HIP-22: Create a zUSD - USDC pool on Pancakeswap V3
Creating a zUSD - USDC pool on Pancakeswap V3 in collaboration with Cupcake Hop (ICHI) as position manager and sunsetting the incentives towards the pools on Wombat Exchange.
Last updated
Creating a zUSD - USDC pool on Pancakeswap V3 in collaboration with Cupcake Hop (ICHI) as position manager and sunsetting the incentives towards the pools on Wombat Exchange.
Last updated
Type: Horizon Improvement Proposal
Date: October 31st, 2024
Status: Draft 1
Create a zUSD-USDC Concentrated Liquidity Pool on Pancakeswap V3. Move the zUSD liquidity managed by the Community Staking Wallet from the Wombat pool to the newly created Pancakeswap V3 Pool. Deposit protocol-owned USDC liquidity to initialize the Pancakeswap V3 Pool. Sunset the incentives for the Wombat zUSD and USDC pools. Collaborate with Cupcake Hop and Cakepie to create a USDC Vault and a position manager for the zUSD - USDC V3 pool.
Initialize a V3 concentrated liquidity pool on Pancakeswap for the zUSD - USDC pair, with ~0.01% fees.
Withdraw zUSD liquidity from the Wombat pool and deposit to the newly created V3 pool on Pancakeswap.
Transfer protocol owned USDC liquidity from the Community Staking Wallet to the newly created V3 pool on Pancakeswap.
Create a USDC Vault in collaboration with Cupcake Hop (ICHI) and Cakepie in order to attract liquidity and manage the USDC - zUSD pool.
Stop the incentives for the Wombat zUSD and USDC pools.
Improving Liquidity for zUSD
The implementation of the zUSD and USDC pools on Wombat, through HIP-8 and HIP-9, aimed to enhance on/off-ramp liquidity for our Spot and Futures exchange, as well as to strengthen the peg mechanisms for our core pegged token, zUSD.
In recent months, the performance of the Wombat pools has been below expectations, negatively affecting the zUSD peg. In response, incentives were redirected from the zBNB-BNB pools to the USDC pool by HIP-21, but this change didn't have a significant impact.
This HIP proposes an alternative to the Wombat pools that aims to provide more efficient on/off-ramp liquidity and improve the strength of the zUSD peg. This alternative involves the creation of a new V3 pool on Pancakeswap, the creation of a Vault and automated position manager in collaboration with Cupcake Hop, and the integration into Cakepie.
PancakeSwap V3 pools offer enhanced efficiency by concentrating liquidity within specific price ranges. With V3 pools, a smaller amount of concentrated liquidity can handle larger volumes compared to V2 pools. However, this feature requires a more active approach from liquidity providers to keep positions within range and to accrue fees. Position managers, such as Cupcake Hop (ICHI), offer automated solutions for a seamless experience in V3 pools, simplifying liquidity provision and optimizing yield.
Protocol-Owned Liquidity vs. Incentivized Liquidity
Since Horizon Protocol's inception, liquidity pairs for core tokens (HZN, zUSD, zBNB) have been incentivized with HZN rewards. This model allows for rapid liquidity growth but lacks long-term sustainability, as it relies on a continuous flow of incentives that need to remain competitive to attract temporary liquidity.
This HIP proposes a gradual shift towards a protocol-owned model to ensure the long-term sustainability of the protocol, moving away from the incentivized liquidity model. As a first step, the Community Staking Wallet will use 20k USDC, obtained from the Pyth airdrop, along with an equivalent amount of minted zUSD, to initialize the new V3 pool in collaboration with Cupcake Hop for position management. In future HIPs, the community will decide whether to continue incentivizing the USDC pool on Pancakeswap via Cakepie Voting Gauges or redirect incentives to increase protocol-owned liquidity by leveraging protocols such as Apebond.
The implementation of this HIP might come with some risks, including the following:
Peg fluctuations: it is possible that during the transition from one liquidity pool to the other, the peg for zUSD will be temporarily affected.
Interacting with decentralized applications (dApps) involves a number of associated risks, like smart contract risks and front-end risks, for example. Users that interact with Pancakeswap, Cakepie and Cupcake Hop will face these risks, similar to interacting with any other dApp. These risks are partially mitigated thanks to smart contract audits and other security programs.
Additional thoughts we should take into consideration:
After the successful implementation of V3 concentrated liquidity and monitoring, the next step is to decide where to redirect the incentives that are currently flowing towards the zUSD / USDC pool. There are two options that can be detailed in futures HIPs:
1. Redirecting the incentives into the USDC vault created by Cupcake Hop via Cakepie to attract liquidity to the USDC pool.
2. Selling the incentives as bonds through Apebond for a limited time to strengthen protocol-owned liquidity, allowing the community to participate in the bond sale.
Please ask your questions here.
