Bug Finance – Another Attempt at the ve(3,3) Model on Polygon

Improvements to BUG Finance on ve(3,3)

The Solidly model aims to match rewards with long-term commitments. This has proven to be a flawed goal, as in the regular ve(3,3) model, everyone who locks up their tokens to receive veToken gets voting rights. This means they get a portion of fees on the platform, as well as incentives and bribes to ensure they keep holding their veToken, as veNFTs can be traded on the secondary market, reducing demand for the native token.

But Bug Finance goes further, allowing locked-up liquidity to receive token emissions, further stabilizing liquidity. The ve(3,3) model re-imagined by Bug Finance coordinates incentives for all participants in the ecosystem. This includes veBUG voters, liquidity providers, traders, and the protocol. Deep liquidity is incentivized by providing emissions, transaction fees, and bribes to those who deposit $BUG LP into veBUG.

For the protocol, most liquidity on ve(3,3) is expensive, and if bribes stop, the token emissions for their liquidity pool decrease, causing them to lose liquidity. Bug Finance makes liquidity more sticky by setting up exit mechanisms for $BUG LP and regular LP. If liquidity wants to leave, it must pay an exit fee, which is used for automatic bribes, PoL increases, and staking rewards, making it more effective for protocols building liquidity pools on BUG Finance to purchase liquidity.

Not only that, but compared to the traditional model, the protocol decides to completely eliminate the lock-up period, and introduces a unified exit mechanism for all types of pledges, including LP Boosted Staking, veBUG, and single-sided pledges for veBUG. When a user exits, part of the exit fee is reallocated to the protocol, ensuring that when someone exits, it simultaneously increases the liquidity owned by the protocol, enhancing its strength and increasing the yield for those who vote in the exit pool and reinvest liquidity.

Mechanism Details

Refactor ve(3,3)

Traditional DEXs mainly face issues with governance token holder income and LP incentives. BUG Finance refactors the ve(3,3) structure in Solifly by turning lockers in ve(3,3) into LPs and solving this problem by setting up a unique fee and incentive structure.

  1. Most of the transaction fees are paid to veBUG voters.

  2. Use $BUG token emissions to incentivize LP.

  3. Incentivize deep liquidity by providing $BUG emissions, transaction fees, and exchange rates to pledgers who lock $BUG LP.

  4. Support BUG emissions through trading revenue and utility.

Liquidity Supply

Users can provide liquidity to the Bug Finance pool in exchange for LP tokens. Pledging LP tokens on the platform qualifies users for $BUG emissions, with the base emission rate determined by the Bug Finance meter and controlled by veBUG voters. To obtain veBUG, users must pledge liquidity provided by $BUG paired LPs whitelisted by the team or pledge $BUG tokens.

Bug Finance also introduces the LP Boosted Staking mechanism to ensure deep liquidity between the BUG pool and ordinary LPs. This innovative system allows users to pledge ordinary LP tokens indefinitely while receiving a 2x emission boost. LP tokens are no longer locked for a fixed period of time, but instead apply an exit penalty, which decreases over time until it reaches 0%. The exit penalty is calculated based on the APR of the token pledging pool, ensuring users reach the breakeven point within 4 weeks.

Pledging and Exit Mechanism

In BUG Finance, the lock-up period has been completely eliminated and an exit mechanism has been implemented. In the Solidly Fork project, ve positions can be sold on the secondary market, but this is not beneficial to the protocol. The exit mechanism improves this problem by charging an exit fee:

  • 40% of the exit fee will be used to bribe the exit pool, which will be allocated within 4 weeks to maintain a stable APR.

  • 40% is allocated to the exit pool lock-up bonus, which provides LP and veBUG tokens with a 2% bonus for pledging token users as long as the supply continues.

  • 20% is used for the protocol’s liquidity, permanently locked in LP and strengthening the protocol over time.

