[FIP - 114] Blueberry AMO

Author: Slater Heil, Composable Corp (Development Company Engaged by Blueberry Protocol)

Summary

Create a Blueberry AMO to provide stablecoin liquidity directly to the Blueberry protocol.

Background and Motivation

Blueberry Protocol is a leveraged liquidity position provider for actively managed concentrated liquidity pools, focusing on Uniswap v3 pools on the Ethereum network. Concentrated liquidity has proved a superior option compared to Uni v2, but it creates unreasonable difficulty and management requirements for the everyday user. However, we believe community-owned liquidity is the strongest and healthiest liquidity, and protocols should strive to have their holders be their LPs (rather than relying on outside market maker deals). Blueberry empowers users to become liquidity providers once again by aggregating the best performing automatically managed uni v3 pools and enabling leverage. The protocol also unlocks capital efficiency by allowing holders to maintain their full single-sided token position while providing liquidity(for example, I have $100k FXS, and I can keep that deposited collateral–earning interest–while taking a 10-150% value LP position in a FXS pool). Lastly, the protocol boosts returns for LPs by offering $bBLB rewards. veBLB is used to vote to incentivize protocols’ pools, creating a sustainable flywheel for token demand and keeping yields high.

To start, Blueberry allows leverage for actively managed pools with a track record of profitability provided by Arrakis, Ichi, and Gamma.

Boosted BLB rewards usually would require the accumulation and locking of $BLB. However, Blueberry Protocol will offer 2x boosted BLB rewards for the duration of the liquidity partnership to any FRAX or FXS pools on the protocol.

Concentrated liquidity has established itself as the future of liquidity, and Blueberry will be the ideal destination for concentrated liquidity providers. By becoming the liquidity provider on the lend side to enable borrowing, FRAX accomplishes four goals:

  1. Additional utility for unused reserve stablecoins
  2. Competitive interest, with boosted $BLB rewards
  3. An incentivized and actively managed concentrated pool for both FRAX and FXS
  4. No cost ownership of $BLB token supply–an innovative, investor-backed liquidity protocol

Phases

Alpha/Beta Phases:
The Blueberry Protocol is currently in process of an audit through the reputable firm Hacken. It will launch near the end of October, which will begin the Alpha Phase.

In its Alpha Phase, Blueberry will require $15M in stablecoin liquidity in the form of FRAX, USDC, or DAI. This is the amount required for this phase, as the protocol has secured commitments from various market participants to generate up to $10M in borrow demand in this phase. The protocol will request liquidity in 2 tranches. A new tranche will be requested when the borrow utilization reaches 66%. The expected interest rate paid at 66% utilization is an ~8% APR, NOT including $bBLB rewards.

In the Beta Phase, Blueberry may require an additional $25M in liquidity. Depending on need, Blueberry will request an additional tranche in this amount. See deal terms below.

Deal Terms
Each time a tranche is granted, a locked BLB token allocation will be granted in exchange from Blueberry DAO to Frax. The BLB tokens will be on a vesting schedule of a 1 year cliff and 3 years vesting thereafter–the same vesting schedule as protocol contributors and investors.

Tranche 1 - $15M stablecoin liquidity - 2% Token Supply - 15,000,000 $BLB - 2% Token Supply Total
Tranche 2 - $25M stablecoin liquidity - 2% Token Supply - 15,000,000 $BLB - 4% Token Supply Total

If stablecoin liquidity is no longer needed by Blueberry as organic LPs have filled the need, the liquidity will be returned to Frax. Boosted BLB rewards will only be active for the duration of the stablecoin liquidity provision, which is defined as any time before Blueberry has returned 100% of either tranche 1 or 2. However, Frax will maintain its vested ownership of the token supply forever. Liquidity is one of the main difficulties new protocols face, and the team believes the liquidity contribution to help the protocol get off the ground warrants ownership in the protocol token.

Risk Analysis
Borrowers (leveraged liquidity position creators) are subject to conservative liquidation terms, as the top priority of the protocol is to ensure the safety and repayment of lender funds. When borrowing to create a volatile token liquidity position, the liquidation threshold is an 80% negative PnL relative to supplied collateral. When dealing in stablecoin positions, the threshold is a 90% negative PnL relative to supplied collateral. As an additional safety measure, a Stability Pool immediately purchases liquidated positions and instantly repays debt to the lender, while taking on the risk of collateral liquidation itself. Together, this creates a robust, low-risk system to assist repayment of any borrowed funds.

