Lybra War Operation Guide Financial Game of Decentralization and Centralization

Guide to Financial Gameplay in the Lybra War Balancing Decentralization and Centralization

Gold and wealth are the main roots of war. – Tacitus

On October 13th, Lybra officially announced the launch of Lybra War and made it the focus of the next phase.

Looking back at the previous Curve War and Pendle War, we can see that the entire ecosystem has experienced significant growth under the Defi War model. This article will deconstruct the basic pattern of Defi War, combining it with the most classic Curve War. By analyzing Lybra itself, the execution method of Lybra War, and the participants, we will analyze the mechanism of Match Finance, the only publicly participating protocol in Lybra War, and conduct a deep simulation of the upcoming Lybra governance battle.

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If we build a war machine for Crypto, what can we gain?

TL;DR

• In order for an ecosystem to initiate a governance battle, it usually needs underlying protocols with sufficient liquidity to attract externalities. Layer 2 protocols accumulate governance power through yield boosting of governance tokens, creating more efficient governance channels. Third-party protocols provide externalities to the system by obtaining liquidity from underlying protocols. Bribing protocols provide a bribery channel to obtain short-term liquidity.

• Usually, after assigning incentive distribution rights to underlying protocols, they create ecological positions for layer 2 protocols, and the governance battle begins officially.

• Looking back at previous governance battles like Curve War and Pendle War, they have brought significant growth to the ecosystem.

• Lybra’s growth has hit a roadblock, so it chooses to initiate a governance battle as the next strategic move, creating an ecological position for a layer 2 protocol with a valuation of no less than $20m.

• Match Finance, as the only publicly participating protocol in Lybra War, solves the matching problem between eUSD and dLP for yield boosting. It also issues its own wrapped esLBR and mesLBR, which can be directly comparable to cvxCRV.

Curve War Historical Review: The First Governance Battle of Crypto

As stated in the Book of Ecclesiastes:

“What has been will be again, what has been done will be done again; there is nothing new under the sun.”

To foresee the future, one must look into the past. It is crucial to review the most classic Curve War in order to explore the core and essence of Defi War.

By taking advantage of the first-mover advantage, Curve has accumulated a significant amount of sustainable liquidity through the ve model on its platform. Under the ve model, governance power is distributed in the form of incentive allocation rights, thus giving them to the DAO. This means that the liquidity demand of third-party protocols directly translates into the demand for voting power represented by veCRV. For third-party protocols with long-term liquidity demand, such as FRAX and Terra, they choose to purchase CRV and lock it continuously for voting. For short-term liquidity demand, third-party protocols bribe veCRV lockers in the bribery protocol in the next voting round to increase the incentives in their liquidity pools, thereby attracting liquidity to their pools.

Similarly, in order to compete for control over liquidity on the Curve, Layer 2 protocols such as Convex, Yearn, and StakeDAO have issued their own wrapped veCRV, allowing for the separation of yield and governance properties. These Layer 2 protocols initially participated in Curve as the main players, immediately selling CRV upon receiving rewards.

Later, Convex entered the scene and further optimized the mechanism by using yield boosting for veCRV to attract CRV. Specifically, it does this in two ways: at the yield property level, veCRV is permanently locked into cvxCRV on Curve upon user deposit in order to maximize yield. In addition, there are CVX token rewards to maximize returns. Since veCRV cannot be withdrawn, the cvxCRV issued by Convex actually provides liquidity for veCRV lockers. At the governance property level, due to its excellent yield properties, Convex has accumulated a large amount of veCRV and has become the main allocator of liquidity on Curve. Third-party protocols in need of liquidity in Curve can purchase CVX tokens to penetrate Curve’s governance. They can also provide bribe funds to Convex to obtain short-term liquidity on Curve.

With excellent mechanism design, Convex’s total value locked (TVL) quickly reached the level of billions of dollars, and the accumulated amount of CRV also reached 48.80%.

