Detailed Instructions

Before deploying capital, the protocol must formalize its POL treasury and governance parameters. This involves creating a multi-signature wallet or a dedicated smart contract vault to hold the protocol's native token and other assets. Governance must ratify a clear mandate specifying the target liquidity pools, acceptable risk parameters (e.g., impermanent loss thresholds), and the percentage of protocol revenue to be allocated to POL.

• Sub-step 1: Deploy a Gnosis Safe or a custom Treasury.sol contract to custody assets.
• Sub-step 2: Pass a governance proposal (e.g., via Snapshot/Tally) defining the POL strategy, including target AMMs like Uniswap V3 or Curve.
• Sub-step 3: Set up a timelock or a committee (e.g., via Governor Bravo) to execute approved liquidity provisioning transactions.

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// Example: Simple Treasury Contract Skeleton
contract ProtocolTreasury {
    address public governance;
    mapping(address => uint256) public balances;

    function provideLiquidity(address lpToken, uint256 amount) external onlyGovernance {
        // Logic to approve and deposit into LP
    }
}

Tip: Use a structured mandate document (like a "POL Charter") to align stakeholders and prevent mission creep in capital deployment.

Detailed Instructions

The protocol must obtain the constituent assets for its target liquidity pools. For a derivatives protocol's governance token/stablecoin pair, this typically involves using protocol-owned stablecoins (e.g., DAI from fees) or executing a bonding mechanism to acquire ETH or stablecoins at a discount in exchange for future token emissions. Alternatively, the treasury may use a portion of its native token holdings, pairing them with externally sourced stablecoins via a DEX aggregator.

• Sub-step 1: Analyze the target pool composition (e.g., 50% PROTO, 50% USDC) and calculate the required amounts.
• Sub-step 2: If using bonding, deploy a Bonding contract (inspired by OlympusDAO) allowing users to sell ETH for PROTO tokens over a vesting schedule, funneling the ETH to the treasury.
• Sub-step 3: Execute a swap via 1inch or CowSwap to balance the treasury's holdings into the exact ratio needed for the pool.

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// Example: Calling a DEX Aggregator to Swap Treasury Assets
interface I1inchRouter {
    function swap(
        address executor,
        SwapDescription calldata desc,
        bytes calldata permit,
        bytes calldata data
    ) external payable returns (uint256 returnAmount);
}
// Treasury function to prepare pair assets
function preparePairAssets(address router, bytes calldata swapData) external onlyGovernance {
    I1inchRouter(router).swap(..., swapData, ...);
}

Tip: Use MEV-protected swap services when moving large treasury amounts to minimize price impact and front-running.

Detailed Instructions

With assets ready, the protocol deposits them into the AMM. For derivatives markets, concentrated liquidity on Uniswap V3 is common to maximize capital efficiency around the current price, while stable pools on Curve are used for pegged asset pairs. This step involves calling the AMM's deposit function with precise parameters, which for Uniswap V3 includes defining a price range (e.g., tickLower: -100, tickUpper: +100) where liquidity is active.

• Sub-step 1: Approve the AMM router (e.g., Uniswap V3's NonfungiblePositionManager) to spend the treasury's tokens.
• Sub-step 2: Call mint() on the position manager, passing the token addresses, amounts, and the chosen price range expressed in ticks.
• Sub-step 3: Store the received NFT (ERC-721) representing the liquidity position in the treasury contract for future management.

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// Example: Minting a Uniswap V3 LP Position
INonfungiblePositionManager npm = INonfungiblePositionManager(0xC364...);
npm.mint(INonfungiblePositionManager.MintParams({
    token0: address(PROTO),
    token1: address(USDC),
    fee: 3000, // 0.3% tier
    tickLower: -100,
    tickUpper: 100,
    amount0Desired: 1_000_000e18,
    amount1Desired: 2_000_000e6,
    ...
}));

Tip: Use historical volatility data to set price ranges that balance fee earnings against the frequency of needing to rebalance the position.

Detailed Instructions

Active position management is critical as market prices move. The protocol must monitor its LP positions to prevent divergence loss from prices moving outside the active range. A keeper bot or governance-controlled function should periodically collect accrued fees and, if necessary, execute a rebalance: burning the old position and minting a new one centered around the current price. This may involve withdrawing all liquidity, swapping assets to the correct new ratio, and re-depositing.

