Author: Go2Mars Research

Gold and wealth are the main sources of war.

------Tacitus

On October 13, Lybra officially announced the launch of Lybra War, positioning it as the next strategic focus.

Looking back at the previous Curve War and Pendle War, we can see that the entire ecosystem experienced significant growth under the Defi War model. This article will analyze the basic model of Defi War in conjunction with the classic Curve War. It will provide a top-down perspective on Lybra itself, the execution of Lybra War, and the participants, as well as an analysis of Match Finance, the only publicly participating protocol in Lybra War, and conduct an in-depth simulation of the upcoming governance war in Lybra.

What can we gain from building a Crypto war machine?

TL;DR

• For an ecosystem to initiate a governance war, it typically needs a sufficiently liquid underlying protocol to attract externalities; layer two protocols accumulate governance rights through yield boosting of governance tokens, creating more efficient governance channels; third-party protocols provide benefits to obtain liquidity from the underlying protocol to support system operations; bribery protocols offer channels for acquiring short-term liquidity;

• Usually, once the underlying protocol delegates the incentive distribution rights, it creates an ecological niche for layer two protocols, and the governance war officially begins;

• Previous governance wars, such as Curve War and Pendle War, have brought significant growth to the ecosystem.

• Lybra's growth has hit a bottleneck, prompting it to initiate a governance war as the next strategic point. This aims to create a valuation of no less than $20m for the layer two protocol niche.

• Match Finance, as the only protocol openly entering Lybra War, addresses the matching issue between eUSD and dLP for yield boosting; it also issues its own wrapped esLBR and mesLBR, which can be directly compared to cvxCRV.

Historical Review of Curve War: The First Governance War in 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 see the past is to foresee the future. It is essential to revisit the classic Curve War to uncover the core and essence of Defi War.

Curve, leveraging its first-mover advantage, accumulated a substantial amount of sustainable liquidity on its platform through the ve model, and delegated the incentive distribution rights under the ve model to the DAO. This way, the demand for liquidity from third-party protocols directly translates into a demand for voting rights represented by veCRV. For third-party protocols with long-term liquidity needs, such as FRAX and Terra, they choose to purchase CRV and lock it up to continuously vote for themselves; for short-term liquidity needs, third-party protocols bribe veCRV lockers in the next voting round to increase incentives in their liquidity pools, thereby guiding liquidity into their pools.

Correspondingly, to compete for control over liquidity on Curve, layer two protocols such as Convex, Yearn, and StakeDAO issued their own wrapped veCRV, achieving a separation of yield and governance attributes. Each layer two protocol engaged in fierce competition to attract CRV from the market, with Yearn Finance and Stake DAO initially being the main participants in Curve, immediately selling CRV after obtaining CRV rewards.

Later, Convex entered the scene, further optimizing the mechanism by attracting CRV through yield boosting of veCRV. Specifically, it operates in two aspects: on the yield attribute level, when users deposit, veCRV is permanently locked on Curve as cvxCRV to maximize returns, in addition to CVX token rewards to maximize yield, and since veCRV cannot be exited, the cvxCRV issued by Convex effectively provides exit liquidity for veCRV lockers; on the governance attribute level, due to its excellent yield attributes, Convex accumulated a large amount of veCRV, effectively becoming the main distributor of liquidity on Curve. Third-party protocols needing liquidity in Curve can purchase CVX tokens to penetrate governance in Curve, and will also provide bribery funds to Convex to obtain short-term liquidity on Curve.

Thanks to its excellent mechanism design, Convex's TVL quickly reached the billion-dollar level, and the accumulation of CRV reached 48.80%.

(Source: https://www.defiwars.xyz/wars/curve), the Convex War followed, which will not be elaborated here.

The Essence of the War Machine: An Abstract Framework Interpretation of Defi War

If we break down the model of Defi War, then its essence is the process in which the underlying protocol delegates the incentive distribution rights of platform operations to the DAO, and the relevant parties compete for that distribution right.

In this process, there are several participants: the underlying protocol, layer two protocols, third-party protocols that have business needs in the distribution process of the underlying protocol (hereinafter referred to as third-party protocols), and tool protocols. Specifically:

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

• Layer Two Protocol: Builds product logic on top of the underlying protocol, which usually imposes some constraints to control token emissions, while layer two protocols present yield boosting to users.

• Third-Party Protocol: Business partners of the underlying protocol that open liquidity pools.

• Bribery Protocol: Provides bribery channels to assist third-party protocols in bribing, such as Votium, Hidden Hand, etc.

Conditions Required for Underlying Protocols to Become the Source of Defi War

In European history, the Balkans is an unavoidable topic in the study of European wars. Thanks to the complex geopolitical and religious factors, it has almost always been the source of major wars from ancient to modern times, even earning the title of "the powder keg of Europe" from war historians. For this reason, the Balkans has become an excellent reference for scholars studying the elements of war.

