Auto-compounding the Reserve yield

[RickGriff]

The LQTY Reserve (bonded LQTY + POL) in Chicken Bonds should earn yield, which should be converted back to LQTY and regularly redeposited to the POL.

Sources of yield:

• Liquity Staking contract - earns LUSD and ETH gains.
• LQTY-ETH AMM (Uniswap v2 and v3 fees)

The LQTY-ETH Uniswap v2 pair already auto-compounds the trade fees. If we also (or instead) connect Chicken bonds to the Uniswap v3 pair, its fees are in LQTY and ETH, so may be redeposited.

So the main question is how to determine the auto-compounding of the LQTY staking yield (LUSD and ETH).

Primary architecture questions/aims

• Should we use integrate Chicken Bonds with a 3rd party system for yield auto-compounding, or roll or own?
• Can we minimize governance/admin control, and incentivize regular & frequent yield harvests?

3rd party protocols to review

• Pickle Finance (LQTY Jar)
• Yearn
• Gelato (bot network for automation of arbitrary smart contract logic)

Research questions for 3rd party systems

• What are the auto-compounding mechanics at the smart contract level?
• What manual action is required - e.g. harvesting? How often is it performed? By who?
• What level of admin/governance control does harvesting have? Can funds ever be held back/frozen? What is the incentive structure?

[cvalkan]

Thanks for writing this up @RickGriff!

It's also worth looking at B.Protocol and their integration of Gelato:

The formula offers the ETH for sale with a discount over market price. And the bigger the ETH balance is (w.r.t total LUSD + ETH inventory) the bigger the discount is. Up to a limit of 4% over market price.

The sell price is aggregated by DEX aggregators such as Kyber Network and Paraswap, and decentralized keepers from Gelato and Chainlink Keepers were integrated to execute an arbitrage trade whenever the price falls too much below market price as a secondary safety measure.

and most lately KeeperDAO: https://twitter.com/0x81b/status/1482081778584068100?s=21

Another architecture question is whether we would use an AMM for exchanging LUSD/ETH to LQTY or rather an OTC-like approach.