• Sub-step 1: Query the position's current state (liquidity, fees earned) via the AMM's subgraph or contract calls.
• Sub-step 2: Call decreaseLiquidity() and collect() on the position manager to withdraw liquidity and claim fees in tokens.
• Sub-step 3: If rebalancing, execute swaps to re-achieve the 50/50 value ratio for the new target price range before minting a new position.

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// Example: Collecting Fees and Adjusting Liquidity
// Decrease liquidity by 50%
npm.decreaseLiquidity(INonfungiblePositionManager.DecreaseLiquidityParams({
    tokenId: positionId,
    liquidity: currentLiquidity / 2,
    ...
}));
// Collect accrued fees
npm.collect(INonfungiblePositionManager.CollectParams({
    tokenId: positionId,
    recipient: address(this),
    amount0Max: type(uint128).max,
    amount1Max: type(uint128).max
}));

Tip: Automate fee harvesting and health checks using a Gelato Network task to ensure protocol revenue is consistently captured and reinvested.

Detailed Instructions

The final step is integrating the POL pool directly into the protocol's mechanics. For a derivatives platform, this can involve using the pool as the primary on-chain price oracle for perpetual swaps, or as a liquidity backstop during high volatility. The protocol can reference the TWAP (Time-Weighted Average Price) from its own pool. More advanced integration includes creating a liquidity insurance module where the pool's assets can be temporarily borrowed to cover insolvent positions during a black swan event, with predefined repayment terms.

• Sub-step 1: In the perpetual swap pricing contract, reference the observe() function on the Uniswap V3 pool to get a 30-minute TWAP.
• Sub-step 2: Create a CircuitBreaker.sol contract with permissions to withdraw a capped amount from the POL position (via decreaseLiquidity) during extreme market moves defined by governance.
• Sub-step 3: Route a portion of trading fees (e.g., 10%) generated by the derivatives protocol directly to the treasury to fund further POL acquisitions, creating a flywheel.

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// Example: Using POL Pool as a Price Oracle
interface IUniswapV3Pool {
    function observe(uint32[] calldata secondsAgos)
        external
        view
        returns (int56[] memory tickCumulatives, uint160[] memory secondsPerLiquidityCumulativeX128s);
}
// Calculate TWAP from the protocol's own pool
function getPriceFromPOL() public view returns (uint256 price) {
    uint32[] memory secondsAgos = new uint32[](2);
    secondsAgos[0] = 1800; // 30 minutes ago
    secondsAgos[1] = 0;
    (int56[] memory tickCumulatives, ) = polPool.observe(secondsAgos);
    int56 avgTick = (tickCumulatives[1] - tickCumulatives[0]) / 1800;
    price = TickMath.getSqrtRatioAtTick(int24(avgTick));
}

Tip: Using your own pool as an oracle reduces reliance on external data providers but requires robust monitoring to prevent manipulation of the pool's price.

Detailed Instructions

Begin by auditing the protocol's treasury and smart contracts to identify all POL positions. This includes liquidity provider (LP) tokens staked in Automated Market Makers (AMMs) and collateral locked in perpetual futures or options vaults.

• Sub-step 1: Query on-chain data for all treasury-owned addresses using a block explorer or subgraph. Aggregate the USD value of LP tokens (e.g., Uniswap V3 NFTs, Curve LP tokens).
• Sub-step 2: Calculate the concentration risk by determining the POL's percentage of the total liquidity in each pool. A concentration above 30-40% can pose significant slippage and exit liquidity risks.
• Sub-step 3: Assess the correlation of underlying assets. High POL concentration in pools with correlated assets (e.g., ETH/wstETH) amplifies systemic risk.

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// Example using Ethers.js to get a wallet's LP token balance
const lpTokenContract = new ethers.Contract(lpTokenAddress, erc20Abi, provider);
const balance = await lpTokenContract.balanceOf(treasuryAddress);
const totalSupply = await lpTokenContract.totalSupply();
const poolTvl = 1000000; // USD value of pool, fetched from DEX API
const protocolShare = (balance / totalSupply) * poolTvl;
console.log(`Protocol exposure: $${protocolShare}`);

Tip: Use DeFi Llama's Treasury dashboard or build a custom subgraph to track these metrics in real-time across multiple chains.

Detailed Instructions

Impermanent Loss (IL) is a critical risk for POL providing liquidity in AMMs. Model how price movements of the paired assets will affect the value of the POL position compared to simply holding the assets.

