Author: Arbor Finance @arborfinance, Cameron Schorg @schorgie30
## Simple Summary
This LEAP proposes the Lyra DAO raise $250k USDC via the Arbor Bond Protocol for the purpose of cheaper LyETHpt Protocol Owned Liqudiity (POL) on the Optimism Newport release.
This proposal will establish the terms in which the Lyra DAO can create and sell $250k USDC worth of Arbor bonds to deploy into the sETH Lyra vaults on Optimism Newport. The Arbor bonds can be thought of like fixed rate and term loans where the maturity date, interest rate, and collaterlization ratio are all established at the issuance of the bonds. The bonds are all over-collateralized with the DAOs treasury assets, however, the bonds are non-liquidatable. This means the collateral assets could devalue to a point below the total borrowed amount without triggering a liquidation. The borrowed assets (principal) and interest are due in a balloon payment upon reaching maturity. The Lyra DAO will deposit collateral into Arbor’s bond factory minting the bonds and will then sell the bond tokens at a discount via Arbor’s bond auction interface (gnosis’s auction). A max interest rate will be established at the onset of the auction and the final settlement interest rate will be at or below that rate. The USDC proceeds from the auction will be sent to the DAO’s wallet and can then be deposited into the sETH vaults on Optimism Newport.
If Lyra does not repay principal and interest by the maturity date, there will be a seven day grace period. If Lyra does not make the payment within the grace period, the posted collateral can be claimed by bondholders on a pro rata basis. DAOs who default will incur serious reputational damage which would impair their ability to continue operating in the sector as a record of the default will exist on-chain.
Lyra vaults need large amounts of liquidity to signal to market participants the general safety and validity of a profitable opportunity. Liquidity mining programs have long been the most used mechanism to incentivize this liquidity. This is evident in many other protocols but also via LEAPs 3,4, and recently 44. Some of the major downsides of securing liquidity via liquidity mining programs are potential sell pressure of the Lyra token from farmers, mercenary liquidity (not sticky), and the overall cost of these programs.
Protocols have the option to own their own liquidity via Protocol Owned Liquidity (POL). Rather than selling Lyra tokens for USDC or financing the POL another way, the DAO can raise capital at fixed rates and terms via Arbor and ensure their POL was obtained via the most capital efficient way.
Aside from benefiting the Lyra DAO, this solution will also benefit Lyra users by providing more liquid and stable Lyra vaults.
Lyra to create a collateral basket token via protocol by depositing $250k OP, $250k Lyra, and $250k LyETHpt LP tokens into the token set mint factory. Refer to the token set made using TokenSets. This is currently considered a test set, as should the prices or the deposited amounts of tokens change, the set will be remade to maintain the appropriate token weights.
Lyra to create bonds on Arbor by depositing the previously created collateral assets to the Arbor bond factory using the following terms:
3 month maturity
300% collateralization ratio
18% max interest rate
Arbor will deploy ETH mainnet contracts to Optimism to facilitate this bond offering.
With the approval of this LEAP, Lyra will be able to fund $250k USDC of Protocol Owned Liquidity. This will be achieved by collateralizing a 3 month bond on Arbor Finance with $750k of Lyra owned collateral at a max interest rate of 18%.
Funding POL via Arbor is a more capital efficient strategy than funding liquidity with Lyra tokens.
### Technical Specification
There are no specific changes within the Lyra protocol. There are normally two steps in an issuance through Arbor Protocol. These steps are simply to create a Bond and create an auction with the Bond. However, because the collateral being used must be “wrapped” into a single ERC-20 using the Set Protocol, that must be done as well.
#### Token Set Collateralization
The Set is already created and viewable here, and to get the collateral tokens, there will be four transactions.
- Approve tokens to be transferred into the Token Set (one transaction per token).
- Issue Set tokens by transferring the LP tokens, OP tokens, and Lyra tokens. This can be done through TokenSets UI with an EOA or with a multisig by interacting directly with the basicIssuanceModule using the tokenSet address.
#### Bond Creation
Bond creation requires two transactions.
- Approve collateral tokens to be “spent” by the Arbor Bond Factory.
- Create a bond using the Arbor Bond Factory which will immediately lock the collateral and mint a proportional amount of Bond tokens.
#### Bond Auction
Auctioning the newly created bonds also requires two transactions.
- Approve the Bond tokens to be “spent” by Gnosis EasyAuction.
- Auction creation using Gnosis EasyAuction which will immediately lock the bond tokens and start an auction with the specified parameters.
### Test Cases
Arbor has successfully conducted 3 different bond issuances. 1 of the issuances has reached maturity and been fully paid back.
We have included the set protocol tokens as part of Arbor’s Bond testing suite. This shows that the normal functioning of the Bond protocol works with the given token set.
Upon passing governance, Arbor will deploy all smart contracts that are needed onto the OP network and update addresses where appropriate.
### Configurable Values
Total Amount to Raise:$250k USDC
Bond Maturity: 3 months
Max Interest Rate: 18%
Collateralization Ratio: 300% consisting of $250k OP, $250k Lyra, $250k sETH LP tokens
Copyright and related rights waived via CC0.