As per request here are some resources on protocol owned liquidity. Including
- relevant historical context,
- current examples live in production,
- as well as theory.
Protocol-Owned Liquidity (POL)
Protocol-Owned Liquidity, or POL, is a native derivative of Liquidity Mining and refers to the strategic acquisition and management of onchain liquidity by a protocol itself rather than relying solely on external liquidity providers. This approach offers protocols more direct control over a portion of their market’s liquidity, ensuring stability, reducing slippage, and generating revenue from trading fees.
Similar to Liquidity Mining, POL enables a protocol to kickstart trading activity or maintain a baseline level of liquidity without depending on external incentives to attract LPs. Unlike Liquidity Mining, where users are motivated to contribute liquidity in exchange for rewards, POL places the responsibility on the protocol itself to act as the LP, utilizing its own resources to ensure market liquidity.
As decentralized finance grows to autonomously managing hundreds of billions of
dollars of assets, capital efficiency has become an ever increasing component of protocol design. Recently, the Olympus protocol (also known as Ω) has utilized a novel liquidity provisioning mechanism that improves capital efficiency. This system introduces the concepts of a decentralized protocol renting, leasing, and buying liquidity when it is required for protocol functioning. In this note, we formalize the notions used by Ohm smart contracts in probabilistic and control theoretic terms. In particular, one can view the Ohm system as a stochastic non-linear control system. We show that the non-linear control mechanism is actually approximating the behavior of a simpler stochastic linear-quadratic regulator. We construct an associated Hamilton-Jacobi-Bellman equation for a mean-variance portfolio optimization problem, and show that the protocol can stabilize price by choosing appropriate portfolios. Our main result shows that the Ω protocol enjoys increasing ability to control price as the number of bond durations increases, but that this ability has diminishing marginal returns. Therefore, using this formalism, we show that with proper dynamic tuning and adjustments, the Ohm protocol can both improve capital efficiency and reduce risk to protocol users. We conclude by generalizing the Ohm controller model to a generic mechanism for optimizing risk and incentives in decentralized protocols, which includes other mechanisms like Tokemak and ve.
Rebalancer
The Rebalancer system is a tool for the execution of third-party capital allocation strategies for liquid assets that takes the current portfolio, a target portfolio, and exchange policy as inputs. The Rebalancer periodically computes assets to be sold or acquired to incrementally move toward the target portfolio. The assets are sold or acquired according to the user’s desired policy, which could include gradual dutch auction or direct trade on a whitelisted exchange. Users of the Rebalancer can set parameters to strike the desired balance between urgency and slippage minimization on a portfolio or per-asset basis.
The “Curve Wars” centers around the fight for liquidity in DeFi, primarily focused on Curve Finance’s platform. At its core, protocols compete for veCRV (vote-escrowed CRV tokens) to direct liquidity to their pools, which was largely won by Convex Finance who “controls more liquidity than any other DEX.” Convex created “a liquid version of veCRV” called cvxCRV that lets users “earn Curve platform fees without having to lock your tokens for 4 years.” This led to the “Convex Wars” where protocols now either buy CVX tokens or “bribe” CVX holders to vote for their pools, with platforms like REDACTED Cartel and Tokemak emerging as new players in this “fight for liquidity” that is "just getting started.
Aerodrome was originally a fork of solidly, the OG ve(3,3) token model.
The Olympus protocol is a decentralized financial (DeFi) system that supports OHM, a treasury backed, liquidity-enabling token on the Ethereum network. Olympus leverages the mechanisms of Protocol Owned Liquidity (POL), Range Bound Stability (RBS) and Cooler Loans to create a robust, flexible, censorship-resistant, and smart money.
The goal of Olympus is to build a programmatic policy-controlled money that:
- Preserves purchasing power via long-term price predictability.
- Maintains reliable liquidity across decentralized exchanges.
- Is used as a unit of account (e.g., by being paired against many other decentralized assets)
- Is utilized as a trusted asset (e.g., to collateralize other assets or deposited into protocols’ treasuries).
- Is fully decentralized and controlled by the community
- Is financially flexible, allowing users to borrow the backing against their money
Tokemak creates sustainable DeFi liquidity and capital efficient markets through a convenient decentralized market making protocol." It works through “token reactors” where “Liquidity Providers (LPs) deposit assets” and “Liquidity Directors (LDs) utilize TOKE to control liquidity direction.” The protocol aims to replace traditional solutions like “engaging centralized market makers” and “yield farming” with a more sustainable model where “TOKE is the native network token that is earned through participation in the protocol” and can be used for “directing liquidity and governance.” The system operates in “Cycles” where assets are deployed and withdrawn, creating what they call a “black hole effect” that “will pull in value” over time
The second (V2) expansion of FRAX focused on the idea of fractional-algorithmic stability by introducing the idea of the “Algorithmic Market Operations Controller” (AMO). An AMO module is an autonomous contract(s) that enacts arbitrary monetary policy so long as it does not change the FRAX price off its peg. This means that AMO controllers can perform open market operations algorithmically (as in the name), but they cannot arbitrarily mint FRAX out of thin air and break the peg. This keeps FRAX’s base layer stability mechanism pure and untouched, which has been the core of what makes our protocol special and inspired other smaller projects.
Proof-of-Liquidity (PoL) is a novel economic mechanism that uses network incentives to align the interests of ecosystem participants and bolster both application-layer and chain security.