• Sub-step 1: Use an IL calculator (e.g., the formula for a Constant Product Market Maker) to model losses across a range of price changes (±20%, ±50%). Input the current pool composition and the protocol's share.
• Sub-step 2: Estimate slippage impact for large withdrawals. Calculate the price impact if the protocol needed to remove its entire liquidity position in a single transaction. This requires the pool's liquidity depth and fee tier.
• Sub-step 3: Stress test these models against historical volatility data, like the May 2021 or June 2022 drawdowns, to understand tail risk.

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# Simplified Impermanent Loss calculation for a 50/50 ETH/USDC pool
def impermanent_loss(price_ratio_change):
    # price_ratio_change = P_new / P_initial
    return 2 * (price_ratio_change**0.5) / (1 + price_ratio_change) - 1

# For a 2x price increase (ETH doubles vs USDC)
il_pct = impermanent_loss(2)  # Result: ~-5.72%
print(f"IL for 2x price move: {il_pct:.2%}")

Tip: Incorporate trading fee revenue into the model. High-volume pools can offset IL, but this is not guaranteed during low-activity bear markets.

Detailed Instructions

POL is only as secure as the platforms it interacts with. Counterparty risk here refers to the failure or malicious action of the derivative protocol (e.g., a perpetual futures exchange).

• Sub-step 1: Review the audit history and bug bounty program of the integrated DEX or derivative protocol. Prioritize protocols with multiple audits from reputable firms (e.g., OpenZeppelin, Trail of Bits) and a live bug bounty on Immunefi.
• Sub-step 2: Check for administrative privileges. Determine if the derivative protocol's admin can upgrade contracts, pause functions, or withdraw funds in a way that could trap or seize the POL. Prefer non-custodial, immutable, or time-locked contracts.
• Sub-step 3: Monitor for economic attacks specific to derivatives, like oracle manipulation to trigger unfair liquidations of the protocol's positions or funding rate arbitrage.

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// Example check for a dangerous unlimited approval in a smart contract
// This is a common vulnerability when interacting with derivatives vaults.
// BAD PRACTICE:
IERC20(token).approve(vaultAddress, type(uint256).max);

// BETTER PRACTICE: Approve only the exact amount needed for the operation
IERC20(token).approve(vaultAddress, exactDepositAmount);

Tip: Use monitoring tools like Forta or Tenderly to set up alerts for unusual transactions involving the protocol's treasury addresses.

Detailed Instructions

Passively held POL is vulnerable to market swings. Actively manage the risk by using the derivatives markets themselves to create a hedged position.

• Sub-step 1: For POL in an ETH/stablecoin pool, hedge the ETH price exposure by taking a short position in ETH perpetual futures on a separate platform. The notional value should match the protocol's ETH delta from the LP position.
• Sub-step 2: Set up rebalancing triggers based on predefined thresholds. For example, if the POL concentration in any single pool exceeds 35% of the pool's TVL, automatically initiate a partial withdrawal.
• Sub-step 3: Use options for more sophisticated hedging. Selling covered call options on the volatile asset in the LP can generate premium income to offset potential IL, while buying put options can insure against downside risk.

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// Pseudo-code for a rebalancing trigger based on concentration
const maxConcentration = 0.35; // 35%
if (protocolShareOfPool > maxConcentration) {
    const excessAmount = protocolShareOfPool - maxConcentration;
    // Initiate a withdrawal transaction for the excess amount via a multisig or keeper
    await executeRebalance(withdrawAmount);
}

Tip: Hedging costs (funding rates, option premiums) must be factored into the overall yield calculation. Over-hedging can eliminate the revenue benefits of providing POL.

Detailed Instructions

Risk management is ineffective without proper oversight. A transparent governance framework ensures POL strategies align with the protocol's goals and are accountable to token holders.

• Sub-step 1: Draft and ratify a formal POL Policy via governance vote. This document should define risk tolerance (max concentration per pool, allowed asset types), hedging mandates, and authorized derivative platforms.
• Sub-step 2: Implement a multi-signature wallet or DAO module (like SafeSnap) for all POL-related transactions. Require 5/9 signatures from elected committee members for any deposit, withdrawal, or hedge adjustment above a defined threshold (e.g., $500k).
• Sub-step 3: Publish real-time dashboards that track all POL positions, their current value, estimated IL, and hedge status. Use on-chain data to ensure the dashboard is verifiable and cannot be falsified.

Tip: Regular (quarterly) risk assessment reports should be published, detailing performance against benchmarks, incidents, and proposed adjustments to the POL Policy. This builds trust and decentralizes risk oversight.