Chapter II: How we make money

This beautiful piece was created by the following Leservians: xzbt & Kamkuh 🌖, 🌖

Dear Leservians,

It is time to unpack another meaningful chapter of the Leserve series. This piece delves into how the protocol aims to make money and generate profit. We recognize that this is an integral part of the protocol and its underlying functionality and that there are potentially thousands of different ways to generate profit.

Given, the fast-paced nature of the industry that we operate in, we focus on building up a strong and sustainable foundation for the protocol, while acknowledging that the future revenue-generating mechanisms are to be shaped and formed by the community. Hence, it is vital to mention that the mechanisms below only outline the options we have considered and to what extent they will be utilised is to be determined by the DAO.

We put emphasis on incorporating and leveraging multiple revenue-generating mechanisms that are safe, robust and yet appealing to LSRV token holders. The purpose of these mechanisms is to generate profit, as well as to enhance the added value of Leserve within the Terra ecosystem, which is likely to further embed and strengthen the protocol’s position in the overall DeFi landscape.

So, how exactly are we going to deliver value to sLSRV (staked LSRV) holders?

It is a two-part system:

a) Getting assets into the treasury

i) Selling our own bonds

ii) Selling bonds of other protocols

b) Deploying the assets in the treasury to generate returns for sLSRV holders

i) Flash loans

ii) Lending assets via lending protocols

iii) Buying out locked assets such as bLuna with a discount

iv) Issuing self-repaying loans

We use the additional income to increase the risk-free value of the protocol.

A. Getting assets into the treasury

I) Selling our own bonds

  • The main method of filling up the treasury (As stated in Chapter I)
  • No linear vesting of bonds. Pay-out is at the end.
  • Bond pay-outs are staked at the time of purchase -> Bonds sell for sLSRV tokens directly
  • We can offer bonds with different discounts and different lockup periods (+5 days)

Selling bonds of other protocols (upon DAO vote)

  • Similar to Olympus PRO
  • We believe that offering this natively on Terra would effectively add value to the entire Terra ecosystem as protocols do not have to rely on mercenary capital to provide their liquidity.
  • Innovation: Leserve could potentially develop a secondary bonds market on top of itself, where people / us as a protocol can trade bonds before maturity date subject to fractional token rewards (to avoid users taking advantage of discounted tokens received at the time of bond issuance).

B. Deploying our assets to generate a return

Our philosophy

  • Leserve would like to base most of it on the composability of protocols on the Terra blockchain. There is no intention of reinventing the wheel and adding unnecessary competition. We want to let the DAO decide which protocols are adopted first based on a list that is going to be put forward by the developers, advisors, and community. The DAO will then decide the extent to which we want to forge alliances.
  • Initially, Leserve strives for the revenue generation processes to be as passive as possible, in order to avoid establishing reliance on a treasury operations manager and hence effectively reduce the risk of having individual(s) in control of the treasury. However, as the protocol matures and becomes more sophisticated, such an option may eventually be considered.
  • Leserve can start with yield-bearing protocols on Terra first and expand into the IBC cosmos afterwards.
  • Especially at the start, we want the revenue generation to be fully managed by smart contracts without direct human treasury management, which could lead to errors.
  • The question remains: which protocols have an interesting risk/reward profile for a reserve treasury?

How risk is managed

  • Leserve must stay on the safer side from the beginning and establish a balanced risk and liquidity portfolio of deployed capital.
  • Leserve needs to lean on more liquid and less risky opportunities from the start to build trust with the holders in order to potentially withstand any sell pressures, should they come about.
  • Our assumption is that the most suitable and optimal approach is to develop a well-balanced portfolio of strategies with various risk profiles. The exposure to risk index will be calculated automatically depending on the market conditions and the current state of the treasury. If the capital allocation becomes suboptimal, bots and other actors on the Terra network will be incentivized to trigger capital redeployment to keep the risk exposure optimal.
  • After the establishment of a DAO governance, the sLSRV token holders will have the ability to vote on a range of aspects from the allocation of treasury capital between the strategies, reserve ratios, to the ratio split between different protocols. Holding sLSRV tokens will thus have profound governance value and impact on the overall shape of the protocol.

