July 14, 2023: Conic Finance 🤖🐻
Written Llama Party with BB8 and Wicket Warrick
We’ve had a bunch of wonderful guests join for our live video Llama Parties, but they’re terribly unrepresentative of the undoxxed, which include some of the best our wonderful DeFi space has to offer. The autists and builders who stay at home deploying smart contracts while the doxxed party it up at events.
One of the most requested teams has been Conic Finance. The team is nearing $150MM in their omnipools, including serving as the majority destination of $crvUSD, with no LP losses to date. We took some time to hear their thoughts.
crv.mktcap.eth
Hello! Tell me a bit about yourselves!
bb8
Beep boop 👋. I’m bb8 - a core contributor at Conic Finance. My origins come from the distant world of Jakku. I’ve been a long time lurker in the crypto space and have slowly transitioned to DeFi over the years. Now I spend the majority of my time growing the Curve ecosystem with Conic.
wicket warrick
Hi, thanks for having us.
I'm Wicket, from the forest moon of Endor.
I am one of the main developers behind Conic and have written a good chunk of the Conic Protocol.
I have been in the space for a while now, and have worked for a few other projects (that I cannot name for obvious reasons) before.
I had been looking into the single-sided liquidity issue for a while before starting Conic, especially in the context of Curve.
crv.mktcap.eth
I'm picking up that strong Star Wars vibe Conic has adopted :)
I've always wondered about that, is there a major "cone" reference in the Star Wars movies that I missed? Was that an intentional cultural element built in from the outset of the project, or was it more that everybody turned out to be a big Star Wars fan so you just adopted it after the fact?
wicket warrick
Haha, unless we also missed it, I don't believe there is any major cone reference in Star Wars.
We just all happened to be Star Wars fans and thought that friendly droids and Ewoks could be good characters to have behind Conic 🤖
bb8
We’re also big fans of the Curve Wars narrative and thought that a Star Wars theme (within the community) could be a good fit. Providing, in a sense, a fun allegory to the Curve Wars.
crv.mktcap.eth
Nice! Take us back to the beginning (the Episode IV, I guess in Star Wars parlance?) How did the early idea of Conic come together?
bb8
As Wicket mentioned, we were quite focused on the single-sided liquidity problem. While single-sided liquidity offers many benefits for users, it has also been a big pain point in DeFi. Solving this problem and creating a viable (and scalable) solution was one of the biggest factors that drove the early idea of Conic. Furthermore, we were also motivated to address the flaws of incentivized liquidity provision. Incentivized liquidity provision (i.e. liquidity mining) has been the “blue chip” token emission scheme in DeFi. While emitting governance tokens to LPs does work as a method of growing liquidity, it has some limitations. Most notably, liquidity mining is completely reliant on investor demand to earn said governance token rewards. Or in other words, it can only attract liquidity. Creating a sort of lagging inefficiency of liquidity on AMMs like Curve. In the early ideation of Conic we were motivated to address these problems by introducing direct liquidity provision (e.g. liquidity allocation votes) to Curve. A system that does not rely on attracting liquidity, but can actually directly control it.
crv.mktcap.eth
It is indeed a tough problem. I'm sure in building out Conic you took a deep look at several past protocols that attempted to solve this problem and ran into issues. What were your takeaways from studying them, and how did this affect the design of the protocol?
wicket warrick
We looked a lot into what was already out there and, in particular, how protocols got hacked.
Most hacks were more trivial than one might think. For example, Yearn DAI v1 vault had no proper protection for single-sided liquidity: https://rekt.news/yearn-rekt/
Some related hack (in the sense that it involves pricing LP tokens) was also the Warp finance one, which used a flawed method to price LP tokens: https://rekt.news/warp-finance-rekt/
Overall, after looking at what was around, we arrived at a conclusion that two things needed to happen to be able to achieve single-sided liquidity safely:
Being able to price an LP token accurately (which means that something like https://blog.chain.link/using-chainlink-oracles-to-securely-utilize-curve-lp-pools/ is not an option)
Making sure that the user depositing/withdrawing into/from the pool pays for the slippage
We initially put quite a lot of effort into 1. and came up with a novel way to price curve LP tokens: https://github.com/ConicFinance/POC_curve_lp_token_pricing
This method is well known for Uniswap V2 and other AMMs with "simpler" invariants, but we were, as far as we know, the first to make this possible for Curve.
