[RFC] COMP Buyback Strategy — Nerite, Steer, Yearn, Summerstone & Uniswap v4 (Arbitrum)

Proposals
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Motivation

  • Treasury can use LP yields to buy back COMP without spending treasury funds.

  • The Compound COMP token currently has next to no presence outside the ETH Mainnet ecosystem, COMP DEX liquidity on Arbitrum suffers a 10% price impact on trades as small as $6k.

  • Structured products and Liquidity Pools built with onchain COMP generate fees, which translate into buyback pressure.

AlphaGrowth has built a transparent vault that:

  1. Generates Fees from single sided COMP deposit.

  2. Strengthens COMP liquidity on Arbitrum.

  3. Buys Back COMP using fees from trade volume.

Introduction

The Compound DAO has been circling around the Buyback issue for some time. Legal uncertainties have derailed momentum to actualize these plans, so AlphaGrowth has designed a Buyback Vault.

A DeFi first approach means this strategy is based on the following principles:

  1. Build Structured Products onchain, for COMP holders.

  2. Allow Vault Depositors to win Onchain Trade Routes, which capture trade flow from onchain COMP activity.

  3. Market buy COMP with fees from trade volume.

Instead of designing a centralized buyback program, we plan to deploy multiple smaller vault strategies, where COMP Buyback is a design component. As the utility for the COMP token expands, onchain trade volume increases, and buybacks accrue within each vault.

Below are two strategies which serve varied needs of the Compound Treasury, Delegates, and COMP holders.

The Strategies

Each of the strategies below uses the same framework, and risk management structures. The main differences are in how the ALM, or Automated Liquidity Manager, shapes this liquidity.

Nerite has enabled these strategies by listing COMP as collateral on Arbitrum. Nerite’s contracts are immutable, and we’ve built a toolkit so COMP holders can safely and quickly build liquidity strategies on Arbitrum.

The two key strategic offerings are as follows:

  1. The COMP treasury does not need to supply USDC or ETH in order to build liquidity on Arbitrum.

  2. The COMP treasury does not need to execute buybacks on behalf of the DAO – these processes can be embedded within onchain activity.

buyback1
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The Buyback Strategy is a collateral bank of COMP, built on top of a liquidity pool on Arbitrum.

Using this strategy, Compound can enable deeper liquidity on Arbitrum, while also beginning to accrue COMP with each trade routed through the pool.

It works like this:

  1. COMP is deposited into Nerite as collateral.
  2. USND is minted, and a COMP / USND LP is formed.
  3. Arbitrage trade flows through a Univ4 Pool, with a fixed range.
  4. Trade fees purchase COMP, and deposit that COMP into the collateral bank on Nerite.
  5. LTVs are maintained with active risk monitoring, so that the pool grows proportionally with the collateral bank.

The main benefits of the Buyback Strategy are as follows:

  1. This pool attracts arbitrageurs to Arbitrum, which captures fees for buybacks.
  2. This pool would enable COMP to be listed as collateral on the stablecoin Comets on Arbitrum.
  3. This pool would also enable a COMP comet to be deployed, enabling hedging strategies which grow in capacity as the pool outpaces Mainnet dex liquidity.

The Buyback strategy means that COMP continuously flows into Nerite, and never comes out. This strategy also lays the foundation for more COMP utility on Arbitrum.

ALM
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A second strategy we’d like to present is the ALM Stream.

The DAO needs to pay its service providers, here’s a treasury management strategy which is designed to accrue USD stablecoins during favorable market conditions. Moreover, the ALM Stream is a resource available to all COMP holders to perform token distribution in a way that preserves the market.

The ALM Stream is a single directional market making strategy, optimizing for stable assets during good market conditions with predetermined price parameters. Arbitrageurs are responsible for execution, enabling this strategy to exist on top of the Buyback pool.

Risk Management:

Any time you introduce leverage into a structured product, there are risks. Steer Protocol is mitigating these risks through LTV monitoring and keeper automation:

LTV
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  • When LTV drops down to 20% or lower, our LP Grow and Buyback strategies mint more USND to increase capital efficiency.
  • When LTV is at 30%, our LPs simply accrue fees.
  • When LTV is at 40% or higher, our LP strategies re-absorb COMP to increase collateral, and USND to decrease debt.

Risk management automation is inaccessible to most users, and that our vault empowers users to engage in strategies which require embedded risk management structures. This product is both for individuals who don’t have time to mind their LTV constantly, and to protect assets from the COMP Treasury.

Key Partners

Building these vault strategies has been a collaborative effort between 5 key partners:

  1. Nerite: An immutable Liquity V2 friendly fork used to take over-collateralized loans at interest rates as low as 0.5%.

  2. Yearn Finance: Used for stability pool maximization.

  3. Steer: Used for Automated Liquidity Management (ALM).

  4. Uniswap V4: Used for liquidity provision and rehypothecation of assets.

  5. AlphaGrowth: Responsible for strategy, orchestration and execution.

The strategy manages sub vaults to optimize yield while maintaining a safe Loan to Value (LTV) ratio. It borrows USND against COMP, deposits a portion into Nerite’s Stability Pool for yield/liquidation profits, and seed a COMP/USND liquidity pool with Steer’s ALM.

Team

Company/Protocol Name Relevant Experience Profile
Nerite (Liquity V2 Fork) CupOJoseph Built Nerite Protocol X Account
AlphaGrowth Jon Strategy & Growth X Account
Yearn Finance Corn Business Development X Account
Steer Protocol Derek Built Steer X Account
Summerstone Chris Interest Rate Management X Account

Ask:

AlphaGrowth would like to request feedback from delegates, and engage in discussion around which strategies are most compelling for the DAO.

AlphaGrowth will be deploying our own COMP holdings into the Buyback strategy, and invite you to join. Anyone who wants to dive deeper into the mechanics of the strategies we are happy to walk through the Implementation Details & Vault Logic.

Resources:

COMP Liquidity Profile:

Nerite:

Yearn:

Steer:

Summerstone:

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It’s what we really need

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Bump, Let’s get this done

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