Conic, the new playing field for major DeFi protocols?
Your old boy is already back to enlighten you on a new DeFi protocol, Conic Finance.
As Conic launches very soon, 3 major competitors are trying to take control of Conic’s future liquidity. I’m talking about Frax, Maker and Synthetix.
Here some datas I compiled on Conic’s current structure with omnipools and their respective whitelisted pools :
What did we learn?
First things first, I think FRAX, USDC and DAI are the right assets to have as the first omnipools. Stablecoins pools shouldn’t bring impermanent loss (IL) on Conic if pegs hold, this will facilitate the first user entry into an omnipool. These stablecoins omnipools offer different risks profiles to users, a stablecoin collaterized with AMOs with FRAX, an overcollateralized stablecoin with DAI and a fiat collateralized-centralized stablecoin in USDC. What is interesting is that FRAX, USDT and DAI are in each omnipool. Conic users will be exposed to all stablecoins types without choosing, only the allocation weights of pools will vary across omnipools.
Based on the table numbers, I think Frax have influence on over 800k vlCNC voting power, Maker over 480k vlCNC, and Synthetix around 170k. Of course, this is a totally subjective theory that won’t be discussed here.
Frax
Frax only want to attract liquidity through FRAX pools considered as the safest liquid stablecoins pairs : USDC & USDT (BUSD, GUSD…). Numbers tell us this.
FRAX omnipool will sell itself as the highest yield avenue for a stablecoin deposit on Conic.
To offer this, the most incentivized and liquid FRAX pools on Curve should have the highest Liquidity Allocation Vote (LAV) in the FRAX omnipool. This will happen as the first LAV determined that FRAX deposits will go equally to FRAX3CRV and FRAXBP pools (40% each).
This will bring buying pressure on FRAX and liquidity in the two main FRAX pools.
An interesting recycling liquidity mechanism is in play as a majority of FRAX purchases will be routed through Curve pools that are also the main pools in the FRAX omnipool (fraxbp, frax3crv).
Frax owns 92% of frax3crv TVL and 28% of fraxbp, and therefore earns directly from FRAX’s trading activity. As a result, Frax have more interest in attracting lots of FRAX deposits into Conic, as opposed as USDC and DAI which can come from anywhere.
FRAX in USDC Omnipool
At first glance, it might be surprising that Frax didn’t fight for a higher Liquidity Allocation Weight (LAW) for fraxbp in the USDC omnipool as they have the required voting power. FRAX allocation in this omnipool tops at 40%.
I guess they prefer direct FRAX buying power and stickier LPs through the FRAX omnipool than capturing more liquidity through other omnipools. Frax don't want to trick users into choosing USDC OP over FRAX OP when yield is their main criteria. It would be the case if fraxbp and 3crv allocations were closer. Frax’s message is basically “if you want degen yield anon, buy Frax”.
FRAX in DAI Omnipool
Frax need to find the right balance with frax3crv LAW (20%) in the DAI omnipool. Attracting different LP profiles is great for FRAX liquidity, but too high a frax3crv LAW gives DAI free liquidity and increases its influence.
It will be the main headache for Frax, even more so in the early stages of Conic omnipools as user behavior will not yet be predictable. What we do know is that USDC and DAI are less risky than FRAX in people's minds so theoretically retail liquidity should prioritize these omnipools. This will be a fun game theory to watch.
Conic in support to complete the “CR100 project”
Frax want to increase the Collateral ratio of FRAX to 100%. Approximately $39m additional revenues must be generated to achieve this goal. Eliminate the algorithmic backing and increasing AMO revenue is their solution. If Conic is truly PMF and attract a few 100’s of millions in TVL as I believe with conviction, the FRAX omnipool will help increase buy volumes on FRAX, which means more external stable assets in Frax pools, more arb and more fees earned from POL, hence an improved stable collateral backing for FRAX. CR goes up.
Frax’s POL
Gradually increasing the fraxbp LAW in FRAX omnipool is the smoothest way to transfer capital from frax3crv to fraxbp since FRAX OP depositors don’t choose where their liquidity goes, Frax does by deploying their vlCNC voting power in LAVs.
If my theory is correct and Frax controls LAWs in the Frax omnipool for the moment, allocating some POL to the FRAX omnipool could really accelerate the FRAX pools flippening. If Frax do this, the gap between fraxbp and frax3crv LAWs in Conic TVL will be one of the deciding factors for fraxbp to overtake frax3crv in TVL ($455m vs $538m).
There is still some work to do to make this happen as frax3crv has a larger overall allocation at the moment due to it being the only FRAX pool available in the DAI omnipool. Frax should gradually reduce frax3crv LAW for the benefit of fraxbp in the FRAX omnipool if they are confident that enough liquidity will be captured by frax3crv through the DAI and USDC omnipools.
