Another day, another article on the brilliant Maia DAO.
You would think we would eventually run out of things to write about them, but the chad devs simply don’t stop, so we can’t either.
Today however we take a slightly different turn to what most of you are used to at Blocmates. We’ve already introduced every technical aspect of Maia DAO and their products so you should be experts by now.
In our latest article we summarised everything we previously covered and also promised some details on the upcoming migration to Arbitrum as well as the new features coming along with it.
Don’t worry, that’s coming very shortly, but for today we want to show you how Hermes V2, Maia DAOs premier product, is actually a better product in practice for DAOs and users alike.
This article will be especially helpful for DAOs looking to attract liquidity with minimal costs.
What are bribes?
The most important thing for any project is liquidity. In an industry as open and permissionless as DeFi, sourcing liquidity is of utmost importance. The most common form of sourcing liquidity is liquidity mining which was created and popularised by Compound Finance. Essentially, protocols reward liquidity providers with their native tokens for locking up their assets with the protocol.
This was quickly deemed to be a very unsustainable way of attracting liquidity. So after lots of iteration, we landed on vote-locking and gauges.
Users can lock their native token for veTokens and use these tokens to then vote on gauges. The more votes a protocols gauge gets, the more liquidity that gets directed towards it. Thus setting up the now popular bribes ecosystem in DeFi.
Rather than having to dish out so many native tokens to every user, protocols now reduce their costs by only having to “bribe” vote-lockers on a specific DEX to direct more liquidity towards their gauges.
While this system is a significant improvement, it is still far from ideal, especially for DAOs. Bribing and incentivising liquidity is still very much a large part of a DeFi protocol’s operational costs.
Therefore, to make the overall ecosystem more efficient there needs to be a way to make the bribe economy more efficient.
To solve this, things had to be looked at in a different way. If paying less for liquidity may be unfeasible, then why not demand less liquidity to operate as the more feasible solution?
Okay bear with me, this also didn’t make sense to me initially, but when you look at concentrated liquidity and Uniswap V3, this is exactly what has been happening.
With concentrated liquidity, LPs can define a range of prices between which their assets can be used for trading. This not only reduces costs for renting liquidity, but it also opens the door for brand new incentive mechanisms.
Leveraging Uniswap V3’s concentrated liquidity architecture, Hermes V2 has made bribes 100x more efficient for DAOs. So let’s look at how.
Bribes with Hermes V2
The Folks at Maia DAO identified 3 problems with incentivizing liquidity through concentrated liquidity.
- You have previously set a range where liquidity is incentivized.
- You have to periodically and retroactively airdrop users that have active liquidity.
- Be aware of situations like OneTickDAO that happened with Ribbon Finance.
To avoid all these situations, Hermes V2 only allows NFT positions with a minimum range to be staked. Depending on the pool the minimum range size is different. For example, stablecoin pools are tightly correlated and the minimum ranges would be lower but with uncorrelated assets, the ranges would be wider.
To understand how Hermes V2 has significantly improved bribe efficiency, we will look at the vAMM (uncorrelated assets) and the sAMM (stable pools).
The name of the game here is to produce the same depth as Hermes V1 pools without using as much capital.
Let’s start with the vAMM. Suppose there’s a volatile pool such as ETH/USDC and this pool has a TVL of $10M offering 52% APR to LPs. This means each year, $3.25M in bribes are required to produce $6.5M of emissions. That’s $50K on a weekly basis to generate $100K in emissions.
Now if we want to achieve the same depth of liquidity with Hermes V2, this is how much protocols would have to bribe.
If a protocol wants to keep a pool at ± 30%, then they only have to bribe $6.3K per year to generate the 52% APR. That is 87% saved. Absolutely wild.
Now let’s look at the sAMM. Suppose a stable pool with $100m TVL offers 13% APR. It means $6.5M in bribes are required to generate $13M in emissions. Or $125k per week to generate $250k if we look at it on a weekly basis.
With Hermes V2, the same depth can be achieved at a fraction of the cost.
Suppose the pool needs to be kept at ± 0.01% depth. It requires only $4.6K to generate the same 13% APR. A whopping 96% saved.
For those of you who are interested in the formulas and the actual maths that goes behind this improved capital efficiency. I highly recommend checking out this article. I must admit, it’s a little too big brain for me.
The Maia DAO folks are true degens at heart, they love making products for the degens but they also recognize that things have to be cost-effective for the DAOs as well. Without these DAOs, there would be nothing for the degens.
Hermes V2 improving bribes capital efficiency is just one, but one incredibly important way by which the overall DeFi ecosystem can get more capital efficient with Hermes.
If you are a DAO it is simply a no-brainer to use Hermes V2 for liquidity. No other venue can match the level of reduction in operational cost and there is no community more dedicated to helping everyone shine as the Maians.
So notify your favourite protocol and let them know that Hermes V2 is the way to go.