(Source:https://www.defiwars.xyz/wars/curve). As a result, Convex War emerged, which will not be further elaborated here.

The Essence of the War Machine: Interpreting the Abstract Framework of DeFi War

If we break down the pattern of DeFi War, essentially it is the process of project teams, who have a vested interest, competing for the allocation rights of the incentive distribution of the underlying protocol after it is issued to the DAO by incentive allocation from the underlying protocol.

There are several participants in this process: the underlying protocol, the Layer 2 protocols, third-party protocols with business needs in the incentive distribution process of the underlying protocol (hereinafter referred to as third-party protocols), and tool protocols. Specifically:

• Underlying Protocol: The underlying protocol generally exists as a platform for attracting and storing liquidity.

• Layer 2 Protocol: The product logic is built on top of the underlying protocol. Usually, the underlying protocol imposes some constraints on token emissions, and the Layer 2 protocol presents itself as yield boosting to users.

• Third-Party Protocol: The business partners of the underlying protocol that establish liquidity pools on it.

• Bribery Protocol: Provides channels for bribery to help third-party protocols bribe. Examples include Votium, Hidden Hand, and other platforms.

What conditions must the underlying protocol meet to become the source of DeFi War?

In European history, the Balkan Peninsula is an unavoidable topic when studying European wars. Due to complex geopolitical and religious factors, from ancient times to the modern era, it has almost always been a breeding ground for large-scale wars, even earning the title of “European Powder Keg” from war historians. It is for this reason that the Balkan Peninsula has become an excellent reference for scholars studying the elements of war.

For underlying protocols to attract and maintain liquidity, they typically need to have excellent product design and a large number of staking pools on the platform. The ve model or its variant, the es model, is used to allocate incentives between pools, thus attracting sufficient externalities.

In the ve model, users obtain veTokens by locking Tokens, which are non-transferable. The longer the locking time, the more veTokens users receive. Based on the proportion of veTokens held, users receive a corresponding proportion of voting rights, which can determine the allocation of token emission incentives between business pools. In the es model, the rewards emitted by the protocol are esTokens with a lock-up period. Exiting during the lock-up period results in a deduction of the corresponding proportion of shares, thus incentivizing genuine user participation.

As the creator of the ve model, Curve has accumulated a significant amount of sustainable liquidity on the platform through CRV incentives under the ve model. To reduce the secondary selling pressure caused by token emission, Curve delegates the CRV emission rights between many liquidity pools to ve (es) token lockers, thereby increasing the value capture.

Compared to Curve, Pendle has a smaller scale, but as a yield trading platform for interest-bearing assets, its mechanism design of separating PT and YT gives it high potential in the current situation of increasing types of interest-bearing assets. Similarly, using the ve model, ve lockers vote on Pendle token emissions in different asset pools.

How to Join the Defi War

With the groundwork for war laid, how can participants get involved? For Layer 2 protocols, the mechanisms need to be designed in terms of both yield properties and governance properties.

• Yield Properties: Mainly focused on yield boosting for ve tokens, ve lockers filter out governance properties on Layer 2 protocols, preserving and maximizing the yield properties while obtaining liquidity for ve tokens.

• Governance Properties: Layer 2 protocols lock ve tokens for the longest possible time on the platform and automatically reinvest the locked tokens to obtain maximum voting power.

In order to achieve higher yields, users deposit the governance tokens of the underlying platforms into the Layer 2 platform. After helping users with yield boosting, the Layer 2 protocol continuously accumulates voting power in the underlying protocols. This creates a more efficient incentive channel under economies of scale, and captures bribery income as a result. Users capture the value of the Layer 2 protocol’s own tokens by governing the underlying protocols through governance penetration of the Layer 2 protocol.

The operation of a system requires external inputs, and in DeFi War, these external inputs typically fall into two categories. The third-party protocols are the asset issuers and liquidity providers, also known as LPs. Asset issuers need the liquidity of the underlying protocols to support the assets they issue, so they are willing to pay a price in exchange for liquidity, buying tokens of the protocols or providing bribes as external factors to enter the system and provide value support for the tokens of the underlying and second-layer protocols. Liquidity providers, on the other hand, need to stake their incentives in the liquidity pools they are in to earn more profits.