Maker
Maker was able to allocate 50% of DAI omnipool liquidity to the main liquidity source of DAI, the 3CRV pool. I think 50% will be the target LAW for this pool going forward. They also fought for the highest LAW in the USDC omnipool with a satisfactory result (44.5%).
The 3CRV pool is a natural winner in Conic due to the use of 3CRV for fee redistribution in Curve combined with USDC and USDT dominance. DAI benefits greatly from this with its hard-earned first-mover advantage in the race for decentralized and overcollateralized stablecoins.
Furthermore, Maker has an edge in the Conic war as DAI takes advantage of the liquidity flowing to the frax3crv pool in each omnipool, without incentivizing it. Their mission is therefore simpler because it will take fewer incentives to maintain DAI allocation in Conic TVL.
Maker’s POL
Maker DAO has 2.96bn USDC idle in its PSM which must be deployed in profitable and diversified strategies as RWA or deFi vaults. Recently, a vote passed to allocate $100m into a bespoke non-custodial Yearn’s yvUSDC vault. The goal is to generate an estimated return of 2% through multiple Defi strategies with no unhedged exposure to impermanent losses.
Conic should have realistic chances to earn an decent allocation of Maker’s PSM at some point. The USDC omnipool with only stablecoins pools inside acts as a vault offering the highest APR on USDC in Defi, theoretically without IL.
An option as Conic is even more attractive to Maker because part of their POL will be redirected to DAI’s main liquidity pools on Curve. So, without worrying about cost management, they can farm without cannibalizing too much of the rewards from the 3CRV pool. The different LAWs in the USDC omnipool should be respected thanks to Conic’s rebalancing concept.
When a LP deposits into an omnipool, the deposit will always go to the least allocated Curve Pool. Similarly, when a liquidity provider withdraws funds from an omnipool, the withdrawal will come from the most over-allocated Curve Pool.
CNC emissions will be distributed as incentives to liquidity providers who deposit into omnipools while the pools are imbalanced. The CNC received will be based on the amount deposited, and will also increase over time while a pool is imbalanced, and will stop when the pool is balanced again. (I’m quoting the WP here as it's crystal clear).
To maximize the efficiency of their strategy, Maker need to maintain or enhance the DAI share in USDC omnipool (23,5%). This requires the acquisition of more vlCNC voting power as the war escalates. Another game theory could be in action here.
Bribing vlCNC holders to vote for DAI pools should be capital efficient, but Maker’s LP boost won’t be applied (unless I missed something), too bad because their POL deployed should be a substancial share of Conic TVL. So they kind of have a strong incentive to buy and lock more CNC in addition to offering bribes.
Synthetix
Synthetix does not have an sUSD Base Pool and therefore does not fight in the same court as its competitors. Their goal is to secure a decent LAW for their main source of liquidity, the sUSD/3CRV pool present in the USDC & DAI omnipools. sSUD/3CRV LAW is at 8% and 15% in these omnipools. Synthetix fought with all the voting power at their disposal, but I think they didn't allocate their maximum resources to get the vlCNC voting power because their potential advantages in Conic are not as high as Curve or Maker.
As Conic war rages on, the lack of consequent POL for Synthetix and therefore a high LP boost will force Synthetix to engage in the bribes war to maintain their sUSD allocation. Let see if it’s profitable or if the competition is already too fierce.
Let’s not forget that Synthetix should be the winner of the deletion of the BUSD/FRAXBP pool due to BUSD minting shutdown.
The sUSD/FRAXBP pool, 5th in the FRAX omnipool race, will normally take its place in the next LAV.
It is relevant that sUSD pools will often have the highest utilization rate on Curve due to the volumes of atomic swaps. This will always be a major edge in order to be included in an omnipool as sUSD pools provide an organic high yield option.
Composability
I hope composability will be in the spotlight for omnipools at some point. The composition of an omnipool makes it similar to an index of tokens, which is a big advantage for its future composability. It would be a great step forward to be able to use in deFi the receipt tokens for deposits in an omnipool. These yield bearing tokens (ERC-4626 standard) can be used for auto-compounding, or as collateral for liquidity or leverage, to create new trading pairs etc. Conic need this.
CNC
CNC Emissions
We know that 44% (4,4m CNC) of CNC supply is allocated to LPs, 25% will be distributed in proportion to the LP's share of Conic TVL; 19% will be allocated as rewards for rebalancing the pools.
I expect the emission curve to start aggressively as a significant portion of LP incentives are expected to be distributed to players who have the greatest belief in Conic, namely early adopters and protocols who fought for an omnipool or a whitelisted pool in order to allocate part of their POL there.
