Hello Bufferinos!

We're moving out of the very strict risk management mode that we have been in for the past few weeks, and now have much better tools to manage risk, stay competitive, and foster higher trading volume.

What's next?

Revamp the Buffer value accrual system to achieve: a higher optimized APR for BLP liquidity providers & BFR stakers, long-term sustainability, and positive network effects on the platform.

In this article, we illustrate each goal and how we achieve them while overcoming potential roadblocks.

Goal 1: 

• Compensate LPs adequately for counterparty risk they take

• long term sustainability 

BLP liquidity providers earn both trading fees and mark-to-market PnL as position takers. If options traders' net positions lose money, LPs benefit from the distribution of wealth effects. In fact,  if the fees generated exceed net trader profits, LPs would still profit, even when traders have net positive returns.

Y'all are pretty well-versed in the Buffer flywheel effect by now. 

You also know that the aBLP and uBLP exchange rate is subject to oscillations based on day-to-day trading activity within reasonable limits (traders lose = BLP wins, and vice versa).

A Sticky Situation #1

Throughout Buffer's journey so far, we have observed a critical limitation in this flywheel:

The moment more traders win, the exchange rate falls, and LP incentives are lower. Instead of allowing the market time to balance out the value of the token with the TVL and revenues, the liquidity locked in BLP flees and breaks the counter-cyclical effect, protecting its health and sustaining LP incentives.

A Sticky Situation #2:

Distributing BLP-based trading fees between BFR stakers and BLP liquidity providers dilutes rewards for both parties.

Approach:

This is why we are introducing a new revenue distribution that adequately compensates LPs for the risk they take being a counterparty to trades on Buffer Finance.

New trading fee distribution (as of 03.05.2023):

• BLP liquidity providers: 70%

• BFR stakers: 25%

• Treasury: 5%

Goal 2: 

• Higher APR for BFR stakers; driving value to the BFR token while simultaneously increasing platform usage 

• long term sustainability 

A Sticky Situation #3:

If most of the trading fee is distributed to BLP liquidity providers, how do we incentivize BFR stakers?

Approach:

Introducing No-Loss Tournaments

No-loss tournaments are gamified Up/Down trading competitions designed for traders, where participants join by paying a buy-in fee.

The Tournaments offer a competitive environment, allowing traders to join by paying a minimal buy-in fee.

The three factors - risk-free trading environment, fostering competitive spirit, and performance-based rewards - provide a fertile avenue for traders to enjoy the thrill of Up/Down trading on Buffer.

This makes no-loss an effective non-BLP-dependent tool to incentivize higher trading volume among its participants.

Fees generated will be directly distributed as:

• 50% BFR stakers (higher APR);

• 25% treasury (sustainable growth);

• 25% liquidity pool reserve

No-loss tournament will come in many flavors & setups, but I have already overshared. 😉 More details will be released in subsequent posts.

Additional Approaches:

• Exploring trading on new assets, including BFR & ETH

Goal 3: 

- Bring positive network effects to the platform.

The principle of network effects is that the more users a platform has, the more valuable the platform's service is to each user. Network effects are incredibly magical things.

However, a network effect has significantly less impact over time if a platform is confined to a single chain.

The only way to break this ceiling and push Buffer to evolve into a large-scale decentralized trading platform is to onboard users and attract liquidity from several chains.

Approach:

Multi-chain Expansion

Now that Buffer is established on Arbitrum, our eyes are set on:

• Bringing more awareness & exposure to Buffer on Polygon via optimized marketing efforts and campaigns**
  **

• Deploying Buffer on enterprising chains with powerful network effects, including Avalanche and Optimism

The long-term goal is to support POL pools across all networks and share protocol-generated revenue with BFR stakers.

We're also extremely excited about the composability and partnership potential that these ecosystems will offer. 

This update will soon deliver a monumentally positive change to how the Buffer value accrual system works — we're extremely excited about this new design and hope you are too! 

If you have any questions, please pop into our Discord or Telegram to chat and learn more.