In order to attract the governance tokens in the market, the second-layer protocols compete to offer higher and more sustainable yields, better experiences (providing better liquidity and anchoring for their wrapped ve tokens), and more efficient incentive channels to receive bribing rewards.

After the Governance Power War, a more robust ecosystem

When the proportion of governance power held by second-layer protocols on the underlying protocols stabilizes, we can consider the governance power war on the underlying protocols to be mostly over. The entire system presents the following pattern.

Specifically, the inflation of tokens in the underlying protocols is under control, with strong price support, and the liquidity brought by incentives can be sustained. Second-layer protocols create more efficient incentive channels to capture value for their tokens. Liquidity providers can emit higher incentives to themselves through bribes or direct voting. At the same time, third-party protocols incentivize the provision of liquidity for their assets, which gives support to their own assets and provides external factors for the operation of the system. As a result, all participants in the entire ecosystem benefit from growth. Especially for the underlying and second-layer protocols, TVL (Total Value Locked) will experience significant growth.

Lybra War: Lybra’s path to breakthrough

Why Lybra?

Lybra, as the flagship project of LSDfi stablecoin, allows users to use LST to mint interest-bearing stablecoin eUSD on Lybra, generating higher yields compared to holding LST. As of October 12th, Lybra’s TVL has reached $234.7m (Source: https://defillama.com/protocol/lybra-finance).

However, Lybra itself is facing various issues, including high LBR inflation caused by maintaining high APR in the early stage, weak growth due to competition from rivals such as Gravita, Raft, Agilely for LST, and controversies in the community regarding the token handling during the V1 to V2 migration process. To create new growth opportunities, the Lybra team has also made preparations in the V2 update, namely by delegating the distribution rights of earnings from various LST pools to DAO to enhance the empowerment of esLBR, creating a Convex-like ecological position to yield boost esLBR and reduce LBR selling pressure. At the same time, a series of constraints are implemented to absorb LBR inflation. Once the proposals for the three LST collaterals are launched in late October, the Lybra War will begin.

esLBR: Lybra War Arsenal

In Lybra V2, the following mechanisms have been designed to absorb LBR inflation:

• dLP Mechanism: To obtain emissions of esLBR from the eUSD pool, LP providers must lock LBR/ETH dLP worth more than 2.5% of their total loan value. When it is less than 2.5%, other users can purchase these unclaimed esLBR emissions with a 40% discount using LBR and eUSD, and the LBR used to purchase esLBR will be destroyed.

• Punishment Token Destruction Mechanism: The unlocking time for esLBR has been extended from one month to three. If someone wants to redeem LBR in advance, they will be penalized and lose 25% to 90%, and other users can also purchase these confiscated assets with a 40% discount.

In terms of governance, esLBR determines the addition of LST collateral, the capacity of each vault corresponding to LST, and the allocation of esLBR emissions to each vault.

In terms of profitability, esLBR holders earn income through the circulation of eUSD and the minting of peUSD, including:

• A service fee of 1.5% of the annual circulation of eUSD, converted into USDC/peUSD and distributed to esLBR holders.

• eUSD/USDC > 1.005: Sell eUSD and distribute in USDC form.

• eUSD/USDC < 1.005: Convert eUSD to peUSD.

• An APY of 1.5% of the total amount of peUSD minted from non-rebase LST.

Similar to Curve, esLBR can receive different boost factors based on the lock-up duration. The calculation of boost introduces the esLBR lockable threshold as an intermediate indicator. The ratio of personal debt to total debt is mapped to the quantity of total esLBR. The individual locked esLBR quantity divided by the above indicator multiplied by the time coefficient yields the boost factor.

Lybra War Sandbox Scenario: How big will the war spoils be?

