Alluo Tokenomics

What is Alluo?

Alluo is cross-chain yield optimisation and liquidity direction protocol that enables the alluo mobile app users to earn a great yield for the assets (stablecoins and the major crypto coins) they purchase and hold through the Alluo mobile app which is a non-custodial wallet deployed on polygon.

Alluo token economics

In general, our token will follow the tried and tested Token/voteLockedToken approach like convex (convex) where tokens are locked in exchange for vlTokens (vl stands for voteLocked) which allow stakers to receive votes and earn rewards (see below the exact mechanism for locking the token under the Token liquidity section).

By locking their tokens for a period of at least 1 week, vlAlluo holders earn the spread between the advertised APY in the mobile app and the realised APY of those assets. Any excess is used to buy-back Alluo tokens on DEXes and redistribute those Alluo tokens to vlAlluo holders.

For example, if the realised APY on USD stablecoins is 15% and the advertised APY in the mobile app is 8%, vlAlluo holders earn the difference, 7%, directly in Alluo.

Thanks to leverage effects, this spread is multiplied by the ratio of assets coming from the mobile app and the value of Alluo locked. For instance, if we have $1m worth of staked Alluo for $5m of TVL, the spread will be multiplied by 5 ($5m / $1m) so the vlAlluo holders would receive 35% (5 * 7%) APR worth of Alluo tokens without the need for us to issue new tokens (unlike high emission protocols which rely on minting new tokens).

vlAlluo holders can also vote on what the advertised APY should be for each asset and where the liquidity of each asset should flow.

To direct liquidity to specific liquidity pools and yield aggregators (e.g. specific curve liquidity pools staked in convex) vlAlluo holders can vote for particular strategies, where a strategy is a combination of liquidity pool and yield aggregator for a given asset on a given chain (e.g. mainnet, fantom, avalanche etc). Liquidity will then be directed pro-rata to the pools and aggregators indicated by the vlAlluo votes which will be held on Snapshot.

For example, if 40% of votes go to the Frax pool on Curve which should be staked on Convex, and 60% of the votes go to the Mim pool on Curve which should be staked on Convex, then existing and new liquidity will be deployed to these different pools in these ratios during the upcoming cycle — this may require some rebalancing of existing pools or some legacy pools being exited altogether — this ensures that the mobile app users continuously enjoy strong yields without the need for them to monitor where the best sources of yields are, this is effectively delegated to vlAlluo holders.

Note that similarly to convex, by locking their Alluo tokens, holders do not receive a vlAlluo back to their wallets but instead, their vlAlluo balance is kept directly in the alluoLocker smart contract (see the Token liquidity section for more details).

Example from Zapper of a Locked CVX position

This minimises gas fees required for the locking and allows for more effective management of the locked Alluo tokens as protocol backstop compared to a solution where veTokens are sent back to the user.

Protocol Liquidity

Today, when it comes to token liquidity, most of Defi protocol are split in 2 camps:

1. Rented liquidity: where the protocol incentivises a “Pool 2”, for instance a ProtocolToken-ETH pair on Uniswap with significant rewards, when those rewards go away, so goes the liquidity — there is very little alignment between the liquidity providers and the protocol itself.
2. Protocol owned liquidity: where the protocol emits bonds where users are depositing Uniswap or Balancer LPs in exchange for a discounted protocol token (the most famous example being Olympus). Given the need for liquidity, a significant amount of protocol tokens need to be emitted to build up a large enough LP position — to counter this inflation, stakers are offered a high APY with ongoing rebases.

We want to offer a solution which is:

1. Sustainable: ie doesn’t require the emission of a huge amount of tokens to provide for deep amounts of liquidity
2. Aligned with the protocol: ie liquidity providers are not just passively farming the reward token but have an active role to play
3. Resistant to black swan events: ie where liquidity will be available when we need it

So our mechanism is the following:

• When users lock Alluo, they are locking the share of a 80–20 Alluo-Eth Balancer LP. Our Dapp will allow users to convert and lock any token in just one transaction (for instance they could convert and lock $1,000 worth of DAI in a single transaction, thereby reducing gas fees and complexity).
• In return, the alluoLocker smart contract records their share of vlAlluo which is equal to the value of the Alluo-Eth Balancer LP share they have locked.