The exit mechanism increases the liquidity owned by the protocol, increases the yield for those who vote in the pool, increases liquidity providers, and incentivizes new people to join the pool to get bonuses. Everyone in the system benefits. The operation of the exit mechanism is as follows:

  • LP Boosted Staking: Stake normal LP (there is no $BUG in the trading pair) to get twice the emission boost. The exit fee is calculated based on the pool APR invested and decreases over time. As shown in the figure below:

  • Staking BUG LP for veBUG: Stake BUG LP (any whitelist LP paired with $BUG, such as BUG/MATIC, BUG/USDC, BUG/fBOMB) to get voting rights. The exit fee increases from 20% to 2.5% within 1 year through double incentives (LP emission + bribery and fees). The voting rights are dynamic and recalculated weekly based on the amount of $BUG in LP.

  • Unilateral staking: Get more veBUG by staking $BUG unilaterally, with 50% voting rights compared to staking BUG LP. There is no direct exit option here, but you can choose to upgrade your position to a 100% veBUG position. This means that you can choose to add any whitelist token (such as MATIC, USDC, fBOMB) to BUG LP and upgrade your position to a 100% veBUG position that can be exited through the above mechanism.

Bribery

By staking LP paired with $BUG chosen by the team or staking $BUG, users can get veBUG. Owning veBUG gives you the right to vote on the platform’s gauges. The gauges control the emissions of different LPs on Bug Finance. The mining pool with the most votes gets a larger proportion of the $BUG emissions for that period.

Due to its unique mechanism design, the capital efficiency of bribery on BUG Finance is higher.

First, it realizes sticky liquidity, which means that the liquidity attracted by partners to Bug LPs will not leave easily but will stay for a longer time. This is a significant leap from the standard situation of other protocols, where liquidity can only be leased for one week. If liquidity wants to exit, it must pay a certain percentage of the exit fee, which can protect the interests of the protocol, partners, and veBUG holders.

Secondly, it has strategically allocated the exit fee so that it can bring multiple benefits to the protocol. A portion of the exit fee is used for automatic bribes to increase the attractiveness of liquidity; a portion is used to enhance the liquidity owned by the protocol to increase the stability of liquidity; and a portion is used to provide staking rewards to incentivize liquidity providers. This means that the protocol is always able to effectively purchase a portion of the liquidity it attracts because the minimum exit fee is 2.5%, of which 20% is used to enhance the liquidity owned by the protocol.

Third, it increases the efficiency of bribes, making it more rewarding for partners to bribe on Bug Finance. Because partners hold a large amount of LP, they can not only receive a share of the profits from Bug Finance, but also earn profits from their own bribes. This creates an environment where partners can bribe more, as they earn more from their own bribes and can recover a portion of the bribes.

Finally, it promotes bribe recovery, making it easier for partners to recover bribes on Bug Finance. As their LP holdings increase voting power, they can more effectively influence the voting results and earn more rewards from them. This further increases the effectiveness and efficiency of bribes.

Tokenomics

BUG

$BUG is the governance token of Bug Finance, mainly released as a reward to incentivize liquidity. To obtain veBUG, you need to stake $BUG in the whitelist LP pair, such as BUG/USDT. You can also stake $BUG unilaterally to get veBUG, but this will result in less voting power.

veBUG

It is an ERC-721 governance token in NFT form. Unlike other ve(3,3), all veBUG have the same voting power, which does not decrease over time. The voting power is based on the amount of $BUG in the LP head pool. In addition to exiting the mechanism, it can also be increased, split, and resold on the secondary market.

BUG NFT

Bug NFT can be mortgaged to obtain a certain proportion of weekly transaction fees, starting at 20% and gradually decreasing to 15% after 4 months.

Conclusion

By unifying LP with ve lockers roles, BUG Finance increases incentives for LP to gain deeper liquidity and enhances the efficiency of bribes on the platform by using the exit mechanism to make liquidity more sticky.

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