[RFC-06] DUST/USDC Liquidity Incident Mitigation Plan

Governance Request for Comment
1

[RFC-06] DUST/USDC Liquidity Incident Mitigation Plan


Summary

This proposal outlines a plan to address the current severe liquidity imbalance in the DUST/USDC market. It recommends shifting from a focus on encouraging a single Balancer AutoRange liquidity pool to a balance between Balancer AutoRange and Uniswap v3, helping to maintain capital efficiency and liquidity under strong selling pressure.

The move to the Balancer AutoRange pool solved a clear problem: the old Uniswap V2 pool offered easy access, but much of the capital wasn’t used efficiently within the actual trading range, resulting in waste. Balancer AutoRange, a dedicated Balancer liquidity pool, automatically adjusts the liquidity range daily, improving capital efficiency and allowing passive LPs to provide centralized liquidity without manual range management.

However, recent market developments have revealed a structural weakness. Under sudden, one-sided selling pressure, the Balancer AutoRange group can exhaust liquidity on the USDC side within its operating range. When this happens, DUST experiences liquidity depletion. The group then needs a long time to lower its price within the defined range until new buying demand emerges.

For a protocol distributing native token incentives, this poses a serious risk. If the issuance creates selling pressure but liquidity cannot absorb it, the incentive system will collapse.

This RFC does not propose removing the Balancer AutoRange pool. It remains valuable for passive LPs and routine trading flow. Instead, it proposes complementing it with a Uniswap V3 pool, where Uniswap V3 serves as a secondary liquidity layer capable of absorbing sell pressure when the Balancer AutoRange pool moves out-of-range.

Proposed changes:

  1. Split LP incentives between Balancer AutoRange and Uniswap V3:

    • 50% to Balancer AutoRange USDC/DUST pool

    • 50% to Uniswap V3 USDC/DUST pool

  2. Temporarily adjust protocol revenue distribution for a 4-week stabilization period:

    • From 70% veDUST / 30% LP / 0% burn

    • To 20% veDUST / 20% LP / 60% buyback-and-burn

Objective: strengthen DUST liquidity, ensure continuous bid-side support when Balancer AutoRange is out-of-range, and deploy protocol revenue to support market stability during transition.

Problem Statement

The migration to Balancer AutoRange solved capital inefficiency but introduced fragility under stress.

The initial issue was inefficient liquidity distribution. Constant-product pools spread liquidity across the entire price curve, leaving limited depth near spot. Moving incentives to a Balancer AutoRange pool improved capital utilization and execution quality by concentrating liquidity within an actively managed range.

The new issue is resilience.

Balancer AutoRange automatically adjusts its liquidity range on a daily basis. While this is effective under normal conditions, it introduces a delay in response during sudden, one-sided market movements. If sell pressure rapidly consumes USDC liquidity within the active range, the pool can become effectively one-sided before it has time to reposition.

At that point, DUST loses immediate bid support rather than experiencing gradual slippage. The market must wait for the pool to rebalance or for external liquidity to step in.

This is especially important for Neverland as a protocol. Incentives are paid in DUST, meaning the selling pressure is continuous and structural, not random. If liquidity cannot absorb this outflow, the emissions become worthless. All users will flee the platform.

Consequences include:

  • Reduced attractiveness of DUST incentives due to weak exit liquidity

  • Value erosion for veDUST holders

  • Lower LP participation due to perceived risk

  • Declining effectiveness of incentive mechanisms

The core issue is not the Balancer AutoRange pool itself, but its role as the sole incentivized liquidity source. It is currently expected to serve two distinct functions:

  1. Capital-efficient liquidity for normal trading

  2. Supporting continuous liquidity within a price range from 0 to infinity

AutoRange’s mechanism doesn’t allow for an immediate reduction in liquidity range, leading to liquidity depletion during periods of intense selling pressure.

Neverland should incentive dual-source liquidity architecture, where Balancer AutoRange handles efficiency and Uniswap V3 provides persistent fallback liquidity when AutoRange is out-of-range.

Low Level Details

Proposed Liquidity Incentive Split

Source Incentive Allocation Purpose
Balancer AutoRange USDC/DUST 50% Passive, capital-efficient liquidity for standard trading
Uniswap V3 USDC/DUST 50% Continuous liquidity layer, absorbing sell pressure when AutoRange fails

This structure preserves AutoRange efficiency while introducing a complementary liquidity layer that remains active regardless of AutoRange positioning.

Balancer AutoRange Role

The Balancer AutoRange pool remains a core component due to:

  • Automatic daily range adjustment

  • Accessibility for passive LPs

  • Efficient execution for routine swaps

  • Strong routing efficiency under normal conditions

Reducing allocation from 100% to 50% reflects repositioning, not deprecation. Its role is to provide efficient liquidity during stable market conditions.

Uniswap V3 Role

Uniswap V3 serves as the resilience layer in the system.

Unlike Balancer AutoRange, Uniswap V3 liquidity positions are user-defined and do not automatically shift. This allows liquidity to remain available across a broader price spectrum, even when the market moves outside the AutoRange pool’s active range.

Key roles:

  • Maintain bid-side liquidity when AutoRange is out-of-range

  • Provide continuous execution depth during sharp price movements

  • Allow LPs to choose risk profiles (full-range, wide-range, or concentrated)

In this architecture, Uniswap V3 is not competing with AutoRange. It is complementing it by ensuring that liquidity does not disappear during stress events.