This is akin to Aave’s staking system for their safety module (see Aave Safety Module). In Aave’s case, they allow users to either stake Aave token only or an Aave-Eth Balancer LP share but we wanted to have a simple mechanism first.

This system is aligned with our 3 goals:

1. Sustainability: because the locked Alluo pool is the only one getting Alluo rewards which we can generate at the back of the excess spread between the realised APY of the assets deployed and the advertised APY of those assets, we don’t have to incentivise 2 separate pools (ie one for users locking their tokens and one for users providing their liquidity).
2. Alignment with the protocol: only the users locking receive the rewards for providing the liquidity, the protocol backstop but also get involved in setting the APY for the different assets and where liquidity should flow.
3. Resistant to black swan events: because the tokens are locked for at least a week with a cooling off period 3 of days this means that liquidity cannot disappear overnight when we need it.

Note that the cooling off period of 3 days is particularly helpful to manage governance attacks (see below) — it means that once the locking period has elapsed, a user requesting their tokens back will need to wait 3 days before being able to withdraw them — during this time, the DAO could hold a vote to slash tokens for a particular user or sets of users who would have acted maliciously.

Protocol Backstop

Users who decide to lock their Alluo tokens also play a role in backstopping the protocol against black swan events which would impact the mobile app users negatively. These black swan events come in two main forms:

1. Smart contract exploits
   If the protocol suffers an exploit where there are unexpected losses of funds beyond a level agreed by the DAO, vlAlluo holders will be asked to compensate for the losses, this is akin to the Aave Safety Module.
   We will introduce a backstop feature where vlAlluo holders insure losses beyond a certain threshold (for example for losses more than 10%) and with a cap (for example not beyond 20%), which should make the Alluo mobile app much more attractive to depositors. This threshold is configurable per asset, and is controlled by the DAO.
2. Governance attacks
   Because the Alluo protocol deploys the liquidity from its mobile app users according the vlAlluo votes, there is a risk that a protocol could exploit this feature for short term gains by buying large amounts of Alluo tokens, locking them and use their vlAlluo votes to direct liquidity to their own protocol in a way that could result to losses for mobile app users. In such an event, the DAO could decide to slash the addresses involved in this attack. This is where having the vlAlluo tokens locked in the smart contract itself rather than sent back to the users wallet is important since it negates the possibility for the attacker to sell their vlAlluo on a secondary market once the vote have passed.

As a reward for providing this service, vlAlluo holders will be compensated in additional Alluo rewards as well (beyond the buyback themselves).

How is the Alluo Protocol useful?

There are three types of users that can benefit from using Alluo: Defi enthusiasts who want to play an active role in liquidity management, other Defi protocols who are looking for liquidity and Alluo mobile app users.

For Defi enthusiasts, Alluo allows them to earn attractive yields on their Alluo holdings by being active and voting for the advertised APY of each asset and earning the spreads between the advertised APY and realised APY for a broad range of assets (starting with stablecoins).

For protocols looking for liquidity, by purchasing Alluo tokens, other protocols can direct stable and cost-effective liquidity to their pools and enable their own use cases (this is akin to some of the curve wars we are currently witnessing where protocols are fighting for control over the CRV gauges by holding CRV and/or CVX tokens). We believe protocols will one day seek to purchase the Alluo token for this particular purpose (particularly because we are bringing new liquidity to Defi, we are not competing with other existing protocols or yield farmers, we want them to be able to have new liquidity flowing to them through their Alluo token purchase).

In addition to this, the Alluo mobile app users are benefiting from the Alluo protocol in a way that is transparent to them, indeed, the Alluo protocol ensures that they continue to receive a stable and attractive yield for their stablecoins and other crypto assets (initially, the mobile app will focus on yield of stablecoins but will rapidly expand to other crypto assets) without the need for them to constantly monitor which strategies are best at any point in time. The ongoing optimisation and yield management being delegated to vlAlluo holders.

Future

Stablecoins

Beyond USD stablecoins, our ambition is to quickly expand to EUR and GBP stablecoins which are starting to get traction and are currently enjoying very significant yields as their usage increases.

For each new stablecoin currency, the DAO will vote on the advertised APY in the mobile app and the direction of the liquidity which will be brought by the mobile app users.

As before, vlAlluo holders will receive the spread between the advertised APY and the realised APY in the form of Alluo token rewards.

