Dear Overnight stakeholders,
As you know, Overnight’s operation is largely dependent on the Base blockchain and its core liquidity DEX, Aerodrome. On November 21st, the Aerodrome team published a new set of rules for its partners, effectively banning incentives for major USD+ liquidity pools that serve as the source of TVL and form its revenue base.
The pools that fall under the restrictions include:
- USD+/OVN
- USD+/USDC+
- USDC/USDC+
- USD+/Dola
- USD+/MAI
We expect restrictions to result in a reduction of our TVL from an ATH of $168M, and recent average of $65M-$75M, towards the $15M range, i.e., more than 10 times, with a corresponding reduction in revenue. Also, as OVN/USD+ can no longer be incentivized, we expect a reduction in OVN liquidity and a significant impact on OVN price, which has already been materializing over recent months.
The rules are designed to affect Overnight the most, as we have grown too big, causing Aerodrome to perceive Overnight capturing too much of the value Aerodrome creates. This has been building up since March 2024, where a series of formal and informal restrictions were introduced, gradually forcing changes to our tokenomics and overall model. In particular, our original tokenomics implied using revenue for voting incentives and farming POL. We largely exceeded our voluntary commitment back in March and recycled over 10M USD worth of Aero as incentives, used most of voting income from our veNFT to lock in Aero via relay, but the model implied that at some point we had to sell some Aero from POL farming, especially, as OVN voting incentives were continuously sold by the Aero relay (to the total amount roughly estimated in the range of 15–20M USD). After selling the first tranche of ~300K USD worth of Aero in early summer, we were subject to intense pressure to stop, and thus could no longer farm POL, which led to our changing the tokenomics.
We obviously got inspired and improved upon the superOETH farming strategy with USDC/USDC+ pool and support that ‘self-farming’ models should be restricted — with no exceptions made to anyone. Contrary to common belief, we absolutely share and support Aero’s current strategy of focusing on sustainable high quality fee generation and reducing the share of voting incentives. We actually proposed this strategy ourselves to the Aero team as early as February 2024, and if one looks at our pools, that’s the strategy we have followed ourselves. In the spirit of open partnership, we showed calculations demonstrating that USD+ as connector stable would enable Slipstream to capture the same or larger fees and add sustainable voting incentives from USD+ rebases, thus growing the pie for everyone. This was unfortunately seen as a competitive rather than cooperative proposal. Consequently, new rules were designed to exclude USD+ from the list of connector tokens despite USD+ being largely the 2nd most traded stable on Base, ahead of USDT, DAI, and recently even USDbC, not to mention eUSD; USD+ pools have generated over $1M in fees on Slipstream outside of USD+/OVN and over $3M in total. The rationale for the exclusion lies beyond strictly business reasons and traces back to our leading contribution to the success of Chronos.
While not all of it is fair, many other things in life are unfair too, and it would be too easy to blame Aerodrome. In the end, we survived the bear thanks to OP and Velodrome, and grew to where we are thanks to Base and Aerodrome, for which we are forever grateful. We believe the root cause is ultimately our choice of tokenomics we had made over a year ago. Then, we were small, struggling after not being able to raise a seed round, and launched OVN out of the need for survival. We chose to list on a DEX as we could not qualify for a CEX listing, and we locked ourselves into tokenomics based on DEX voting incentives and emissions. Then, from a protocol that no one knew or cared about, we, to our own surprise, grew to become probably the largest project in the history of ve(3,3) DEXes as measured by the amount of voting incentives provided — so I can totally see how that could be seen as inconvenient by our partner. In the end, the current situation is of our own making, although a year ago it was inconceivable to foresee the ride we have been through.
The recent changes will have impact on the way we conduct business, but also transfer value to OVN holders:
- Buybacks: As OVN price has suffered a major downfall and further incentives to OVN/USD+ pool are banned, we plan to conduct weekly OVN buybacks, using a portion of our weekly revenue.
- Staked OVN: Once price stabilizes, we will look to transition to the OVN staking model, i.e., distributing part of the revenue towards OVN stakers (this still needs to be built). Overall, we expect ~15–20% of our revenue to be directed towards buybacks, with the remaining used for further voting incentives on USD+ liquidity pools.
- Perp-based yield: Our target yield model — delta-neutral strategies is based on on-chain perps. Those have been built on Arbitrum, however, Base until recently had limited perp liquidity in comparison to our size. With the advent of Vertex to Base and Synfutures token launch, we will start switching part of the collateral on Base towards perp-based strategies.
- PMM: We plan to further promote and grow USD+ by acting as a market maker for USD+ on decentralized venues, such as RFQ-based PMMs, using POL liquidity we have accumulated so far. In the end, it’s important not to be nominated as a ‘connector’ token, but to be one.
- Zapins: Zapins have been in the advanced beta on our UI, and everyone loves them. We look to make a major push with its marketing and start monetizing after the 2K unique transacting users milestone is achieved.
- xUSD: Currently on pause due to marketing budget constraints.
- Ongoing operations: Last but not least, we have accumulated a large veAero position worth ~$4.5M that we plan to use to vote for the USD+/WETH liquidity pool, thus deepening liquidity for USD+, driving trading volumes and fee generation for all of our pools with USD+, while extracting fee cash flow that should enable the protocol to cover its operating costs in a sustainable way.
This is a tough situation, but we are certain Overnight will come out of it more resilient, stronger, and with new capabilities that should enable it to grow in a more sustainable way. Sun always rises after dark and it happens Overnight!
Sincerely,
Max and the Overnight team