The following yield generating strategies are sorted from the less risky to the riskiest. The DAO will decide which combination of strategies will be deployed first after the launch.

I) Flash loans

Liquidity: Very liquid
Risk: Very low
Return: 0.1% — 0.3% per loan (adjustable by the DAO)

We believe that Leserve is in an ideal position to offer flash loans of UST and Luna to the Terra ecosystem. To our knowledge, there is currently a significant absence of such a product within the Terra ecosystem. Hence, Leserve might provide and facilitate the first-ever implementation of flash loans on the Terra chain.

Flashloan is an uncollateralized loan option (no collateral is needed) with instant execution and repayment during one transaction. Our LSRV flash loan contract would ensure that the loan and the fee are repaid during the transaction or the whole execution is reverted. It represents the basic building block of traditional DeFi and we are proud to bring it to the Terra blockchain.

Common use cases:

1. Self-liquidation

  • Arbitrage opportunities
    (Different exchanges trade the same tokens but with prices differing up to 2–3 % between the exchanges. To take advantage of arbitrage, significant capital is needed to offset transaction costs while profiting on the price differences.)

2. Swapping collaterals

  • Traders would have an option to swap collateral A for collateral B on a loan in concern.

3. Loan refinancing

  • Users with a loan against collateral with a positive net position can switch DEXes for better interest rates while unlocking the vault without external capital at lower fees.

In the future: The flash loans can be deployed to a broader IBC ecosystem via proxy contracts on the native chains

Flash Loans can be hard to use for users without prior coding experience. Hence, the DAO can decide whether we should build a UI for using flash loans for the most common use cases such as self-liquidations. Flash loans will also work differently on Terra than on EVM-based chains due to contracts using an actor-based model of the CosmWasm ecosystem. In theory, we should be able to do it. Verification by a proof of concept is underway.

II) Lending assets via lending protocols

Liquidity: Liquid
Risk: Low
Return: +20% APY (we are taking Anchor protocol as a baseline)

  • Leserve can spread its exposure to different protocols to mitigate the risk of losing funds via a protocol or smart contract hack.
  • We can deploy to Anchor now and consider Starport and Mars in the future.
  • We are looking forward to when the White Whale protocol launches, as that could allow Leserve to attain returns — APY’s higher than 20%. We would deploy a smaller part of our treasury there and increase our exposure as the protocol matures.

III) Buying out locked assets such as bLuna with a discount

Liquidity: Less liquid (lockup of up to 21 days)
Risk: Low to moderate
Return: Estimating up to 17%-86% APY

  • The treasury can sometimes wait, people sometimes cannot. That is why people would be potentially willing to sell bounded assets such as bLuna with a discount to Leserve.
  • Basic source of bLuna is the luna-bLuna LP, however, the juicy premium lies in the liquidations of loans. Given that the treasury can wait, we can compete at a lower liquidation premium and have our liquidation orders filled more often.
  • In essence, there is a “risk-free” opportunity to get some free value anywhere, where we can get a treasury acceptable asset guaranteed if we wait.

IV) Issuing self-repaying loans

Liquidity: Less liquid
Risk: Moderate to high
Return: 20%+ APY

Imagine you have collateral and need a loan or a liquid token we accept, and you would like us to lend you UST against that collateral (e.g. fraction of sLSRV holdings of a user).

