# Guarantee Locked, Long Term stETH/ETH Liquidity with Element Protocol

The Lido protocol currently pays out rewards to deposit into the liquidity pool for stETH on curve. This encourages stETH offramp liquidity but has limitations: LDO has constant sell pressure from auto-compounding, the pools can shrink as the LDO market cap varies [esp. post withdraw], and LPs can pull out when the liquidity is most needed in steth deleveraging events.

We propose a solution to these problems using a new liquidity mining mechanic developed by Element Finance. This solution creates high fixed rate ETH/stETH bonds for depositing into the curve liquidity pool for a guaranteed duration, let’s say 2-3 years, and enables people who are long LDO to buy the right to future emissions now while freeing up their capital, decreasing the need to regularly sell LDO.

**Benefits**:

- Guaranteed stETH liquidity for multiple years.
- Stability of liquidity pool through stETH deleveraging events.
- High fixed rate ETH/stETH bonds give liquidity providers exposure to LDO rewards without needing to hold or sell LDO.
- Liquidity providers have further avenues of revenue via trading fees on bonds.
- LDO bulls can buy future emissions now, possibly at a discount to market, without having to lock up significant capital.
- Eliminate multiple years of LDO sell pressure from autocompound farms.

## Mechanism Summary
It essentially splits the current ecosystem into two groups, giving each user what they want.

**User 1: Those who want access to LDO emissions over the long term and are willing to leverage into them.**

In the case of a 1 year stETH/ETH bond selling for 3% APR, stETH/LDO emissions for the next year costs .03 crvSTETH. Buying the yield of an Element split gives the user the rights to all future stETH/LDO emissions for what a current user would receive for staking 1 crvSTETH. This locks 1 crvSTETH for a year, even though the user only spent .03 crvSTETH.

If the user believes they’ll gain more than .03 crvSTETH off future stETH/LDO emissions, then it makes sense to purchase direct access to the LDO emissions at quantity. This equates to a leveraging mechanism. For example, it only costs 30 crvSTETH to access stETH/LDO emissions on the equivalent of 1,000 crvSTETH in the current system. This leveraging function causes the stETH/ETH fixed APR to increase, giving a pseudo indirect exposure to the LDO emissions. This increases accessibility; users without 1k steth can now get LDO exposure at market rates.

Example: The current price of ETH is $1,500 and LDO rewards by emission account for a 5% APY based on the current price of LDO ($2). Therefore, one crvSTETH emits 37.5 LDO per year at current market conditions. Based on the case above, if the stETH/ETH bond sells for 3% APR, the cost to take on the future emissions of one crvSTETH (75 LDO) will only cost $45, which is a 40% discount on the price. The user buying at a discount causes the rate to go up, and therefore trend to expected yield value.

**User 2: Those who are long ETH and want a guaranteed high yield over the next 2-3 years.**

Because of User 1 who is purchasing direct access to stETH/LDO emissions, User 2 gets access to a high fixed rate bond that indirectly has exposure to LDO emissions via User 1’s leveraging games. They are also able to further their yield by staking the bond in a bond marketplace, garnering further trading fees.

## Our Commitment
Element Finance is committed to making the rollout of this system as secure and simple as possible for the Lido core team and DAO. To ensure a smooth rollout we are committed to developing, auditing and deploying any of the needed:

- Integration smart contracts with any customized features requested by Lido DAO
- Mechanism design and implementation for a smooth transition of current LPs to fixed rates.
- Distribution system for LDO to match the rules of this program.
- Any custom front ends required for the above.

Our goal is to make a rollover of incentives to this model as simple and low lift as possible for the Lido DAO and team.

## What we are asking for
While we are committed to doing as much as possible to make this program successful we will need buy-in from the Lido DAO:

- We ask that [x] LDO from the liquidity mining program is shifted to be distributed to 1 year, 2 year and 3 year bonds deposited into the stETH/ETH pool.
- We need feedback. To ensure that this program is perfectly tailored to the needs of Lido we want to be in constant communication with the DAO and core team.

## The technical details
Element issues two tokens to the depositor. The Principal Token is redeemable for the deposited amount, and the Yield Token is redeemable for the interest amount earned during the term period.


The principal tokens are then tradable on an AMM which is customized to work well with assets which accumulate interest over time. The trading on the AMM prices the value of the future emissions of LDO token and interest.

Violet, our smart contract lead, describes in [her talk at EthCC](https://www.youtube.com/watch?v=Y8q4SP7_gbs) how Element Pools act as a **natural locking mechanism**¹. They’re not only effective at Yield Splitting between Fixed and Variable Rates, but also lend themselves well to incentive reward programs.

Protocol users receive rewards for holding Yield Tokens (YT). Principal Token (PT) holders benefit indirectly as their fixed rates are driven higher by those wishing to mint and sell PTs to leverage into greater YT exposure, speculating on future stEth yield, and the price of LDO.

This provides a supply of Fixed Rates at the higher boosted rate, denominated in ETH or stETH. Fixed Rate buyers benefit from LDO incentives, without users being forced to sell LDO to cover the cost of capital.

**We at Element are proposing to launch 1, 2 and 3 year stETH terms for fixed rates that directly integrate and funnel deposits into Lido locking up stETH for those terms.**

This provides a variety of risk profiles for investors to choose from, between fixed and variable rates, and lockups from 1 to 3 years. Longer terms may have higher rates to reflect the longer lockups, as determined by market forces.

**To further support an upward sloping yield curve, we propose assigning higher LDO emissions to longer terms, incentivizing longer lockups** (pictured below).

| Now | Future |
|:----------------------------------------------------------------- | --------------------------------------------------------- |
| Everyone gets the same thing  | Everything is custom  |
|Expensive for no lockup 4.28% reward for $1.2 billion = $51 million per year For no stEth lockup | Half the emissions, tailored by lockup preference [2.47%, 3.49%, 4.28%] to [1,2,3]-year terms Assuming $400 million per term Token rewards only to YT holders = $20 million per year For average 1.5-year stEth lockup

## High Level Overview
- Takes advantage of Element’s splitting mechanism
- Current design splits principal and yield, creating a fixed and variable payout
- Adding token rewards on top, lets you isolate Liquidity Mining rewards
- LDO goes to people who want to purchase that emission
- LPs buy PT to get guaranteed return in what they care about: ETH.
- PT and YT balance out pricing based on future expected value of token rewards (LDO)

## Implementation
- Element contracts:
- A vault on crvSTETH can be deployed on element v1 which deposits into either convex gauges or into yearn. If convex the vault will collect any token emissions and forward them to be distributed with LDO.
- A Balancer based AMM is deployed which allows trading from crvstETH into fixed rate crvstETH. One pool is needed for each length.
- Rewards distribution:
- A highly customizable version of Elements Optimistic reward’s system is deployed and funded with LDO. This system tracks holders of YT erc20s and then posts a root of their proposed rewards weekly.
- If a root is invalid LDO or Element governance can reject the root within a finalization period.
- Users then can move tokens however they want and still get rewards without any smart contract interaction.
- If there are major concerns about this system a smart contract staking system for YT can be developed.
- Transition:
- If the total program rollout is small to medium sized then Element AMM pools will be deployed and the program will commence when they have enough liquidity to enable transition.
- If the rollout is large, then a week-long auction [via cowswap or another 3rd party] will be conducted over the course of a week. The auction will give enough time to accumulate the needed bids on future LDO to give fixed rates to LPs.