The ultimate goal of BUG Finance is to become the main liquidity layer on Polygon. The protocol restructures the ve(3,3) model, allowing users and protocols to obtain veBUG by staking liquidity rather than simply locking $BUG tokens, and sets up new incentive mechanisms and exit mechanisms to make liquidity more sticky. This promotes the liquidity depth of the entire platform.
BUG Finance's improvement on ve(3,3)
The Solidly model aims to match rewards with long-term commitment. This turns out to be a flawed goal, in the regular ve(3,3) model, everyone who locks up their tokens to get veTokens gets voting rights. This means they get a portion of the fees on the platform, as well as incentives and bribes to ensure they continue to hold their veTokens, since veNFTs can be traded on secondary markets, which makes the demand for the native token smaller.
But Bug Finance goes a step further and allows locked liquidity to earn token emissions, further stabilizing liquidity. Bug Finance's reimagined ve(3,3) model aligns the incentives of all participants in the ecosystem. This includes veBUG voters, liquidity providers, traders, and protocols. Deep liquidity is incentivized by providing emissions, transaction fees, and bribes to those who stake $BUG LP into veBUG.
For protocols, liquidity is expensive on most ve(3,3). If bribes are stopped, the token emission of their liquidity pools will decrease, resulting in a loss of liquidity. Bug Finance makes liquidity stickier by setting up an exit mechanism for $BUG LP and ordinary LP. If liquidity wants to leave, an exit fee needs to be paid. This fee will be used for automatic bribes, increasing PoL, and providing staking bonuses, which makes it more effective for protocols that build liquidity pools on BUG Finance to purchase liquidity.
Not only that, compared to the traditional model, the protocol decided to completely eliminate the lock-up period and introduce a unified exit mechanism across all types of staking, including LP Boosted Staking, veBUG, and veBUG's unilateral staking. When a user exits, a portion of the exit fee is redistributed to the protocol, and the system ensures that when someone exits, it simultaneously increases the liquidity owned by the protocol, thereby enhancing the strength of the protocol, while also increasing the yield of those who vote in the exit pool and re-attract liquidity.
Mechanism Details
Reconstruct ve(3,3)
Traditional DEX mainly faces problems such as the income of governance token holders and the incentives of LPs. BUG Finance reconstructed the ve(3,3) structure in Solifly, converted the lockers in ve(3,3) into LPs, and solved this problem by setting a unique fee and incentive structure.
Give most of the transaction fees to veBUG voters
Incentivize LPs with $BUG token emissions
Incentivize deep liquidity by providing $BUG emissions, transaction fees, and exchange rates to stakers who lock up $BUG LP
Support BUG emission through transaction income and utility
Liquidity Provision
Users can provide liquidity to the Bug Finance pool in exchange for LP tokens. Staking LP tokens on the platform qualifies users for $BUG emissions, with a base emission rate determined by the Bug Finance meter and controlled by veBUG voters. To earn veBUG, users must stake liquidity provided by $BUG paired LPs whitelisted by the team or stake $BUG tokens.
Bug Finance also introduced the LP Boosted Staking mechanism to ensure deep liquidity between the BUG pool and regular LPs. This innovative system allows users to stake regular LP tokens indefinitely while receiving a 2x emission boost. Instead of locking up LP tokens for a fixed period of time, an exit penalty is applied that decreases over time until it reaches 0%. The exit penalty is calculated based on the APR of the token staking pool, ensuring that users reach a break-even point within 4 weeks.
Staking and withdrawal mechanism
In BUG Finance, the lock-up period is completely eliminated and an exit mechanism is implemented. In the Solidly Fork project, ve positions can be sold through the secondary market, but this is not good for the protocol. The exit mechanism improves this problem by charging an exit fee:
The 40% exit fee will go towards the bribe exit pool, distributed over 4 weeks to maintain a steady APR.
40% is allocated to lock-up bonuses for exiting the pool, which provides users who stake tokens with a 2% bonus in LP and veBUG tokens as long as supply lasts.
20% is used for protocol-owned liquidity, which is locked in LPs forever, strengthening the protocol over time.