This would offer interesting opportunities:

  • Implementing a self-liquidating/repaying loans feature, as we would use the liquid collateral to generate profit that would repay the debt. This would be similar to Alchemix or Ramp protocols with a set of options to generate profit on the collateral (or repaying the debt).
  • Leveraging prism protocol and its ability to split assets into its yielding part (that the treasury would keep) and principal part (that treasury would lend out) is another way to accomplish this functionality.
  • Besides fees, collateralized loans would help to balance the risk profile of the asset portfolio.
  • Repaying loans should benefit from the larger Leserve DAO ecosystem and options of lower fees in cases the debt will get repaid using the collateral.
  • If you use sLSRV tokens to borrow a derivative of UST, this could be thought of as a (4,4) strategy where you can keep your sLSRV (and rebasing rewards), borrow “UST for free”, LSRV can withstand the possible sell pressure by keeping the yielding component in the treasury and the yield is boosted above 20%

We hope that this chapter has effectively answered your questions and sufficiently covered the different strategies, options and mechanisms that can be leveraged in order to generate revenue for the protocol. Yet again, let us reiterate that these are the options that have been considered and evaluated as of now. We are confident that the future holds a set of revenue-generating mechanisms that lie unbeknownst to us as of now. The extent to which these and future options will be implemented lies in the hands of our beautiful community of Leservians that will decide to hold sLSRV tokens.

Stay tuned for the following chapters in which we will cover:

III. Leservanomics

  • Funding of the project and LSRV token functionality

IV. Leserve DAO (Part I — Governance, Part II — Constitution)

  • We are big supporters and proponents of DAOs and hence we would like to hand over the governance of all aspects of the project to the hands of the community. This chapter will delve into how we plan to do it and how we will mitigate the associated risks.

V. Smart Contracts & Frontend/Design

  • Differences between Solidity contracts (compilers, complete rewrite)
  • Security & audit
  • Frontend technology and hosted on IPFS
  • Design language — showcase colour palette & potentially design guideline

VI. Community & Growth

  • Marketing strategy
  • Leserve’s social identity & overarching philosophy

X. Launch strategy

  • Whitelisting, tiers, launch sequence
  • How we plan to fight for the community and tackle frontrunners and bots

Thank you for putting your time aside to read Chapter II. There is an exciting journey ahead of us. To provide feedback and stay up to date, please visit our Discord and Twitter.

Until then,

(🌖,🌖)

This medium article was prepared with the help of the following community advisors: kulmjord, Fart Breath, charlie2212, Karsa, and yeezy. The DAO is grateful.

Disclaimers

The above content is published solely for informational purposes. It should not be construed as an investment thesis or be deemed to constitute a prospectus of any sort or a solicitation for investment or investment advice. The information provided in this Medium Post pertaining to the LeserveDAO is for general informational purposes only and is not a formal offer to sell or a solicitation of an offer to buy any investments, securities, options, futures, or other derivatives related to securities in any jurisdiction and its content is not prescribed by securities laws.

The information provided in this Medium Post pertaining to LeserveDAO, its business assets, crypto-assets operations, and strategy, is for general informational purposes only and is not a formal offer to sell or a solicitation of an offer to buy any securities, futures, options, or other derivatives related to securities in any jurisdiction and its content is not prescribed by securities laws. Information contained in this Medium Post should not be relied upon as advice to buy or sell or hold such securities or as an offer to sell such securities. This Medium Post does not take into account nor does it provide any tax, legal or investment advice or opinion regarding the specific investment objectives or financial situation of any person. LeserveDAO and its agents, directors, advisors, employees, officers and shareholders make no representation or warranties, expressed or implied, as to the accuracy of such information and LeserveDAO expressly disclaims any and all liability that may be based on such information or errors or omissions thereof. LeserveDAO reserves the right to amend or replace the information contained herein, in part or entirely, at any time, and undertakes no obligation to provide the recipient with access to the amended information or to notify the recipient thereof. The information contained in this Medium Post supersedes any prior Medium Post or conversation concerning the same, similar or related information. Any information, representations or statements not contained herein shall not be relied upon for any purpose. Neither LeserveDAO nor any of its representatives shall have any liability whatsoever, under contract, tort, trust or otherwise, to you or any person resulting from the use of the information in this Medium Post by you or any of your representatives or for omissions from the information in this Medium Post. Additionally, LeserveDAO undertakes no obligation to comment on the expectations of, or statements made by, third parties in respect of the matters discussed in this Medium Post.

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