HIP-12: Updated Utilization of zUSD & zBNB Liquidity

Utilize zUSD & zBNB LP tokens from the Community Staking Wallet that were unstaked from Wombex and stake them into Magpie, to continue earning rewards. Use earned HZN to provide liquidity to the HZN-BNB pair on PancakeSwap.

Type: Horizon Improvement Proposal

Date: Feb 29, 2024

Status: Draft 1

Summary

Since the migration from the Wombat Exchange bribe system on Feb 2nd, all of the LP tokens were unstaked from Wombex due to the Wombex team not confirming the distribution support of HZN rewards from the Wombat Rewarder system. As such, these unstaked LPs are currently not generating any yield.

This HIP aims to utilize the unstaked zUSD & zBNB liquidity provided by the Community Staking Wallet, and stake them into Magpie in order to continue earning rewards and to repurpose earned HZN rewards. The migration from the Wombat bribe system to a direct rewarder mechanism resulted in HZN incentives flowing directly to liquidity providers instead of being used as ‘bribes’ to direct WOM inflation. Because of this the Community Staking Wallet will also receive HZN as rewards.

HZN earned by the Community Staking Wallet will be recaptured and repurposed to provide liquidity in the HZN-BNB pair on PancakeSwap, directly supporting the main HZN liquidity pool and earning yield in the form of CAKE tokens.

Specification

• Move the unstaked zUSD and zBNB LPs and consolidate the Community Staking LPs on Magpie

• Use the HZN recaptured from the liquidity pool incentives to provide liquidity to the HZN - BNB pair on PancakeSwap, and start generating yield in the form of CAKE tokens.

Motivation

The creation of the Community Staking Wallet through HIP-7 aims at bolstering liquidity for zAssets and, additionally, generating yield and capturing rewards that can strengthen the long term sustainability of the Community Fund. In order to optimize the Community Staking Wallet activities, it’s necessary to monitor the performance of each pool and make adjustments when needed, as well as managing the collected rewards. In this situation, unstaking LPs from Wombex subsequent to the migration of the incentives to the Wombat rewarder pool ceased rewards accrual for these LP tokens. For this reason, it is in the protocol’s mandate to maintain its directive from HIP-10 and continue to generate revenue by relocating the LP tokens to Magpie. Additionally, the Wombat rewarder pool started distributing HZN to the Community Staking Wallet for the LP tokens staked in Magpie, which has been accumulating and remains unused. This HIP proposes to use the HZN collected by the Community Staking Wallet to provide liquidity to the HZN-BNB pair on PancakeSwap, and start generating yield from the CAKE distribution, instead of using the HZN as revenue directly.

Potential Risks

The implementation of this HIP might come with some risks, including:

• Risks of impermanent loss. Non-stable liquidity pairs on AMM decentralized exchanges like Pancakeswap are affected by price volatility, which implies a risk known as impermanent loss. This loss is estimated as the difference of the LP token value at a given time compared to the result of holding each asset separately, and is often compensated in the long term by yield farming APR and/or opposite price movement. By providing liquidity to the HZN-BNB pair, the Community Staking Wallet will be exposed to impermanent loss risk.

• Interacting with a decentralized application (dApp) involves a number of associated risks, like smart contract risks and front end risks, for example. The Community Staking Wallet will face these risks by interacting with Wombat, Magpie and Pancakeswap, similar to interacting with any other dApp. These risks are partially mitigated thanks to smart contract audits and other security programs.

Considerations

Additional thoughts we should take into consideration:

• Selling HZN on the open market

Since the Pancakeswap V2 pools do not support single sided liquidity provision, it will be necessary to sell some HZN in the open market to acquire BNB and create LP tokens. Given the current trading volume of HZN and the amount of tokens captured in the form of rewards, it’s expected that the price will be negligibly impacted. Furthermore, the liquidity on the pool will be gradually increased, which will improve slippage and price impact on future trades for all users.

• Considerations for current liquidity providers

Utilizing the Community Fund to provide liquidity on Wombat (via Mapgie) and PancakeSwap, might result in reduced rewards for other liquidity providers, but it is essential to prioritize maximizing liquidity for the overall benefit of the protocol. The primary objective is to ensure ample liquidity, which is crucial for the protocol's success. Additionally, any revenues generated through this process would help with the long-term sustainability of the Community Fund. About Magpie Magpie is the first protocol within Magpie XYZ, designed to provide yield and veTokenomics boosting services for Wombat Exchange. Incubated by Wombat Exchange, Magpie is focused on locking WOM tokens to own governance rights and boosted yield benefits as liquidity provider on Wombat.

The platform offers users the opportunity to deposit tokens in single-sided boosted pools to earn high APR % while it allows Wombat Exchange voters to cost-effectively acquire voting power and earn passive income at the same time through the MGP token.

About PancakeSwap PancakeSwap is a decentralized exchange (DEX) that operates across multiple blockchain networks, allowing users to conduct cryptocurrency trades without the need for middlemen or traditional financial institutions. As the biggest platform on BNB Chain, PancakeSwap is renowned for its three core features: trading, earning, and winning. Users can instantly swap assets, earn tokens by providing liquidity or staking in Syrup Pools, and take part in lotteries and games to win tokens or NFTs.