This way, people who exit increase the liquidity of the protocol, increase the yield of those who vote in the pool, thereby increasing liquidity providers, and incentivize new people to join the pool to receive bonuses. Everyone in the system benefits. The exit mechanism works as follows:
LP Boosted Staking: LP Boosted Staking: Pledge regular LP (no $BUG in the trading pair) to get a 2x emission boost. The exit fee is calculated based on the pool APR invested, which will decrease over time. As shown in the figure
Stake BUG LP for veBUG: Stake BUG LP (any whitelisted LP paired with $BUG, e.g. BUG/MATIC, BUG/USDC, BUG/fBOMB) to gain voting rights. With double incentives (LP's emission + bribes and fees), exit fees increase from 20% to 2.5% in 1 year. Voting rights are dynamic and recalculated weekly based on the amount of $BUG in LPs.
One-Sided Staking: Get more veBUG by staking $BUG, and get 50% of the voting power 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 whitelisted token (such as MATIC, USDC, fBOMB) for BUG LP and upgrade your position to a 100% veBUG position that can be exited through the above mechanism.
bribe
Users can earn veBUG by staking LPs that are paired with $BUG selected by the team or by staking $BUG. Owning veBUG gives you the right to vote on the platform's meter. The meter controls the emissions of different LPs on Bug Finance. The pool that receives the most votes gets a larger proportion of $BUG emissions for that period.
Due to its unique mechanism design, the capital efficiency of bribery on BUG Finance will be higher.
First, it achieves sticky liquidity, that is, the liquidity that partners attract to the Bug LP pair will not leave easily, but will stay for a longer time. This is a significant jump from the standard situation in other protocols, where liquidity can only be leased for a week. If liquidity wants to exit, it must pay a certain percentage of exit fees, thus protecting the interests of the protocol, partners and veBUG holders.
Second, it strategically allocates exit fees so that they can bring multiple benefits to the protocol. Part of the exit fee is used for automatic bribes to increase the attractiveness of liquidity; part is used to enhance the liquidity owned by the protocol and improve the stability of liquidity; and part is used to provide staking rewards to incentivize liquidity providers. This means that protocols can always effectively purchase a portion of the liquidity they attract, because the minimum exit fee is 2.5%, of which 20% is used to enhance the liquidity owned by the protocol.
Third, it increases bribery efficiency and makes it more rewarding for partners to bribe on Bug Finance. Because partners hold a large number of LPs, they can not only get a share of Bug Finance's profits, but also from their own bribes. This creates an environment where partners can bribe more because they earn more from their bribes and can get a portion of the bribes back.
Finally, it facilitates bribe recovery, making it easier for partners on Bug Finance to perform bribe recovery. As their LP holdings increase voting power, they can more effectively influence voting results and receive more rewards from them. This further improves the effectiveness and efficiency of bribery.
Tokenomics
BUG
$BUG is the governance token of Bug Finance, which is mainly released as a reward to stimulate liquidity. To obtain veBUG, you need to stake $BUG in a whitelisted LP pair, such as BUG/USDT. You can also stake $BUG unilaterally to obtain veBUG, but this will give you fewer voting rights.
veBUG
The ERC-721 governance token in the form of NFT is different from other ve(3,3). All veBUGs have the same voting rights and will not decrease over time. The voting rights are based on the number of $BUGs in the LP head village. In addition to exiting through the exit mechanism, they can also be increased, split and resold on the secondary market.
BUG NFT
Bug NFTs can be staked to receive a percentage of weekly transaction fees, starting at 20% and gradually decreasing to 15% after 4 months.
Summarize
BUG Finance unifies the roles of LP and ve lockers, increases incentives for LP to obtain deeper liquidity, and also makes liquidity more sticky through an exit mechanism, thereby enhancing the bribery efficiency of the protocol on the platform.
Disclaimer: This article is for research reference only and does not constitute any investment advice or recommendation. The project mechanism introduced in this article only represents the author's personal views and has no interest in the author or this platform. Blockchain and digital currency investment has extremely high market risks, policy risks, technical risks and other uncertainties. The price of tokens in the secondary market fluctuates violently. Investors should make decisions prudently and bear investment risks independently. The author of this article or this platform is not responsible for any losses caused by investors using the information provided in this article.