I think 30% of the allocation will be released the first year, so 750k CNC for LPs only. At the MA 30D price (8.86$), this means $6.6m distributed as incentives in the next 12 months. With a a hypothetical Conic TVL at $100m, that would mean an 6.6% APY on a $10 000 deposit. Don’t forget that this is added to the base yield of the Curve pools.
So if the pools in the FRAX omnipool earn an average yield of 4%, $10 000 deposit will earn a total APY of 10.6% in CRV, CVX and CNC.
3.89m CNC are circulating but 1.72m are currently locked. Using my figures, 750k CNC distributed annually would represent an inflation rate of 19.2%. CNC daily lock rate will need to be monitored intensively to evaluate adoption and sustainability. Speculators be careful.
By the way, I often saw people asking in Conic discord if they should lock their CNC or provide liquidity to CNC/ETH.
I would say that retail who don't pursue acquisition of a whitelisted pool, therefore not looking to amass as much vlCNC voting power as possible, don’t need to lock their CNC balance as long as the bribes market isn’t launched.
Locking isn’t yielding rewards at the moment, the only benefit is getting a lock time boost which is not that useful for retail as they aren’t yet be paid to vote. Platform fees could be enable through governance later. For now, the fees are 0, so there is no direct redistribution of revenue possible for vlCNC holders. I think accumulate CNC & CRV and soon more CRV and CVX through providing liquidity in CNC/ETH pool (Curve gauge just came in) might be the best option at the moment (watch out about IL).
Yield should be crazy high, 10% of the supply ($8.88m at current MA30 price) is reserved to incentivize the CNC/ETH Curve pool, 55% of that as extra rewards to LPs and 45% used for bribes through Votium.
LP Boost
We saw models where protocols were whitelisted and incentivized to deploy their POL on DEXs by allocating them a % of the token supply of those DEXs (Velodrome, Solidly, Camelot).
Conic changes this by not allocating boost on yield but boosts on vlCNC voting power to incentivize major DeFi protocols to have skin the game. I guess this has been introduced to keep the Conic war fair and incentivize LPs to not dump their earned CNC. The protocol is not even launched yet that it already takes a disproportionate amount of vlCNC to integrate an omnipool at the current CNC price.
But first a protocol can deploy part of their POL in the USDC omnipool eg, and so farm and lock CNC to receive multiplicative boosts on their CNC balance.
If their POL is substantial and their TVL share stands at 20% per eg, their voting power can be multiply by a x6 factor thanks to the LP boost. If their CNC are locked for the 4 months maximal duration, this adds a 1.5 multiplier to the x6 LP boost. Meaning a potentially x9 on their vlCNC voting power. So a protocol can quickly become a vlCNC whale and get a whitelisted pool if it is dedicated to having skin in the Conic game.
This will attract protocols will vasts amounts of capital, the best opportunities will be early on as Conic TVL is still low, so getting a higher TVL share and improved LP boost is cheaper. It feels like a second chance in the Curve War for protocols. As always, early adopters will get a big head start.
Lock time boosts
Two different lock time boosts will be available at launch. A temporary lock boost for early lockers of CNC. If you lock CNC before the snapshot for 4 months, you will receive a x2 boost on your vlCNC voting power. If you locked CNC for less than 4 months, the value of your boost will be proportional to the duration (1 month lock, x1.25 ect). When activated, the boost will lasts for the duration of your initial lock.
The other lock boost isn’t temporary, the longer you lock CNC, the higher the boost you get up to a maximum of x1.5. If you lock your CNC for 4 months, you’ll receive 50% more vlCNC voting power for 4 months.
This boost have be implemented to really incentivize CNC holders to lock as they will get a straight benefit that will directly make their vlCNC balance more profitable (more voting power, more bribes). The lock time boost especially targets protocols that need large chunks of vlCNC for a whitelisted pool as their accumulation period will be shorter.
veCRV Airdrop Boost
VeCRV holders will receive a retroactive airdrop boost on their vlCNC balance. We don't have any information on how it's calculated at this time, so this will just be speculation on my part. My guess is that this will be based on USD value and proportional to the veCRV user balance. If an user has $10 000 in veCRV at the time of the snapshot, they can max boost (x1.5) $10 000 in vlCNC.
Of course, Convex is a huge beneficiary but they have to activate this bonus by locking CNC for 4 months before September 2023. Having a window to activate this airdrop boost is a good thing as eligible people who don’t hold CNC yet can observe how Conic is gaining momentum while having more time to prepare their entry.
Convex should exploit this, I guess that Conic will be integrated somehow in Convex (and Votium). Convex has 288m veCRV, and vlCVX supply is 52.6m. Thus the veCRV/vlCVX ratio is 5.47, meaning 1 vlCVX can receive the x1.5 max boost on $5.47 of vlCNC (if CRV was around 1$ at the snapshot).
