital efficiency of Compound v3 “Comet” Market. The primary focus is to create a strategy for each chain that the Compound protocol is integrated. The secondary focus is to increase activity for the Compound Protocol. Some other benefits are shift the COMP trading volume from centralized exchanges (CEX) to a more decentralized ecosystem, thereby fostering increased decentralization and user engagement. Finally the protocol can earn fees from trading volumes and volatility in a risk neutral way.

Target Audience

This strategy benefits:

  • Individuals who hold COMP want to earn increased yields
  • Compound DAO
  • COMP Holders Institutions & Whales

Analysis

Terms:

  • Delta Neutral Vault (DNV): A financial strategy that aims to minimize risk associated with price fluctuations of an asset.

Key Assumptions:

  • The Compound DAO should earn trading fees from COMP pools, not third-party entities.
  • Increasing TVL, trading volume, and user transactions in the Compound ecosystem will benefit all stakeholders, including COMP holders and the DAO itself.
  • A significant proportion of COMP holders lack the means to create financial products that can leverage their holdings for additional yield.
  • Added utility to the COMP token will reduce selling pressure if there are more ways to earn yield on the token.

Solution

The proposed solution is to implement a Delta Neutral Vault (DNV) for the COMP token. This involves:

  1. Communicate Value: First step is to socialize the concept with community and help answer any questions.
  2. Align on Strategy: Open questions, is AERO the right token, is Aerodrome the correct DEX, is there enough economic and business case for this strategy. Upon success will Compound DAO expand from chain to chain?
  3. Trading Pool: Facilitates trading between COMP and other assets (e.g., AERO)
  4. Money Market: Facilitates Lending & Borrowing between COMP and other assets (e.g., AERO)
  5. Contracts & Rebalancing Script Build: Allows users to lock their COMP tokens in exchange for a higher yield. Automatically adjusts asset ratios in the vault to maintain a delta-neutral position, thereby mitigating the risk from price fluctuations. Enables users to withdraw their original COMP tokens along with the earned yield.

This approach ensures that the counter party token (e.g., AERO) price volatility does not affect the vault’s stability and enables the Compound DAO to earn through lending fees and trading fees.

More on Delta Neutral Vaults

The functional definition of delta neutral in this context is that the price volatility of the counter party asset (e.g. AERO) will be hedged. This way the vault would be able to earn COMP yield on COMP yield. To facilitate this activity the counter party asset is borrowed before pooled.

Yield is generated in 2 ways. First as price changes between assets yield in the form of trading fees. The second way yield is generated is thru liquidity incentives.

Here is a very good article on the math, concept and backtesting results:

Next Steps

To execute this plan, the following steps are necessary:

  1. Development of Contracts and Scripts: Building the lock and exit contracts, trading pool, money market, and rebalancing script.
  2. Integration with Aerodrome DEX: Establishing a COMP<>AERO pool to facilitate trading and liquidity.
  3. Testing, Security Audits and Deployment: Ensuring the system’s functionality and security before full deployment.
  4. Community Engagement & Marketing: Informing and educating the Compound community about the benefits and workings of the Delta Neutral Vault.
  5. Monitoring and Adjustment: Continuous monitoring of the system’s performance and making necessary adjustments for optimal operation.

In conclusion, this proposal outlines a comprehensive strategy to enhance the utility and value of the COMP token within the Compound ecosystem, which drives significant increase in TVL, user engagement, and returns for COMP token holders.

5 Likes
2

Thanks @bryancolligan.

Think the proposal is clearly beneficial for COMP holders and the DAO. From the Aerodrome side we’re more than happy to get the process started by listing COMP so that a gauge can be created for the COMP-AERO pool and receive AERO emissions.

What might be particularly appealing for Compound is that over the past few months rewards for voters (fees and incentives) have always generated more than 3X the value to LPs i.e for every $1 in fees or incentives, more than $3 worth of value get directed to LPs. This incentive multiplier is what makes Aerodrome more capital efficient than legacy DEXs and we currently have twice as much TVL as all other DEXs on Base combined.

2 Likes
3

While in principle facilitating COMP liquidity on DEXes is great idea, and would be good for protocol, BUT pairing with AERO is not the thing, no matter of whatever emissions they might provide. Actual pairs, which facilitate liquidity are stable coin pairs, like COMP-USDC and possibly COMP-USDT. And to a certain extend COMP-ETH or COMP-WBTC pairs might be also considered.

Pairs like COMP-AERO do not really provide liquidity for COMP, as there is no trading demand for that and the only way thaiding flow will go is like COMP-AERO-USDC or COMP-AERO-ETH. Thus introducing AERO is just adding middleman in trading flow, which primarily benefit middleman and at the same time expose COMP price to fluctuations of price of AERO. (that may or may not be the case, depending on the size of the pool an volumes potentially going through it.)

To summarise i see few if any benefit to Compound of facilitating such a trading pair. It makes no sense in providing any sizable amount of COMP for such pair. And frankly speaking i don’t think protocol as a protocol should really go anywhere further than uniswap and either only stable coin pair or eth/btc pair.

4

Thank you for your feedback @Sirokko. Our goal is to scale to high MC trading pairs over time for deeper liquidity. However the initial capital needed for this engagement may outweigh the risk associated as we start to roll out deeper onchain liquidity. Part of the strategy is to begin to slowly build liquidity to manage risk. Working up to stable coins and blue chips like wBTC, USDT, USDC, ETH, wstETH, etc. Happy to work through strategy sequencing with you.