Having entered the final quarter of 2022, Hedera DeFi has begun a new chapter characterized by protocol advancements that leverage the native services of the network. A highly-anticipated, long-awaited feature for all Hedera users and enthusiasts is HBAR native staking. Herein, we will explain how SaucerSwap will allow users to participate in DeFi without missing out on native staking rewards or worrying about conventional AMM-related risks such as impermanent loss.
We are of course talking about single-sided staking. In this model, yield is derived from three distinct sources: swap fees across all SaucerSwap liquidity pools, yield farm emissions, and HBAR native staking rewards. This latter reward mechanism involves dynamically staking all HBAR in the WHBAR contract to a permissioned node. Moreover, users can compound their earnings by staking xSAUCE (previously referred to as SAUCEr) in Community Pools to earn HTS tokens from projects incubated by HeadStarter.
Users earn yield by providing liquidity for one type of asset, in contrast to liquidity providing on AMMs, which requires a pair of assets. In the case of SaucerSwap, users stake SAUCE in the Infinity Pool and receive a receipt token called xSAUCE. The ratio of xSAUCE to SAUCE begins at 1 and increases in perpetuity, as the Infinity Pool automatically compounds via SAUCE buybacks and farm emissions.
How is yield generated?
The 0.05% protocol fee incurred on all token swaps currently accumulates in an account called feeTo via Uniswap v2 AMM smart contracts. This revenue goes to the DAO treasury at present, but will be reallocated to SAUCE buybacks in Mothership.sol (aka the Infinity Pool) once single-sided staking is implemented. The Brew contract is authorized to withdraw LP tokens from feeTo and burn them to itself, after which point it swaps the underlying assets (token 0 and token 1) for WHBAR and SAUCE using authorized user specified bridges, which are token addresses that facilitate the conversion to SAUCE. Once the bridge swaps are complete, the contract pulls its allocation of HBAR native staking rewards from a payment splitter. These HBAR are wrapped and added to the Brew contract’s WHBAR balance. The final swap to take place is a conversion of WHBAR to SAUCE, resulting in SAUCE being the only token in the Brew contract. This SAUCE, along with <= 10% of SAUCE token emissions from the farm contract, is sent to the Infinity Pool.
Since the balance of SAUCE in the Infinity Pool is increasing in perpetuity, so too is the ratio of SAUCE to xSAUCE. Conversely, the relative value of xSAUCE to SAUCE is increasing. Consider the following example:
- User A is the first to stake SAUCE in the Infinity Pool. They deposit 10 SAUCE and receive 10 xSAUCE, as the initial ratio is 1:1.
- Next, 10 SAUCE derived from swap fees, HBAR native staking rewards, and farm emissions is sent to the Infinity Pool. Since there is 20 SAUCE in the contract and 10 xSAUCE is the total supply, the ratio is now 1 xSAUCE : 2 SAUCE. User A can redeem their 10 xSAUCE for the 20 SAUCE at any time, based on this ratio.
- Say User A does not redeem their xSAUCE. User B deposits 10 SAUCE in the pool and, since the ratio is 1:2, they get half of their deposit as xSAUCE, which would be 5 xSAUCE. Now the Infinity Pool contains 30 SAUCE and 15 xSAUCE, hence the ratio is maintained.
- The ratio only changes as SAUCE are sent to the Infinity Pool and distributed equally among all xSAUCE holders, because each xSAUCE becomes worth more SAUCE.
APR estimate
The single-sided staking APR formula is as follows:
As of writing, there are ~251M SAUCE in circulation, ~125M (50%) of which is in liquidity pools and ~43M (17%) in protocol- and team-owned wallets. For the purposes of this exercise, assume the remaining ~82M (33%), currently in anonymous wallets, will be staked in the Infinity Pool. The daocut and farm weighting coefficients are set to 0.2 and 0.03, respectively. Finally, the 5-day averaged trading volume is ~$400k and there is ~132M HBAR in the WHBAR contract. The HBAR native staking APR is currently unknown, so a range of single-sided staking estimates will be calculated.
The low-end estimate is 17.60% and the high-end estimate is 37.73%. For comparison, xBOO and xSUSHI — SpookySwap and SushiSwap single-sided staking — yield 3.58% and 4.98%, respectively. Another interesting takeaway is the potential for SAUCE to become a buyback deflationary token, meaning the protocol could take it out of circulation (into the Infinity Pool) at a faster rate than it is being minted, or more specifically, distributed to users as LP farm rewards. In the above example, 105,846 SAUCE is sent to the Infinity Pool and 415,112 SAUCE is emitted from the farm contract each day. Inflation could therefore be reduced by 25% from day one. This deflationary effect will become more pronounced as HBAR liquidity and trading volume grow.
Summary
SaucerSwap’s single-sided staking model is unique for its triple reward structure and interplay with Community Pools. Not only does the Infinity Pool allow for impermanent loss-free liquidity provisioning, but it also enables participation in HBAR native staking and Community Pools. In terms of a release date, the SaucerSwap team is targeting Q4. As of right now, the single-sided staking contracts are being audited by Hacken and the front-end is in its final stages of development.
SaucerSwap links: https://barracuda.io/saucerswap