We then realised that the second point was even more critical because it means that even if an attacker somehow manages to manipulate token pricing, he will not gain anything from it.
crv.mktcap.eth
There’s been nothing but stablecoin FUD and partial depegs since you launched, yet it seems you’ve weathered the storms without incident? What have you learned from operating the Omni pools through turbulence?
wicket warrick
Indeed, we had quite the stress test with the USDC depeg happening almost straight after our launch.
The general panic naturally caused many LPs to withdraw funds, but overall, the system has been behaving very well, and everything worked smoothly despite the extreme market conditions.
One of the major takeaways from this was the power of diversification. Despite the (temporary) 10% depeg of USDC and DAI, our USDC pool was doing much better, thanks to having exposure to other assets that did not depeg.
The other takeaway was the importance of preparing for worst-case scenarios. We have seen many protocols that, for example, optimistically hard-coded the price of USDC to 1 dollar and ran into issues during such events. This is the shortcut we made sure never to use, and so far, this has paid off.
bb8
As Wicket mentioned, stablecoin diversification is an effective method to hedge depeg risk. In addition to limiting exposure, stablecoin diversification is generally one of the best options due to its simplicity and low costs. Where other hedges (as in general) can be quite expensive to maintain. Through these recent depegs it was great to see the viability of Conic’s Omnipool model proven. Where Omnipool LPs realized limited downside exposure in comparison to users who were just holding a single stablecoin. We posted an overview of this following the USDC depeg that also touches on Conic’s depeg function. Which can provide Omnipool LPs with an additional hedge.
crv.mktcap.eth
OK, let's talk about $crvUSD -- Conic has vacuumed up nearly all the liquidity in short order!
You'd said that you had big ambitions for Conic to function as the stabilizer of last resort for $crvUSD, how do you feel this is panning out?
Wicket Warrick
We are very happy to see how well the crvUSD pool launch has gone and are looking forward to helping out the growth of crvUSD.
The idea of acting as a stabilizer was more of a community initiative. We have not publicly announced anything along these lines.
However, as you of course know, we are talking to the Curve team and the next step will be to add crvUSD Curve pools to other omnipools. We do hope that it will help the liquidity provisioning on the other side of crvUSD, and that it will in turn help with peg-keeping.
We are also considering how some future version of Conic could potentially help the general stability of crvUSD but this is still very much at the brainstorming stage.
crv.mktcap.eth
When you first opened the Conic omnipool for $crvUSD, did you have any idea that $crvUSD would become as popular as it did? You've become the top destination for the majority of $crvUSD minters -- so much so that the lack of crvUSD within the USDT/USDC omnipools is causing a mismatch leading to higher borrow rates
bb8
When we launched the crvUSD Omnipool I think we all expected to get a reasonable amount of deposits. Conic is well known in the Curve community and crvUSD has been a major point of discussion within our community for quite sometime. However, it’d be silly to say that we expected the amount of growth that we have seen. I for one expected crvUSD minters to be a bit more hesitant considering its novelty and costs. But contrary to that we’ve seen the crvUSD supply continue to grow alongside Conic’s Omnipool. In hindsight I think the rapid growth of the crvUSD Omnipool makes a lot of sense. Conic Omnipools have a specifically strong product market fit for developing markets. While developing markets can oftentimes offer some of the best yields, they also generally require more active maintenance for LPs. Combined with Conic’s governance mechanisms, the crvUSD Omnipool grants LPs with easy access to the growing crvUSD market. Where through a single deposit any LP can get regularly rebalanced and diversified exposure to the best crvUSD pools and yields.
