To enter stage 2 and implement veBAO, a token migration was required, primarily because the token supply was too high to be compatible with the veBAO contracts.
As a result, the BAOv2 token supply is 1000x smaller, and BAOv1 can swap their BAO tokens to BAOv2 at a ratio of 1000:1
Initial Supply of BAOv2 = (total locked BAOv1 tokens across main-net and xDAI) / 1000 + (all circulating BAOv1 across main-net and xDAI) / 1000 = 1.09 Billion BAOv2 Tokens
The BAOv2 initial supply matches the supply of Baov1 tokens on all networks, including locked tokens, reduced by a factor of 1000.
What is Bao Finance (BAO)?
Bao Finance (BAO) is an Ethereum and Gnosis Chain (xDAI) deployed synthetic token protocol which has "soft" and "hard" synthetics token as their main products. Soft means index or basket assets pegged synths, and hard means single asset price pegged synths.
Bao stands for "treasure" or "package." Something wonderful that is wrapped up in another layer. Bao buns, or in Chinese Baozi (包子), are delicious wrapped dumplings.
What is soft and hard synthetic tokens?
Bao uses the terms "soft" synthetics and "hard" synthetics to refer to two different types of synthetic assets, defined below.
Soft synthetics are tokens representing a basket of underlying tokens. Examples of well-known token baskets in the space currently are DPI, Indexed.Finance (CC10, ORA5, DEGEN, etc.) and PieDao.
Hard synthetics are synthetic tokens that link price to data. That data could itself be a price, like $TSLA stock price, the price of 1 ounce of gold, or something more exotic like the number of goals Neymar Jr scores, rainfall levels or crime rates, etc. The value of the synthetic asset is backed by collateral and can have various mechanisms to help it keep its peg. Common examples are being able to redeem the collateral at the rate the data says is correct, or by creating discounts to buy back and “repay” your synthetic position, or premiums on selling it, incentivizing more “borrowing”.
Why create Bao Finance?
Traditional finance does not work. Not for most people. It works for wealthy suits. It is great for them. They own the data. They own the marketplace. And if things do not go their way, they change the rules of the game.
Many people think the answer to fixing this system is simple. Just put it all on DeFi. But in reality, that does not work by itself. The projects that have been successful in DeFi are the ones that do things that did not exist in old finance. Compound, Uniswap, and Balancer are good examples. They all do things in a new way.
What is BAO token and veBAO token?
The Bao token is essential to the Bao ecosystem. It is distributed to liquidity providers who stake their liquidity tokens in gauges.
Bao holders will be able to stake and lock their Bao tokens for up to 4 years and receive veBAO in return, in proportion to the lock length.
veBAO tokens do not trade on liquid markets, nor are they transferable. Instead, they function like an account-based point system that denotes the duration of the tokens' lockdown in the protocol.
Your veBAO balance will dictate your share of:
Governance power: 1 veBAO = 1 vote, and holders of veBAO will be able to vote on where to direct rewards for Bao synths liquidity. This incentivizes holders to stake their tokens so they can direct rewards to pools that benefit them the most.
Boosts: Rewards for liquidity providers will be increased if they stake their BAO tokens, up to a 2.5x boost for staking BAO tokens for a maximum of 4 years. Again, this will provide a clear incentive for holders to lock their tokens in the veBAO system and help boost liquidity, ensuring that active participants who stake their rewards will receive more rewards over time.
Revenue distribution: Finally, veBAO has introduced a new revenue-sharing model that more fairly distributes revenue generated by the network. This means BAO holders who stake their tokens for longer will receive a larger share of any revenue generated, providing yet another incentive to lock BAO tokens. 100% of Revenue will be collected from all products and distributed in baoUSD to veBAO holders.
veBAO improves incentive alignment throughout the protocol. One of the tools it uses to achieve this is gauges. Gauges are smart contracts that reward depositors with BAO tokens (and potentially other tokens) in exchange for deposits such as LP tokens (like Curve LP or Sushi LP tokens), vault tokens (like yearn or beefy vaults), lending deposits (like Aave aTokens or Compound cTokens), and NFTs (such as Uniswap v3 NFT positions).