To attract and maintain liquidity, underlying protocols typically need to have excellent product design, a significant number of staking pools on the platform, and use the ve model or its variant, the es model, to distribute incentives among the pools, thereby attracting sufficient externalities.

In the ve model, users obtain veTokens by locking Tokens, which are non-transferable. The longer the locking period, the more veTokens are obtained. Based on the proportion of veTokens held, users gain corresponding voting rights, which can determine the distribution of token emission incentives among business pools. In the es model, the rewards distributed by the protocol are esTokens with an unlocking period; exiting during the unlocking period incurs a corresponding proportion of the share, thus incentivizing real user participation.

As the pioneer of the ve model, Curve accumulated a large amount of sustainable liquidity on its platform through CRV incentives under the ve model. To reduce the secondary selling pressure caused by token emissions, Curve delegated the incentive rights for CRV emissions among its many liquidity pools to ve(es) token lockers to increase their value capture.

Pendle, while smaller than Curve, has high potential as a yield trading platform for income-generating assets, thanks to its mechanism design of separating PT and YT, which allows it to continuously increase the variety of income-generating assets. It also adopts the ve model, with ve lockers voting on Pendle token emissions across different asset pools.

How to Join Defi War

With the soil for war established, how do participants enter the fray? For layer two protocols, mechanisms need to be designed in both yield attributes and governance attributes.

• Yield Attributes: Primarily focused on yield boosting for ve tokens, ve lockers filter out governance attributes on layer two protocols, maximizing and enhancing yield attributes while obtaining exit liquidity for ve tokens.

• Governance Attributes: Layer two protocols lock the ve tokens with the longest duration on the platform and automatically reinvest to obtain the maximum voting rights.

Users deposit the governance tokens of the underlying platform into the layer two platform for higher yields. After assisting users with yield boosting, layer two protocols continuously accumulate voting rights from the underlying protocol. This creates a more efficient incentive channel under scale effects, capturing bribery income. Users penetrate the governance of the underlying protocol through the governance of the layer two protocol, completing the value capture of the layer two protocol's own tokens.

The operation of a system requires external inputs, and in DeFi War, these external inputs typically fall into two categories: third-party protocols, which are asset issuers, and liquidity providers (LPs). Asset issuers need the liquidity of the underlying protocol to support the assets they issue, thus they are willing to pay a price to obtain liquidity, purchasing the tokens of protocols in the system or providing bribes as externalities to enter the system, thereby providing value support for the tokens of both the underlying and layer two protocols. Liquidity providers need to vote incentives to their own liquidity pools to gain more returns.

To attract governance tokens from the market, layer two protocols will 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 bribery income.

After the Governance War, a More Robust Ecosystem

Once the proportion of governance rights held by layer two protocols over the underlying protocol stabilizes, we can consider the governance war on the underlying protocol to be essentially over. The entire system presents the following pattern.

Specifically, in terms of indicators, the token inflation of the underlying protocol is controlled, price support is strong, and the liquidity brought by incentives is more sustainable; layer two protocols create more efficient incentive channels to complete value capture for their tokens; liquidity providers can bribe or vote directly to obtain higher incentives; at the same time, third-party protocols incentivize their assets to provide liquidity, supporting their own assets and providing externalities for the operation of the system. Thus, all participants in the entire ecosystem achieve growth. Especially for the underlying and layer two protocols, TVL will experience intuitive growth.

Lybra War: Lybra's Path to Breakthrough

Why Lybra?

As the leading project of LSDfi stablecoins, Lybra allows users to mint yield-bearing stablecoin eUSD using LST to obtain higher returns compared to holding LST. As of October 12, Lybra's TVL has reached $234.7m (Source: https://defillama.com/protocol/lybra-finance).

However, Lybra itself is also facing numerous issues, including high inflation of LBR caused by maintaining high APR in the early stages, competition for LST from rivals in the same space such as Gravita, Raft, and Agilely leading to sluggish growth, and disputes within the community regarding the handling of tokens that were not successfully migrated in the transition from V1 to V2. To create new growth points, the Lybra team has also made early arrangements in the V2 update, namely by delegating the distribution rights of rewards from various LST pools to the DAO to enhance esLBR empowerment, creating a Convex-like ecological niche for yield boosting of esLBR to reduce LBR selling pressure. Meanwhile, a series of constraints have been established to absorb LBR inflation. Once the proposal for three LST collateral types to go live on Lybra is released in late October, Lybra War will commence.

esLBR: The Arsenal of Lybra War

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

• dLP Mechanism: To receive esLBR emissions 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 at a 40% discount using LBR and eUSD. The LBR used to purchase esLBR will be burned.

• Penalty Token Destruction Mechanism: The unlocking time for esLBR is extended from one month to three; if one wants to exchange LBR early, 25% to 90% will be confiscated as a penalty, and other users can also purchase this confiscated asset at a 40% discount.

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

In terms of yield rights, 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.

• If eUSD/USDC > 1.005, sell eUSD to distribute in USDC.

