PhIP-01: Liquidity Bootstrapping with Ondo Market Making

Title: PhIP-01: Liquidity Bootstrapping with Ondo Market Making

Author(s): Dan Mueller, Davoice321

Related Discussions: Liquidity Strategies Discussion

Submission Date: 12/31/2021


This Phonon Improvement Proposal 01 (PhIP-01) is a formal proposal to move forward with the Ondo option for bootstrapping and boosting liquidity for the PHONON token on DEXs (i.e., SushiSwap). The proposal will be ratified by the PHONON token holders via a Snapshot vote.

This proposal is being drafted after a favorable polling of this strategy from the forum post titled, RFC: PhIP-01: Initial Liquidity Bootstrapping Strategy.

This proposal calls for $4 million in PHONON tokens (~333 million PHONON, sourced from the DAO treasury) to be used to bootstrap $8 million worth of liquidity in two separate pools:. (PHONON-FRAX and PHONON-ETH). Each pool will initially be funded with $2m in PHONON (~166 million PHONON/pool). The DAO would work with Ondo Finance to fund the other half of each pool: i.e., $2 million in FRAX (funded by FRAX finance) and $2 million in ETH (funded by Ondo via its partners).

The goal of this effort is to increase PHONON liquidity to approximately $8 million, which will facilitate larger trades with moderate slippage (an estimated 1% slippage on a $100,000 trade).

Ondo was selected as a liquidity provider partner for a variety of reasons which will be discussed throughout this proposal. Key benefits to the nascent PHONON ecosystem of this liquidity bootstrapping strategy are: :

  • Immediate access to a larger amount of PHONON liquidity as opposed to waiting for liquidity providers to join in.
  • A more cost-effective option versus initiating a liquidity mining program, which would require paying PHONON incentives to LPs
  • Ability to bootstrap multiple pools (PHONON-FRAX, PHONON-ETH) which creates arbitrage opportunities, which would generate additional fees for the DAO.
  • Exposure of the FRAX and Ondo communities to Ondo to PHONON.
  • Earn FXS rewards as a result of incentives provided by FRAX finance to organizations using FRAX to bootstrap liquidity
  • Earn yield from trading fees if net LP yield exceeds the interest rate charged to PHONON for utilizing ETH and FRAX (7% APY, ETH Interest; 5% APY, FRAX interest)


Bootstrapping PHONON liquidity on DEXs is an essential requirement for the DAO’s long-term success and will have a number of benefits, including:

  • Encourage GRID token holders to swap for PHONON
  • Provide the DAO with initial financial resources to begin implementing its mission (and enable the DAO to potentially begin diversifying its Treasury); via a potential increase in PHONON price, accumulating liquidity rewards (see below)
  • Enable individuals who seek to gain governance rights and engage with the DAO to easily acquire tokens


We are proposing the DAO allocate $4 million worth of PHONON tokens from the treasury (~333 million PHONON) to bootstrap two liquidity pools on SushiSwap with the help of Ondo Finance. This will create $8m of total liquidity (after ETH and FRAX are added to each 50/50 pool).

The first liquidity pool will be the PHONON-FRAX pair where $2m in PHONON will come from our DAO treasury and $2m in FRAX from Frax Finance.

The second pool would be for the PHONON-ETH pair. In this case the Phonon DAO will again provide $2m in PHONON to the Ondo variable vault. Ondo is then partnered with institutional investors who will provide the $2m in ETH for the value. One important note to mention is that the institutions may decide not to fund the ETH side of the pair due to our project having low liquidity elsewhere. Ondo is in talks with them to run a risk analysis and at the time of this post we have not heard back.

However, if they decide not to provide liquidity Ondo will open up the fixed yield vault to the community, giving anyone the ability to provide ETH to the vault for the fixed yield of 7%.

How it works with FRAX

  • The Ondo + FRAX LaaS program lets DAOs unlock liquidity in their native governance token without needing to raise capital or implement liquidity mining incentives The service involves Phonon DAO providing its governance token into an Ondo variable tranche, while Frax Finance invests FRAX into the corresponding fixed tranche. The DAO pays a fixed yield (5% APY) to Frax. Phonon receives all excess yield that accrues to the underlying liquidity pool (i.e., any fees that exceed the 5% interest rate, ~$25,000 per quarter)


  • Frax Finance will provide FRAX then invest that into an Ondo fixed tranche pool. Phonon DAO will invest PHONON in the variable tranche pool from its DAO. The Ondo Vault will then provide this liquidity together to create a FRAX-PHONON liquidity pool on Sushiswap. After a fixed duration, Ondo will withdraw this liquidity then pay back Frax its FRAX plus interest. . Finally, PHONON will receive the remaining assets paid out in PHONON.

  • If the LP yield more than covers the fixed yield for FRAX then PHONON earns the excess fees. . Note:

Duration and Fees

  • We will start with four vaults with the following durations: 90 days, 83 days, 76 days, 69 days.