What if cvxCNC emerges, you mint it by deposit CNC and you receive cvxCNC which gives you x1.5 boost and CVX emissions. Convex boosts will last until January 2023 as the last day to claim is in September 2023 and the airdrop boost will last for the maximum duration of a lock, which is 4 months.
This can be a win win deal for Convex as they can use their veCRV airdrop boost trough cvxCNC and lock CNC perpetually. A cvxCNC/CNC pool could emerge with CVX voting power allocated. This grants CNC holders a high yield on CNC without locking it.
Convex need to integrate Conic governance to maximize this synergy. VlCVX holders must be allowed to vote in Conic governance à la Curve. CNC value will mainly resides in bribes, cvxCNC need to benefit from Conic’s bribe system, unlike cvxCRV holders who give up their right to vote on Curve.
Why is it valuable to become an important player on Conic?
Mature protocols that have decent liquidity on board (over $20m) across their stablecoin or non-stable assets need to incentivize it. If the volumes generated are already making their pool return competitive, they can reduce their investments in the highly competitive bribe market and use Conic instead to capture liquidity.
This will allow protocols to have a liquidity floor that feeds their pool, regardless of user attraction to their pool. They will not fight for CRV emissions but directly for liquidity which could be much more efficient. Protocols can attract a higher floor of liquidity in their pools with Conic as their allocation can only change every two weeks in LAV. However, the ceiling is lower as the liquidity that can be attracted to a specific pool is capped by its allocation.
Bribes
If a protocol want to get in, it need the necessary voting power and that comes at a cost. Currently, the most affordable entry cost is to be selected by at least 47% of vlCNC holders when choosing whitelisted pools. The minimum vlCNC vote amount in the first votes of whitelisted pools is 892 000 vlCNC on the USDC omnipool, 47% is 428 000 vlCNC or $3,63m.
Maintaining a +20% LAW for a pool requires at least 220 000 vlCNC votes, or $1.94m. This is already a consequent investment that will redirect many protocols into Conic's bribe war.
It’s hard to define out how much it will cost to bribe vlCNC holders. But I’ll try something based on the vlCVX bribe revenue APR at ≃ 20% since the start of the year.
54,3m CVX locked represent $358,9m at $6.6 per CVX. 20% APR = $71.7m or $2.75m distributed bi-weekly. Taking control of 20% of the voting power requires ≃ $550k (even less in reality as voter turnout isn’t 100%).
If vlCNC bribe revenue APR is ≃ 20%, 1.72m vlCNC should receive $3,06m yearly or $117k bi-weekly in bribes. There was an average of 1.13m vlCNC votes in each LAV, ie 65% rate of participation.
Based on these figures, owning 20% of the voting power in a LAV requires ≃ $15k in bribes every two weeks. If an omnipool weighs $20m, $15k in bribes attract $4m of liquidity to the pool. Looks very cheap.
A bit of crypto fiction (I love that) but if Convex owns a delirious % of vlCNC supply, there is a world where it is even more efficient to bribe vlCVX holders than vlCNC holders. It’s all good for vlCVX holders but how to compensate cvxCNC holders on the long term who miss the bribes revenue? Hard to say for now.
Stickier liquidity and versatility
The mercenary nature of liquidity providers lies precisely in the fact that they have the freedom to migrate liquidity from pool to pool depending on the return opportunities that arise. On Conic this option disappears, LPs can only switch from one omnipool to another. Moreover, they won’t need to shift often as the highest yield opportunities on Curve should logically fit into one of more omnipools. LPs therefore have less reason to migrate, which will make liquidity stickier on Conic.
Defi treasuries will have a new solution for turning idle stablecoins into productive yield-generating assets. Lack of diversity in investment choices was one of their main issues, the need for strategies to be battle tested was another, lack of liquidity and low yield was also one.
With Conic, treasuries have a single side asset deposit option that generates extra yield from the most liquid Curve pools, allowing them to reduce risk, to diversify, save a lot of money on gas costs and to enjoy the juicy yield. The various omnipools available (USDC, DAI, FRAX) will offer them solutions adapted to their risk profile.
That's it for me, I'm excited to see how Conic evolves in the future and solidifies its place as a foundational Curve lego. Everything will need to work fine to mitigate the smart contract risk as there are a few novel concepts tested (new rebalancing model, new LP token pricing, new boost model). I haven't even talked about the potential of non-stable Omnipools because that’s a whole other story.
S/o to their website as it is a work of art. Check the whitepaper, docs, and discord because DYOR, NFA.
The Conic War is here anon, be ready.