Guardrails & LP Safeguards
Ensuring mitigation mechanisms are effective within predetermined market conditions
The asset guardrails are designed to achieve two objectives:
  1. 1.
    Make the LPs whole (QTY): Hold enough of the deployed assets in the system reserve
  2. 2.
    Maintain or increase the PCA (system reserve): Pull operational surpluses and system revenue into the PCA

The Asset Stack & Mitigation Waterfall

In this document mitigation for a relative change in the exchange rate of up to 100% between the two paired assets will be demonstrated.
If a certain threshold (as defined below) of net-withdrawals by the LPs of a particular Asset Jar is reached, mitigation mechanisms become necessary to make the LPs whole while simultaneously maintaining or increasing the PCA:

Make LPs whole

By drawing the asset in deficit from the asset reserve

Assets in Surplus/System Revenue

Draw system-wide asset surpluses and system revenue into the PCA. This will cover a large portion of the negative asset flow. The amount of surpluses that can be pulled into the reserve also depends on the net-withdrawal requests.

veOLIVE staked

OLIVE rewards that were allocated to the Asset Jars in deficit and, in the event of these being insufficient as well, veOLIVE that was staked to direct the asset is used to cure and pull into the PCA. There is a difference in how staked veOLIVE is used depending on which side of the pool the deficit occurred (Quote Jar vs Base Jar).
If the deficit is in a Quote Jar asset, veOLIVE from multiple Jars will be utilized to cure. In case the deficit is localized to a specific asset only the veOLIVE that was staked to that Asset Jar is utilized.

Protocol Controlled Assets

As the last step, should all the above steps turn out to be insufficient to make users whole, the system will resort to:
  • Using ETH and/or stablecoins from the reserve to make the LPs whole.
  • If not enough ETH or stablecoins are available then highly liquid reserve assets are sold for ETH or stablecoins on external venues.
This last step would be performed without regard to a net-negative effect on the reserve. As previously mentioned, this should not occur under circumstances within the range defined by the guardrails. It will be initiated by OliveDAO multisig and executed using best practices in order to mitigate front running and mitigate other manipulations.
Reaching this last stage is highly unlikely and we don't anticipate this stage will ever be reached.

Deployment Guardrails

General Definition

Deployment guardrails are restrictions imposed on the protocol limiting the maximum amount of assets deployed per individual Asset Jars and deployment cycle. The guardrails allow for managing market risk by ensuring that the mitigation mechanisms are effective within predetermined market conditions.

Defining and Setting Guardrail Parameters

In order to define and set appropriate parameters for the deployment guardrails the range of market conditions (exchange rates) under which the changes in the quantity of the deployed assets are to be mitigated has to be defined and potential parameters have to be identified.
Until more refined analytics for asset pairs will be implemented the goal is to set parameters conservatively such that relative changes in exchange rates of up to 100% can be covered by the reserve.
Below is an example of a fictitious asset paired with ETH and deployed to a 50:50 AMM pool under such conditions:
After a 100% price increase of ABC the status of the pool is as follows:
Examining the changes in QTY and associated notional values produces the following results:
The following can be observed in a scenario of a 100% (doubling or halving of the value of one of the assets) relative change in price:
  1. 1.
    A QTY deficit of 29.3% in ABC will have to be covered by assets from the ABC reserve to make the LPs whole.
  2. 2.
    A net withdrawal of over 70.7% of ABC would be required before mitigation mechanics would become necessary.
In conclusion, it can be inferred that the protocol will be able to make LPs whole after a relative change in the price of 100% as long as no more than 3x (as 29.3% of the initial qty will have to be covered) the reserve QTY held in the PCA of an asset is deployed.
It should also be noted that even stricter, gradually lowering guardrails will be implemented in the beginning stages of the protocol, which will provide additional mitigation against other potential issues.
Guardrails to be Implemented
In accordance with the above definitions, the guardrails will be controlled via parameters that can be altered by changing variables, which as the protocol matures will be adapted to match asset pair-specific risks, market conditions and other factors such as overall PCA value and DeFi-landscape (e.g. new protocols that can be leveraged).
For XXX / YYY pool, deploy only the liquidity that obeys the following rules (use most restrictive):
  1. 1.
    Deploy only V-multiple of the quantity of XXX available in the reserve. Deploy only Z-multiple of the quantity of YYY available in reserve
  2. 2.
    Deploy only M% of XXX contributed to the Asset Jars by LPs. Deploy only N% of YYY contributed to the Asset Jars by LPs (this guardrail which is not based on any above calculated percentages will be loosened over time, as its primary function is to ensure safety during the first deployments of liquidity)

OLIVE Backstop

In order to further safeguard the Jars and its LPs, veOLIVE staked to Asset Jars can be used to cure the deficit if the price moves outside of the aforementioned assumptions.

Asset Stack and Jars Health

The below graphic illustrates the asset stack at the beginning of the cycle, from which the Jars health (JH) and the health of Genesis Pools can be calculated using the quantities:
According to the 3x reserve multiplier, the JH is 1.33 at beginning of cycles and can increase and decrease depending on the market price of the asset.
Additionally, the total collateral (TC) of the Jars can be calculated using the notional values, which include the veOLIVE staked to the Jars:

Surplus/Deficit Balancing

At the end of every Season, the Asset Jars will rebalance.
In the case that there are more LP ABC than oABC, the surplus ABC is moved into the reserve. In the case there is less LP ABC than oABC, ABC from the reserve is moved out into the LP.
Using these mechanics, each Season OliveDAO is moving out the same amount of LP ABC as there are oABC deposited into the system (while adhering to the above guardrails).
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The Asset Stack & Mitigation Waterfall
Deployment Guardrails
OLIVE Backstop