Gauges help to incentivize behaviors that are helpful to the protocol, such as increasing lending, deepening liquidity in specific pairs, and growing collaborative relationships with other projects.
The amount of BAO allocated to each gauge is called the "gauge weight". veBAO holders can distribute their voting power across gauges however they like, which results in a decreasing influence for users or pools that sell most of their rewards and an increasing influence for those that do the opposite.
veBAO gauges align incentives of veBAO holders so that the most long-term oriented BAO holders control where the BAO emissions go.
What is the tokenomic and distribution of BAO?
Phase #1 - Community Distribution (COMPLETED November 21, 2022):
During the community distribution phase, users earned Bao rewards each block for staking their LP tokens on the Bao Farming page.
During these two years, around 1.09 Trillion bao were distributed. 95% of rewards were locked, and 5% were liquid. These Bao tokens were distributed using the bao yield farming page on bao.finance, based on the SushiSwap MasterChef protocol. The locked portion of tokens will be distributed in Phase 2.
Phase #2 - BAOv2 and veBAO (November 25, 2022)
To enter stage 2 and implement veBAO, a token migration was required, primarily because the token supply was too high to be compatible with the veBAO contracts.
As a result, the BAOv2 token supply is 1000x smaller, and BAOv1 can swap their BAO tokens to BAOv2 at a ratio of 1000:1
Initial Supply of BAOv2 = (total locked BAOv1 tokens across main-net and xDAI) / 1000 + (all circulating BAOv1 across main-net and xDAI) / 1000 = 1.09 Billion BAOv2 Tokens
The BAOv2 initial supply matches the supply of Baov1 tokens on all networks, including locked tokens, reduced by a factor of 1000.
The initial supply represents a % (initial rate) of the total supply. The initial rate is 43%, similar to Curve Finance, who distributed 43% of all the CRV tokens that will ever be minted to the initial supply of the token. This leaves 57% of the maximum supply minted over time to the LP tokens staked in liquidity gauges.
As time moves forward beyond the starting point of the new token, each year, the slope will reduce the supply emissions rate by 2^(¼) based on the function of the current emissions. This means over time, less and less BAOv2 supply emissions will be given out to LPs staked in gauges as it is with curve finance’s model.
Locked Bao holders have three options they can take with their locked positions. Any distribution will only begin once manually initiated by the wallet owner, then follow the option/s selected below:
- Choose to lock your balance directly into voting escrow BAO (veBAO) for a minimum of 3 years (the length of the unlock period). After you choose to lock into veBAO, you will no longer be able to participate in the streaming of liquid BAOv2 tokens, as all the tokens from your distribution will be converted to a locked veBAO balance. Locking into veBAO relinquishes access to your tokens as they will be locked, but you will benefit from having veBAO. veBAO gives ownership of a percentage of protocol fees and the ability to vote on governance proposals, as well as boosting liquidity rewards by up to 2.5x. Tokens locked into veBAO will not be subject to any slashing penalty.
- Choose to perform a liquid distribution over three years. Over the three years, 100% of your locked tokens will be distributed to you along the distribution curve defined below. Users can claim (this costs gas) as often as they would like throughout this distribution, as long as they have accrued more tokens since their last claim. All tokens claimed using this method are not subject to any slashing penalty.
- Users that perform a liquid distribution can choose to end their distribution early at any time after the distribution starts. A significant slash penalty will be applied to the tokens unlocked early, while all tokens already unlocked have no slash applied. The slash is based on the function defined below. Choosing this option will end your distribution and immediately send the remaining tokens (minus slash) to your wallet. To activate this option, the user has to start their distribution manually, then at some point afterward, decide to end it early.
The protocol will collect all the slashed balances from users ending their distributions early. The community can agree on how the collected slash fees should be used, potentially including future incentives for veBAO holders, liquidity providers, product users, etc.