Note: If my understanding is correct–an AMO is when the strategy or partnership involves the utilization of treasury assets, while a Liquidity partnership involves using FRAX. For this proposal, either one is fine–whether the assets are contributed as FRAX or treasury stablecoins such as USDC or DAI. Please correct me if this understanding is incorrect, and I will move this proposal to another category.

Proposal

Create a Blueberry AMO and authorize up to $15M of liquidity for use in the AMO, followed by an additional tranche of $25M if needed.

For: Create the Blueberry AMO and commit to the first tranche upon protocol launch

Against: Do nothing

4 Likes

An additional comment to better outline the expected ROI for the FRAX Treasury:

  • Blueberry is currently raising at a $25M valuation pre-launch. 4% * $25M = $1M Token Allocation Value, assuming no market growth occurs. For reference, comparables have been valued as high as $650M+ in better market conditions.

  • Interest Accrual - $bBLB rewards in early days will target a 40% APY for LP pools and an additional 5% for lending. Looking at this through the lens of the lending contribution, this would increase the APR from 8% to 13% assuming good utilization, a very competitive interest rate on stablecoins. Over 1 year, this would yield $5.2M.

1 Like

Interesting stuff here. Great team; excited to see the results!

good stuff, we should proceed further with this. Seems to be a win win.

Great write up, Slater! Love the potential of Frax and Blueberry working together.

overall seems like a pretty beneficial proposal, yields are strong relative to other allocations the community has made. I like having exposure to the uni v3 management space. tough to say if it will win long term, but has tons of upside and given we have no cost basis on this ownership… seems solid

looks pretty decent. Will add to my bookmarks

Really enjoyed this summary and am looking forward to the potential of Frax and Blueberry working together. How long do you think the beta and alpha phase will last?

Thanks for the question. The Alpha phase will be two months from around the start of November. The beta phase will last 3-6 months +, or until we feel comfortable leaving beta.

1 Like

Great proposal! I like where blueberry is heading.
Frax has deep liquidity and algorithm stablecoin which is stable and I think Frax+Blueberry is a great duo bond. Can’t wait to see what’s next

Although I like the product that you are building, I think the risks involved with being the first lender in a newly build lending market, especially with the size you are proposing, are too high for the Frax protocol.
Since the Rari/Fuse hack, we have moved away from being a big lender in new lending markets and are now stimulating users to put FRAX in lending markets like Aave via the aFRAX gauge for example.

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We understand the risk aversion, especially in these market conditions and after seeing the failures of other protocols over the last year. I would suggest that it would be beneficial to jump on a community call to discuss the various risks. We can come up with a list of the safeguards that we have in place, or alternatively, you could write a list of potential risks that you are concerned about, and we could address them individually.

We designed the protocol with risk management at our core after seeing the failures of other lend/borrow protocols, and we have a number of controls to mitigate those risks. The Rari exploit in particular was at the center of our design process.

Few key risk management parameters to note:

  • We allow no more than 8% of the available liquidity on chain to be created as positions on the protocol, excluding Blueberry originated liquidity (because it may be leveraged). Typically this yields about a 1.5% maximum slippage when liquidating a position, leaving plenty of margin for liquidators to repay the lender in full while making a profit.
  • Our liquidation incentive is also 20% when a volatile collateral is used, so there is a massive margin for liquidation.
  • The stability pool takes the risk off the lender.
  • No one can take custody of borrowed stables to use the borrow as an exit, as happened with the Rari exploit. The idea on Blueberry is that people can only borrow against volatile collateral in order to contribute liquidity to a pool. This makes the liquidity on chain more robust to allow liquidation of positions. Stablecoins are only borrowable when entering a liquidity position, which is locked in our contracts and can’t be otherwise brought to market or collateralized elsewhere to create additional risk.

We would be open to starting smaller, and/or increasing the amount of smaller tranches. We anticipate $10M of borrow demand from the business development relationships we have established thus far, so the reason for the $15M request is to allow that level of TVL growth while keeping the utilization at or below 66%.

Again though, we understand the risk aversion and desire to see safe proof of concept before committing serious capital.

I would propose a linear scaling solution based on the amount of liquidity FRAX is willing to supply:
$40M = 4% Token Supply.
$3M = 0.3% Token Supply… and so forth.

Keen to discuss this further, please let me know the best next steps.