• If eUSD/USDC < 1.005, convert eUSD to peUSD.

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

Similar to Curve, esLBR can receive different boost multiples based on the locking time. For the calculation of Boost, esLBR lockable threshold is proposed as an intermediate indicator, mapping the proportion of personal debt to total debt to the total amount of esLBR, and then dividing the personal locked esLBR amount by the above indicator multiplied by a time coefficient to obtain the Boost multiple.

Lybra War Simulation: How Large Will the Fruits of War Be?

In Lybra V2, users must stake a minimum of 2.5% of their eUSD value in LBR/ETH dLP to receive esLBR emissions. Therefore, layer two protocols need to accumulate esLBR through yield boosting of esLBR and dLP, but to obtain esLBR emissions, they must hold dLP. Thus, the accumulation of dLP and the dynamic matching of dLP with eUSD are the core of Lybra War.

The distribution rights of Lybra War lie in the esLBR emissions among the LSD pools, with potential demand primarily from LST asset issuers and large eUSD minters. For large LST issuers, the capacity of a single pool in Lybra is relatively small, and the demand for bribery is not strong. Therefore, smaller LST issuers accumulating esLBR will pay more attention to esLBR voting rights to increase their use cases. Additionally, unlike Curve, where liquidity is allocated, Lybra is downstream of asset issuers. Therefore, Lybra War will be more similar to Pendle War.

As of October 12, Lybra's TVL is $234.7m. Based on Pendle War's experience, the scale of layer two protocols is generally between 10%-30% of the underlying protocol. Based on this logic, the Lybra ecosystem is likely to see 2-3 layer two protocols with valuations between $20m and $70m. Among these layer two protocols, the eventual winner will hold the largest proportion of esLBR, and under the scale effect, there will be the most efficient incentive path in this protocol, thus receiving more incentives from LST issuers. Furthermore, the governance token of this protocol can map to more Lybra governance rights, providing strong support for the token price. The position of the winner in the Lybra War can be compared to that of Convex in the Curve War.

The Threshold for Becoming a Power: Requirements for Participants in Lybra War

Based on the general model of DeFi War and Lybra's restrictions on esLBR, the following constraints can be proposed for layer two protocols:

1. Filter out the governance attributes of esLBR, retaining and enhancing yield attributes, while providing exit liquidity.

2. For the LBR inflation that Lybra aims to counter, the requirement to hold LBR/ETH dLP for obtaining emissions must be met, matching dLP with eUSD to receive emissions more efficiently.

Match Finance: The First "New Force" in Lybra War

Based on the current public information, Match Finance is the only participant entering Lybra War, and no competitive landscape has formed yet. In the design of Match Finance's protocol, two main issues are addressed:

1. The issue of users not being able to obtain esLBR incentives without dLP when minting eUSD;

2. The yield boosting of esLBR and the issue of exit liquidity;

For the first issue, Match opens dLP and LST deposits, and after users deposit, the protocol dynamically matches dLP and LST to mint eUSD to earn the maximum esLBR emissions. Minting, redeeming, and risk management operations are handled uniformly by the protocol to improve efficiency and save gas, and unified minting management significantly reduces the risk of liquidation. In extreme scenarios, Match will liquidate internally first rather than Lybra, greatly reducing user liquidation losses. Users can choose to deposit LST or dLP to earn returns, with 20% of the earnings from LST depositors going to dLP providers. If both are deposited simultaneously, earnings are calculated separately.

For the second issue, similar to Convex, Match provides its own wrapped esLBR, mesLBR. Match will convert all esLBR received from minted eUSD at a 1:1 ratio into mesLBR, providing exit liquidity for users wanting to earn staking rewards from esLBR. Unlike others, Match permanently locks the esLBR held by the protocol to maximize boost earnings, allowing mesLBR to be directly compared to cvxCRV. Furthermore, after the Lybra War begins, Match will use the voting rights accumulated by the protocol to obtain bribes and additional incentives.

Outlook------Finding Certainty in Uncertainty

In the current situation of sluggish growth for Lybra, they have decided to delegate the incentive distribution rights of LST pools and create new opportunities through the model of Lybra War. The Lybra War will undoubtedly occur, though its scale may vary. Since Lybra is actually downstream of LST issuers, the strength of bribery in the later stages remains an uncertain factor. On the other hand, currently, there is only one participant, Match, and the entire Lybra War is in its very early stages, with the fog of war still present.

However, if you are an aggressive "war fanatic," perhaps there will be a place for you in the opening act of this battle.

If you are ready, please contact us.

Reference

About Lybra War

1. https://docs.lybra.finance/lybra-finance-docs-v2/overview/lbr-and-eslbr/token-utilities

2. https://medium.com/@Lybra_Finance/welcome-to-the-lybra-wars-3c341fba80fa

3. https://medium.com/@Lybra_Finance/how-the-lybra-wars-will-drive-increased-value-for-governance-token-holders-the-lybra-ecosystem-b463f9a926e9