stkIDLE Gauges full throttle: enabling DeFi protocols to scale liquidity with PYTs

Today, Idle DAO unlocks the full IDLE distribution rate and starts issuing 990 IDLE/day initially across 7 Senior PYTs. With the introduction of stkIDLE Gauges, protocols can leverage Voter Extractable Value (VEV) to add new Gauges or increase the rewards for their own PYTs.

With the PYTs factory pattern, any DeFi protocol can integrate their assets into PYTs and participate in the stkIDLE Gauges to increase their rewards.

This synergy between products and tokenomics triggers a race to stkIDLE, which replicates the dynamics of the so-called “veToken wars”.

📚Check here how Gauges work.

The DeFi trilemma: innovation, yields, and security

The shipping rate in DeFi has been overperforming the innovation wave of the TradFi and Fintech world thanks to its composability, openness and permissionless essence. This huge competitive advance lead to a Cambrian explosion of new products, with more than 1000+ active DeFi protocols according to DeFi Llama.

Despite the flexibility of this environment, today it’s not possible to front-run the innovation while providing high yields in a secure manner. One aspect needs to be sacrificed, limiting the potential protocol growth.

💡 Innovative primitives can organically generate astonishing returns, but they come with a higher grade of risks related to protocol’s smart contracts, governance, and third-party dependencies.

🛡️ Battle-tested protocols that initially released innovative products now lay on low yields, as incentive season has ended and the attracted TVL lowered the APYs. The perceived risks associated with those protocols are low, demonstrated by the robustness of the DAO, skilled core contributors, and a healthy ecosystem.

🔀 Forks of existing protocols can rely on a secure codebase and boost yields with liquidity mining, but there is a perceived low innovation grade and the DAO is in its early stages, with no proof of resiliency and integrity.

How Gauges and PYTs come to the rescue?

💡 Users are now able to access innovative protocols using the Senior and Junior Tranches: the Senior profile provides an additional layer of fund protection to liquidity providers, while Junior LPs receive an APY that overperforms the underlying yield source.

Thanks to PYTs, users can comfortably pick the access point that better fits their risk appetite — and the protocol can bootstrap their new product using the already available IDLE stream.

🛡 In a similar way, battle-tested protocols that already reached the TVL maturity can use Gauges to boost their PYTs and add IDLE rewards on top of their underperforming markets, building up the momentum to attract fresh capital.

🔀 And forks of existing protocols can save their treasury’s governance tokens and reduce the issuing during the launch phase, using IDLE to match the expected incentives.

The dual nature of Tranches empowers these DAOs to make the new release suitable to a broad range of potential LPs.

It is worth mentioning that Tranches deployed on top of DeFi protocols would directly benefit from existing and upcoming Idle network effects, such as on top Tranches integrations like APWine, Yearn, and ShapeShift.

Extending Gauges & PYTs to DeFi 2.0: protocol-controlled liquidity deployments

The so-called “DeFi 2.0” indicates DAOs that are willing to replace incentivization phases, used to push the market to deploy capital, with “protocol controlled liquidity” (POL).

Instead of bootstrapping new AMM pools by issuing governance tokens to attract opportunistic liquidity, those DAOs prefer to directly acquire their own liquidity from the market.

The bonding mechanism designed by Olympus Pro and the “Liquidity as a Service” provided by Tokemak are primary examples of alternatives to subsidization programs.

Alternatively, DAOs use their treasury funds to deploy capital in AMM pools and ensure liquidity while accruing swap fees.

Some DAOs also issue collateral-backed stablecoins, raising funds that are used in DEXs to maintain the stablecoin peg and lower the slippage. These mechanisms are called “Protocol Controlled Value” (PCV) and Algorithmic Market Operations (AMO).

In each case mentioned above, the maximum size of liquidity that a protocol can attract in its pools corresponds to its own POL/PCV/AMO. To attract more funds, the protocol needs to distribute additional governance token rewards, resulting in decreasing DAO treasury and dilution of the current token holders.

Gauges and PYTs (built on top of AMMs like Convex, Uniswap, Sushiswap, or Balancer), can be used to deposit POL to kickstart a new liquidity formation phase without expensive incentivization campaigns.

By deploying POL on the Senior PYT corresponding to their Convex pool, for example, the DAO redirects most of the future pool yields on the Junior PYT. The Junior Tranche now provides overperforming APYs, creating organic incentives to let the open market deploy additional liquidity on Convex.

At the same time, the Convex PYT can be whitelisted in Gauges, letting the DAO accrue IDLE rewards related to their POL deployment.

Looking forward: PYTs Factory and permissionless deployment of new markets

Anyone can use their protocol as the underlying yield source to deploy new PYTs on the blockchain by interacting with the IdleCDO contract.

In this initial phase, PYTs are not automatically listed on the Idle website, but the upcoming factory will make the UI listing fully permissionless. The RFP-10, currently in development, will unlock the ability for protocols to self-deploy, manage and bootstrap their own Tranches in a few clicks.

With permissionless PYTs, protocols will not rely on Idle Governance to kickstart their markets and they can also profit from this on-top product — accruing 50% of the fees generated by PYTs.

Thanks to stkIDLE, any DeFi protocol interested in increasing the IDLE stream allocated to their specific PYTs can leverage Voters Extractable Value and reward stkIDLE holders that vote for the protocol’s pool. Idle Leagues have already taken action to make it easy for protocols and stkIDLE holders.🔥👀

Alternatively, a long-term strategy to acquire voting power is the deployment of a mechanism similar to Yearn’s backscratcher for Curve. That product makes the staked position liquid for improved token usability, and boosts the rewards for all vaults that use Senior PYTs as downstream yield sources.

Take action: build your PYTs with us

Idle DAO and Leagues are connecting and servicing protocols and DAOs in DeFi with on-chain yield automation services; if you have a yield source that you would like to tranche out with PYTs, we’re amped to hear from you.

To start developing your own PYTs, check the documentation and take a look at plenty of live integrations. If you want to learn more about the liquidity flywheel generated by PYTs+Gauges, or want to partner with us, feel free to reach out in Discord to our Treasury League members 🤝

Take your yield to a whole new level with PYTs & stkIDLE Gauges.

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Idle Finance

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