The DAO will bring an amount of its gov token, and Angle will match this amount with stablecoins. These stablecoins would be minted as part of Angle Protocol algorithmic market operations, meaning they will not be backed by anything specific.
Then these tokens would be deposited in a pool. Essentially this enables the DAO to double its liquidity on the pool, with no initial capital requirements and no need for governance token incentives to grow liquidity!
At the end of the program, the repartition of the risks would be as followed: Liquidity is withdrawn from the pool, and Angle is first paid back its initial investment plus a fixed interest rate - which may require some swaps of the DAO token (potentially increasing a negative price action on it). Then the DAO keeps the rest. Basically this means that the DAO will get price variations, trading fees, and assume Impermanent Loss.
Feel free to make simulation of what this means with this spreadsheet.
Here is a list of pros and cons from both the DAO and Angle points of view:
DAO:
Pros:
Cheap and easy deep liquidity on the governance token
No needs from token incentives to grow liquidity on the pool
Non mercenary liquidity
Potentially gains from trading fees and price action
Risk:
Impermanent Loss and negative price action
Angle:
Pros:
Multiple agEUR pools
Increase in utility and potential partners
Revenue for the protocol
Risk:
Failing projects and flash price action that would make reimbursement impossible and hence lead to the creation of unbacked agTokens, also called bad debt for the protocol
This could be very interesting for early projects looking for liquidity on their governance token. However, it looks like it could introduce a very real risk of having unbacked agEUR out in the open if the DAO token is sold to the pool rather than bought from it (i.e. the DAO token decreases in price).
In this case, the mechanism in place is that the DAO token would be sold against agEUR to have enough to burn the amount originally minted. Although this would increase the selling pressure on the DAO token (cf Junior Asset Tranche APY vs Junior Asset Price change in Ondo’s simulation), it should work in theory. However, I don’t think that enforcement of this safety mechanism should rely on the goodwill of the DAO using this liquidity as a service. Rather, there should be a native on-chain mechanism from Ondo enforcing this.
Temporary solution
My other concern is that this is made to be temporary. If not, this would be equal to create unbacked agEUR forever, which would have much bigger implications. However, why would any token need liquidity temporarily, except for big liquidity events (i.e. token releases or unlocks)? In these cases, tokens are mostly dumped, bringing us back to the first concern.
1st Edit
After looking deeper into Ondo it looks like redemption, the process of paying the Fixed Tranche (Angle with agEUR) before the Variable Tranche (DAO with their token) is handled by the protocol itself. In that case, the main risk would be handled by Ondo clearing solution.
I don’t think this program is to be used for DAOs which are launching their tokens but rather for DAOs which already have a side liquidity pool or a treasury which make it possible for them to pay the leftover agEUR in case of impermanent loss.
The goal of this program is not to make revenue it is to create integrations for agEUR and make sure it is used in many different places.
Good point, this should be thoroughly verified before setting up this kind of program.
Another important risk to keep in mind is that doing this kind of operation creates agEUR liquidity that is only backed by the future claim on the DAO token at the end of the loan. If this operation is set to be renewed, the agEUR issued through this mechanism would in effect never really be backed by anything.
An unexpected market event affecting agEUR during this time could impact agEUR’s peg or Angle’s solvency.
Another way to address the risks (DAO token became bad debt) is to transfer the risk to a contingency pool. This is how it works:
Create a pool of 1M$ (use 1M as a place holder)
This pool will be incentivised by Angle, on top of normal farming returns (e.g. sanUSDC) - so the return will be higher.
This pool will be used to take over the bad debts so Angle reserve will not suffer any loss. - so the risk will be higher too.
Apparently, the pool is for investors who are willing to take more risks and probably have more voting power in deciding what DAO token will be allowed.
Interesting, though I have a feeling that this would be very costly in $ANGLE if it were to become a real hedge against this risk. It depends on how much % people will want to put their money in …