  • Frax will accept a fixed yield of 5% APR for each of these vaults (1.23%, 1.14%, 1.04%, and 0.95% for the 90d, 83d, 76d, and 69d durations, respectively).

  • The purpose of launching with vaults of different durations is to stagger the redemption of these vaults. At redemption, the liquidity from one vault is removed, then the Ondo smart contracts will either buy PHONON with FRAX or sell PHONON for FRAX in order to obtain exactly the amount of FRAX owed to the fixed tranche investors. The benefit of having vaults of different durations is to minimize the market impact on the price of PHONON at redemption, i.e., no single vault will represent too large a percentage of the total liquidity in the pool.

FXS Incentives

Frax Finance has also agreed to provide 500 FXS per week per $1m of liquidity to protocols/organizations utilizing its Liquidity as a Service product via OnDO. The DAO would earn 1,000 FXS a week (current value $40,000). One week of rewards would cover the entire 3 months of interest we would owe on $2m at 5% APY ($25,000). These rewards only apply to the $2m in the PHONON-FRAX pool and do not pertain to the PHONON-ETH pool. However, FXS rewards would also exceed fees paid for ETH liquidity…


The benefits of using Ondo to facilitate our liquidity are:

  1. A more capital efficient liquidity building strategy: . In general, liquidity mining programs can be costly, given that token rewards must be provided to liquidity miners. The OnDo strategy is more capital efficient given that PHONON (minus impermanent loss and fees) would be re-deposited into the DAO Treasury at the conclusion of the program. . For example, a liquidity mining program might cost the DAO 125 million PHONON ($1,575,000 at today’s PHONON price). In contrast the liquidity bootstrapping effort would cost the DAO $60,000 in interest expenses. Impermanent loss due to a rise/fall in PHONON”s price are difficult to estimate, but may not exceed what PHONON would pay to LPs to provide liquidity via an incentive program. There is also the option to extend the program to generate additional fees and reduce/moderate impermanent loss. The OnDo strategy allows the DAO to put idle Treasury funds to work to create a more robust and efficient market for the PHONON token, while avoiding the problem of mercenary farmers. That is, individuals who provide liquidity for a limited amount of time, put constant sell pressure on the reward token and remove their liquidity once the program ends.

  2. exposure to the Ondo and Frax communities.

  3. FXS rewards (1,000 FXS per week (~$38,000/week)

  4. We receive the trading fees on the pool (after interest payments) 6. The ability to have two liquidity pools creates arbitrage opportunities that bring in more fees to the DAO.

This solution is not perfect and does come with its risk.

  1. With all defi primitives there are smart contract risks. However, Ondo has been audited by Quantstamp, Peckshield, and Certik. You can read more at
  2. Impermanent loss (IL) risk comes along with any pool in an AMM model. IL when PHONON price goes up relative to the other pair, this can be considered a form of token distribution to individuals seeking exposure to the project and governance rights3. Downside IL is when PHONON price drops relative to its pair and this is where we can run into problems. Especially if Ondo vaults are providing a majority of our liquidity. If PHONON”s price drops significantly from current levels, we would renew the program past the 90 day threshold to allow the market time to re-price PHONON to current levels.
    This is Ondo’s explanation of why re-subscribing in this instance is advised:

As a reminder, at the maturation of an Ondo vault assets are rebalanced (FRAX traded for PHONON or vice versa) to make sure that Frax receives what they are owed. There is some market impact from this rebalance. This market impact is minimized the smaller any individual vault is relative to the size of the FRAX-PHONON LP. If 100% of the liquidity into the FRAX-PHONON LP is coming from Ondo vaults, then we generally recommend participants re-subscribe to ensure continual liquidity in the LP. If organic liquidity into the FRAX-PHONON LP emerges outside of the Ondo vaults then this becomes less of a concern.

The situation Phonon DAO probably wants to be most cautious about is ensuring that there is enough liquidity at maturation of a vault if the price of PHONON goes down substantially during that vault’s life, such that a large percentage of the vault’s PHONON would need to be sold for FRAX to make Frax whole. If this is not managed properly, in extreme circumstances, Phonon DAO does run the risk of losing all PHONON in the pools due to impermanent loss.

Note: Over the course of the initial 90 day OnDo program, the DAO will investigate the feasibility of engaging in additional liquidity boosting initiatives, including Protocol Owned Liquidity strategies, which would allow the DAO to manage/maintain its own DEX liquidity, and capture all fees from trading activity over the long-term.

Polling Period

The snapshot polling process begins now and will end at 11:59 UTC on January 7, 2022.

Snapshot link


For: Initiate the Liquidity Bootstrapping with Ondo Market Making
Program Against: Do Not Initiate the Liquidity Bootstrapping with Ondo Market Making


Very well written, Dan.

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