BarnBridge Partners with UMA to Offer SMART Alpha KPI Options

This post was originally published here

The BarnBridge DAO has voted to approve up to 10,000 BOND for a pilot liquidity mining program in collaboration with UMA Protocol. This liquidity mining program will be targeted at bootstrapping secondary liquidity for SMART Alpha junior and senior positions in the ETH (USD) and BTC (USD) pools on Ethereum mainnet. It will conclude on October 20th to allow for the processing of the last included epoch which ends on October 18th.

Read more below to understand:

  • What are Key Performance Indicator (KPI) options?
  • What are we measuring?
  • How are the options being distributed?
  • How do I measure their value?

In short:

  • SMART Alpha users and BarnBridge DAO stakers will get an airdrop
  • Balancer liquidity providers will earn option token emissions
  • The value of the KPI option is a function of final epoch TVL and average pool balance across all epochs

What are KPI Options?

Liquidity mining has proven to be a powerful mechanism for unlocking flywheels across DeFi. By rewarding early users with upside in the form of a project’s native asset, positive risk taking is subsidized, resulting in a greater chance for network effects to take hold. But this mechanism is a blunt one. More often than not, it attracts mercenary capital willing to take immediate profits at the expense of long-term holders, making it difficult to bootstrap a grassroots community beyond the most die-hard of supporters. Moreover, it clouds a team’s ability to assess how much of that capital will persist even once rewards subside.

KPI (Key Performance Indicator) options address both of these dilemmas by replacing the native asset as the reward for liquidity mining participants. Users instead receive tokens that entitle them to claim a pro rata portion of a sum of the native asset held in an escrow contract upon a given expiration date. The sum to be distributed to options holders is determined by the status of the KPI at the time of expiry. If the chosen metric hits the predetermined target, the entire sum of tokens would be paid out — otherwise, only a fraction of the tokens that were set aside would go to options holders.

The concept was pioneered by the team over at UMA Protocol. Check out the following resources to get a better sense for it:


What are We Measuring?

The goal of the program is to bootstrap secondary liquidity for both junior and senior SMART Alpha positions. Secondary liquidity is key for senior positions to serve as acceptable lending collateral, and for traders to speculate on junior position volatility via spot and further derivative exchange. The outcome of this pilot program will determine whether it makes sense to standardize longer KPI option programs for SMART Alpha pools.

The amount of BOND a KPI option token entitles a holder to at the end of the program will be determined by the following function:

TVL of the SMART Alpha Pool at Epoch Advancement on October 18th * Average Epoch Score

Let’s break that down:

  • TVL of the SMART Alpha Pool at Epoch Advancement on October 18th: The cumulative amount of dollar-denominated value between the junior and senior side of the pool at 10:00 AM EDT on October 18th, 2021.
  • Average Epoch Score: Each epoch is scored between 0 and 2 depending on how far away from 50% the junior dominance of the pool was. If junior dominance is lower or equal to 50%, the epoch score is calculated by multiplying the junior dominance share by 4; if junior dominance is higher than 50%, the epoch score is calculated by multiplying senior dominance share (this is 1 minus junior dominance share) by 4.

This function is bound between outputs of 100,000 and 19,900,000:

The x-axis represents the KPI formula output, while the y-axis represents BOND per option token.

So, what’s the TLDR?

  • 5,000 BOND each are set aside for the ETH (USD) and BTC (USD) pools.
  • The TVL goal for each is $19,900,000.
  • To ensure that this TVL is productive for the system, it is modified by a scoring system that incentivizes a degree of balance between pool sides.

Here are some examples of how this could play out:

  • TVL for the last epoch advancement is $10,000,000 and the average epoch score was 2| KPI Option = 1 BOND
  • TVL for the last epoch advancement is $10,000,000 and the average epoch score was 0.5 | KPI Option = 0.4 BOND
  • TVL for the last epoch advancement is $15,000,000 and the average epoch score was 1 | KPI Option = 0.6 BOND

Who Gets KPI Options?

KPI options will be distributed through a combination of snapshots and emissions. The following schedule highlights the respective allocations, and will be the same for the ETH (USD) and BTC (USD).

Snapshots will be used to distribute 30% of KPI options:

  • SMART Alpha Depositors, Epochs 1–3: 20%
  • BarnBridge DAO Stakers: 10%

Emissions will be used to distribute the remaining 70% of the KPI options.

  • The BarnBridge team will create two Balancer pools, one comprised of WETH / senior SA WETH / junior SA WETH, and the other WBTC / senior SA WBTC / junior SA WBTC.
  • Users will be able to deposit into these pools in returned for the respective Balancer Pool Token (BPT).
  • BarnBridge will host a liquidity mining contract which rewards the KPI Option token in exchange for depositing the BPT.

Regarding the Balancer pools, the BarnBridge team will update the weights weekly such that the junior and senior sides of the pool cancel each other out, while the underlying asset always remains 50% of the pool. Users can expect the value of the BPT to move relatively, but not exactly, in line with the underlying asset as a result.

These pools do not exist at this time. This article will be updated with links to them once live early next week — please confirm in our Discord if you have any doubts about whether you’re depositing into the correct one.

What Happens Next?

If the KPI option program turns out to attract millions in liquidity to SMART Alpha, this positions the BarnBridge DAO to do the following:

  • Run multi-month programs for ETH and BTC pools
  • Collaborate with other communities on joint liquidity mining programs for their respective asset(s)
  • Pursue concepts like senior position lending and junior position options

Should the program fail to do so, the following questions would inform the next attempt at bootstrapping secondary liquidity:

  • Were users uncomfortable with the Balancer pool reweighting mechanism?
  • Were users put off by having to LP both the junior and senior position?
  • Was the reward set aside for liquidity providers not enough to warrant the risk they took on?

As the Balancer pool won’t be live before Epoch 3 of either pool, you can begin to earn KPI option tokens by depositing into this upcoming epoch and becoming eligible for the initial snapshot.

About UMA

UMA builds open-source infrastructure for “priceless” financial contracts on Ethereum. Specifically, this is two things:

Together, these two technologies enable the creation of fast, efficient, and secure derivatives on Ethereum.

Key Performance Indicator (KPI) options are synthetic tokens that will pay out more rewards if a project’s KPI reaches predetermined targets before a given expiry date. Every KPI option holder has an incentive to improve that KPI because their option will be worth more. This is intended to align individual token holder interests with the collective interests of the protocol.

Using UMA’s Long Short Pair (LSP) contract template and Optimistic Oracle, any project can create their own KPI Option tokens. These can be backed by any approved ERC-20 token and can be valued against any KPI that a project wants to improve!

Keep up to date with the UMA community via the following channels:

About BarnBridge

BarnBridge is a suite of risk tokenization protocols for DeFi. Its applications allow users to select from opposing pools and take positions on risk factors like interest rates or asset prices. Its first application, SMART Yield, offers fixed and levered variable yields on stablecoins deposited into underlying lending markets like Aave, Compound, and C.R.E.A.M. Finance. Its application suite has expanded to include SMART Exposure, a position rebalancing solution, as well as SMART Alpha, which allows users to calibrate their exposure to price movements in an underlying digital asset. BarnBridge is currently live on Ethereum and the Polygon Network, with deployments on Avalanche, Arbitrum, and Optimism all on the horizon.

Keep up to date with the BarnBridge community via the following channels:

BarnBridge Partners with UMA to Offer SMART Alpha KPI Options was originally published in BarnBridge on Medium, where people are continuing the conversation by highlighting and responding to this story.

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