In Lybra V2, users must pledge LBR/ETH dLP worth at least 2.5% of their eUSD holdings to accept esLBR emissions. Therefore, the second-layer protocol needs to accumulate esLBR through yield boosting on esLBR and dLP. However, to obtain esLBR emissions, one must also possess dLP. Hence, the accumulation of dLP and the dynamic matching of dLP with eUSD are the core of Lybra War.

The allocation rights of Lybra War lie in the esLBR emissions between LSD pools, with the main potential demand coming from large-scale LST issuers and large eUSD minters. For large-scale LST issuers, the capacity of a single Lybra pool is relatively small, so the demand for bribery is not strong. Therefore, smaller LST issuers are more likely to accumulate esLBR and focus on increasing their own use cases through esLBR voting. Additionally, unlike Curve, which allocates liquidity, Lybra operates downstream from the asset issuers. Therefore, Lybra War will be more similar to Pendle War.

As of October 12th, Lybra’s TVL is $234.7m. According to Pendle War’s experience, the volume of layer 2 protocols usually ranges between 10% and 30% of the underlying protocol. Based on this logic, the Lybra ecosystem is expected to have 2-3 layer 2 protocols valued between $20m and $70m. Among these layer 2 protocols, the ultimate winner will have the highest proportion of esLBR and will benefit from economies of scale, making it the most efficient path to receive incentives from LST issuers. Additionally, the governance token of this protocol will have a stronger support due to its mapping to more Lybra governance rights. The position of the winner in the Lybra War can be compared to the position of Convex in the Curve War.

Becoming a powerhouse: Participation requirements for Lybra War

Based on the general model of DeFi Wars and the restrictions placed on esLBR by Lybra, the following constraints can be imposed on layer 2 protocols:

1. Filter out the governance attributes of esLBR, retain and enhance the income attributes, and provide exit liquidity.

2. For Lybra to counter LBR inflation, there is a requirement to hold LBR/ETH dLP in order to receive emissions. This allows for more efficient reception of emissions by matching dLP with eUSD.

Match Finance: The “vanguard” of Lybra War

Based on the current public information, Match Finance is the only participant in the Lybra War, and competition has not yet formed. In the protocol design of Match Finance, the main issues addressed are:

1. The problem of users not being able to receive esLBR incentives when minting eUSD without dLP.

2. The yield boosting and exit liquidity issues of esLBR.

For the first issue, Match allows for the deposit of dLP and LST. After the user deposits, the protocol dynamically matches dLP and LST to mint eUSD and earn the maximum esLBR emissions. Coin minting, redemption, and risk management operations are handled uniformly by the protocol to improve efficiency and save gas. The unified minting management also greatly reduces the risk of liquidation. In extreme scenarios, Match will liquidate internally first instead of Lybra, thus significantly reducing user liquidation losses. Users can choose to deposit LST or dLP to earn income, with 20% of the returns going to dLP providers for LST depositors, and separate calculations for those who deposit both.

For the second issue, similar to Convex, Match provides its own wrapped esLBR, mesLBR. Match converts all the received esLBR from minting eUSD at a 1:1 ratio into mesLBR, providing exit liquidity for users who want to earn yields on esLBR. Unlike Convex, Match permanently locks the esLBR owned by the protocol to maximize boost returns, making mesLBR comparable to cvxCRV. Additionally, after the start of Lybra War, Match will use the voting power accumulated by the protocol to gain bribes and additional incentives.

Looking Ahead – Finding Certainty in Uncertainty

In the current sluggish growth of Lybra, they made the decision to decentralize the allocation of incentives in the LST pool and create new opportunities through the Lybra War model. Lybra War is definitely going to happen, just the scale of it may vary, as Lybra is effectively downstream from the LST issuers, so the intensity of the later bribes remains uncertain. On the other hand, at this stage, there is only one participant, Match, in the entire Lybra War, and the fog of war is still present.

However, if you are a radical “war fanatic,” perhaps you can find a place for yourself in the opening act of this battle.

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