crv.mktcap.eth
What protocols do you see as your fiercest competition at the moment, and how do you plan to distinguish yourself from them?
bb8
At the moment, at least in terms of protocols that are live on mainnet, I wouldn’t say there’s much that is fierce. However, there is one project that is positioning themselves as a Conic competitor, Torus. I don’t think they’ve shared any code, but it appears to me that it will be a fork of Conic. They claim that they’ll take Conic Omnipools to the next level by supporting ETH Omnipools and a bribe market right from launch. Conic ETH Omnipool(s) will be live quite shortly from now so I don’t see how theirs will provide much new. Regarding bribes, I think (assuming they are copying Conic’s governance system) it’s quite risky to support this right from launch. Supporting and pushing a free market bribe system on immature liquidity that is governed via liquidity allocation votes could allow external parties to easily (and relatively cheaply) take control of the entire pool. As I’m sure you know, balancing value propositions between LPs and token holders is a delicate matter that needs to be considered extensively. With the Conic Omnipool and governance model bribes can certainly drive value, but there needs to be a certain level of maturity before this can happen properly.
crv.mktcap.eth
One longtime reader has this interesting question...
“I couldn’t help but think about the ‘aggressive’ potential of conic in that you could do something like:
1. Gauge weight vote some pool for a lot of CRV rewards, and gauge weight vote CNC liquidity away from that pool so you collect all the CRV rewards
2. Vote CNC liquidity into some competitor stable coin pool so they have some illusion of a lot of liquidity and then at some point you deem it valuable, vote it all away from them
Are these realistic things? Is the true benefit of having vlCNC then just to protect against them (until they enable some fees)
And then on the LP side I guess you’re really just hoping to mitigate risk sort of a stable coin index fund if I’m understanding that correctly
bb8
I think with the current scale that Conic has achieved these ideas are not the most realistic. I haven’t seen anything like this happen yet. So no, I wouldn’t say this is the true benefit of vlCNC. Rather, the benefit is being able to easily (and without occurring gas costs) direct liquidity (at a significant multiple compared to your principle CNC value) across Curve in whatever manner suits your needs bests. Furthermore, while LAVs are somewhat aligned with Curve gauge weight updates, they occur bi-weekly (rather than weekly). So in reality, these strategies would have a rather limited impact. That is considering the current state of Conic governance with 5 day voting windows, etc. However, both scenarios could become more valid as Conic continues to scale or if governance evolves in a way where weights can be updated more rapidly. In terms of your point regarding the LP side I think it’s really worth noting the LP boosts (up to 10x vlCNC voting power) as it gives LPs a lot of additional power. I do quite enjoy these ideas though. I think there hasn’t been enough discussion on vlCNC utility and the nature of direct liquidity provision. It’s a new concept for DeFi that we think, especially when combined with traditional incentivized liquidity provision (e.g. Curve gauges), can bring a lot of new dynamics to the market and ultimately make liquidity more efficient.
crv.mktcap.eth
What can you say about the release of the new Ethereum omnipool? Does this mean Conic is joining the LSD-Fi Wars?
Yes, Omnipool liquidity provision is coming to the LSD-Fi wars! The launch of the ETH Omnipool is a big step forward for Conic as it marks the beginning of Omnipools for volatile assets. Previously, only stable coins had been supported. In building the ETH Omnipool, we enabled Conic Omnipools to support any asset, not just stable coins. This means that we can now support different ETH Omnipools for non ETH-pegged Curve pools or more exotic pairs. In regard to the current ETH Omnipool that we just launched, it will be exciting to see it scale overtime. In prioritizing security, Omnipools are launched with a limited or a more conservative list of whitelisted Curve pools. As the ETH Omnipool matures (and more Curve pools are whitelisted) we expect LPs to realize greater diversification and vlCNC holders to realized more power over liquidity in the broader LSD-Fi ecosystem.
crv.mktcap.eth
Anything we missed out on that you'd like to mention before we bounce?
Think we’re all good. Thanks again for organizing this. It was a real pleasure!
To ask them more, find them at…