Other crypto assets

Similarly, we will want to launch to major crypto assets on which we can generate yield at scale starting with ETH and BTC.

The mechanism of voting by the vlAlluo holders on APY and liquidity direction remains the same.

It is interesting to note that in the case of crypto assets, if their value increases significantly, our TVL will increase in a similar fashion which will create incremental spread.

For instance, if ETH was at $3k and our ETH TVL was $100m with an advertised APY of 5% and a realised APY of 7% (ie a 2% spread on $100m which is $2m) then when ETH goes to $6k our TVL increases to $200m (without any incremental deposits by users) and our spread is now $4m (2% on $200m) increasing protocol revenues and buybacks.

Capital efficiency

Beyond offering competitive yields for mobile app users, our ambition is also to allow users to borrow using their yield bearing assets as collateral.

For instance mobile app users depositing $1,000 in Alluo, would be able to borrow up to 75% of that amount in alluoUSD at a very competitive rate (typically 0.5% fee and 1.5% interest rate).

Interestingly, this can be used to create either levered yield strategies yielding up to 25% APY on stablecoins or self repaying loans like alchemix which could create interesting consumer lending use cases (e.g. buy now pay l̶a̶t̶e̶r never, where the yield of deposit in Alluo would be used to pay for items purchased today).

Levered yield / Degen section

How can we produce yields of 25% on stablecoins?

In a nutshell, users would deposit into our USD stablecoin vault earning 8% APY and they would be able to use this as collateral to borrow up to 75% of the value of this collateral in alluoUSD.

Assuming that this alluoUSD loan has a cost equivalent to 2% APY (0.5% fee + 1.5% interest) then if one replicates this enough times (ie through looping where USD is deposited into our 8% vault, then an alluoUSD loan is created, deposited back in the 8% vault etc.) to reach a leverage of 3.85x, the total APY achievable is around 25% = 8%+(3.85–1) * (8%-2%).

In order to create a stable USD peg for alluoUSD, we will incentivise a curve pool of alluoUSD-3Crv and we will eventually want to get CRV rewards on that pool (instead of just Alluo rewards) and get it listed on Convex.

Interestingly, that also means that once we have reached a certain scale, we could also deploy the mobile app users funds in the alluoUSD-3Crv curve pool and stake them on Convex for CRV and CVX rewards.

Note that at that moment of time, we will probably want to vote on a proposal to keep some of the CRV and CVX rewards in the treasury (versus selling them to buy back Alluo tokens in the market) to align incentives more between ourselves and Curve, Convex and other liquidity pools and yield aggregators.

This would mean for instance that if our liquidity was yielding 16% in CRV and CVX combined, we would sell half of it to generate the advertised 8% and the remaining CRV and CVX rewards we would keep in the treasury

In an ideal world, we would actually not even sell CRV and CVX rewards but instead deposit them in the relevant convex pools and borrow against them as collateral on Alluo itself to ensure that depositors get the right yield but also ensure we sell as little rewards tokens as possible with the ultimate goal of having Alluo as the most aligned liquidity provider in the market given we would never sell rewards tokens.

A worked out example:

• Given a $100m TVL in the USD stablecoin vault at 8%
• Given the $100m is deployed in curve/convex vaults yielding 10% CRV and 6% CVX APR (16% total)
• Every day, we would earn 10%/365 in CRV and 6%/365 in CVX ($27.4k in CRV and $16.4k in CVX)
• We would deploy these rewards on convex and borrow enough against them to ensure we would generate the required 8% on the $100m USD stablecoin vault, creating an alluoUSD loan in exchange for $21.1k (= $100m*((1+8%)^(1/365)-1)) which would be deployed back into the USD stablecoin vault for compounding.
• If the rewards token prices go up, then the treasury’s net value is increasing (because the alluoUSD loan hasn’t changed and the rewards value which are acting as collateral have increased)
• If the rewards token prices go down below a certain threshold, they would be liquidated to ensure the alluoUSD loan gets repaid
• This can extend to any crypto asset that would be given to us as rewards, for as long as they have reasonable liquidity.

The bottom line is that this is very useful for users, enabling them to get high yields for long periods of time if they are willing to take some underlying liquidity pool risk. For the protocol, this can directly increase TVL manifold and also generates incremental revenues which can be redistributed to vlAlluo holders.