Temporary Revenue Reallocation

Current distribution:

Recipient Share
veDUST 70%
LP 30%
Burn 0%

Proposed (4 weeks):

Recipient Share
veDUST 20%
LP 20%
Buyback-and-burn 60%

Effects: Emergency liquidity injection for Neverland during its challenge period.

Expected Protocol Behavior Changes

  • Balancer AutoRange remains active but no longer the sole liquidity source

  • Uniswap V3 becomes a critical fallback liquidity layer

  • Liquidity persists even when AutoRange is out-of-range

  • LP participation diversifies across passive and active strategies

Security Considerations

No new AMM deployment is required. The proposal utilizes existing Balancer AutoRange and Uniswap V3 infrastructure.

No token contract changes are required.

Governance Implications

Affected areas:

  1. LP incentive allocation

  2. Revenue distribution

  3. Buyback-and-burn policy

The 4-week period must be strictly time-bound. Post-period review should determine whether to revert, extend, or adjust parameters.

Monitoring and Reporting

Evaluation should focus on liquidity continuity and resilience, not just TVL.

Key metrics:

  • Liquidity distribution by source

  • USDC-side depth across both pools

  • Frequency of AutoRange out-of-range states

  • Uniswap V3 liquidity distribution by range

Timeline Considerations

  1. Governance discussion

  2. Deploy incentive campaign

  3. Adjust AutoRange allocation to 50%

  4. Activate Uniswap V3 incentives (50%)

  5. Initiate 4-week revenue reallocation

  6. Weekly reporting

  7. Final review

Timeline depends on operational readiness and execution setup.

Closing Statement

The Balancer AutoRange migration improved capital efficiency and accessibility. However, efficiency alone is insufficient.

A token-based system must withstand continuous sell pressure. If liquidity disappears when the market moves outside the AutoRange pool’s active range, emission becomes worthless.

The solution is not to remove Balancer AutoRange, but to complement it with a second liquidity source that remains active under all conditions.

A dual-source model provides:

  • Efficient baseline liquidity via Balancer AutoRange

  • Continuous fallback liquidity via Uniswap V3

  • Reduced risk of liquidity cliffs

  • Active market support via buybacks

Expected outcome: stronger DUST market structure, improved LP participation, and more sustainable veDUST economics.

This proposal is being submitted for urgent community discussion prior to the governance vote.


[RFC-07] DUST Claim Reform: Commitment-Based Release
2

While I am understand and agree to a certain extent, I am not quite sure your remedies are going to be effective long term VeDUST holders are the backbone of Neverland and a big reason why the platform receives huge support. Not to mention the fact that locked dust is automatically TVL sitting in Neverland as we cannot borrow against it, further reducing the revenue would make many holders not very bullish long term. Also, Redirecting 60% of protocol revenue from veDUST holders to buybacks effectively asks long-term supporters to fund a short-term intervention. What evidence suggests four weeks of buybacks will materially improve liquidity once the program ends? Without structural changes, this risks becoming a temporary price support rather than a lasting solution.

I see the problem, I just do not think this is a solution

5 Likes
3

Wouldn’t doing this expose us to potential price cascade due to the low liquidity and people being able to pick a range? This has already happened once before.

2 Likes
4

Buybacks and burns are never an effective way to truly support token price. It just give exit liquidity to people who want out. I think we should stick with Balancer and allow the market to figure out the price. The team should work with Balancer to make sure it can shift liquidity within the price tracking of external liquidity (V2 in this instance).

I think veDUST lockers and LP should share protocol revenue, perhaps 40/40, but the protocol should start building a protocol treasury with some share of protocol revenue to build more POL.

7 Likes
5

Here’s a polished English draft you can post directly in the governance thread (or as a new comment/reply). It’s professional, concise, and highlights your perspective as a committed veDUST holder:

Alternative Suggestion for RFC-06: Distribute Locked veDUST Instead of Burning Repurchased DUST

I support the overall goal of RFC-06 — addressing the DUST/USDC liquidity fragility by splitting incentives between Balancer AutoRange (50%) and Uniswap V3 (50%), while using protocol revenue for temporary stabilization. Dual-pool liquidity makes sense for resilience under one-sided sell pressure.0

However, I propose a modification to the 60% buyback-and-burn portion during the 4-week period:

Instead of burning the repurchased DUST, distribute it as additional locked veDUST to existing veDUST holders (pro-rata based on voting power or lock amount).

Why this is better:

  • veDUST holders are the backbone of Neverland. They provide long-term alignment, governance stability, and locked TVL that cannot be easily borrowed against. Reducing their revenue share (from 70% to 20%) to fund buybacks effectively asks long-term supporters to subsidize short-term liquidity intervention.

  • Stronger incentives for locking: Distributing locked veDUST rewards committed holders directly, increases their future revenue share and voting power, and further reduces circulating supply/ selling pressure (similar deflationary effect to burning, but with added utility).

  • Better community sentiment: This feels like a reward for loyalty rather than a temporary tax on veDUST emissions. It should help maintain whale confidence during this challenging period.

  • Post-4 weeks review: After the stabilization window, we can evaluate liquidity metrics and decide on reverting, extending, or adjusting the mechanism.

This approach preserves the liquidity benefits of buybacks while prioritizing the holders who have the most skin in the game. Happy to discuss details on implementation (e.g., snapshot timing, lock duration requirements, or a hybrid model with partial burn).

What do others think? Let’s refine this before the vote.

Tips for posting:

  • Copy-paste directly into the forum.

  • Add any personal stats if you want (e.g., your indefinite lock amount) for credibility, but keep it optional.

  • You can tweak the tone or add more specifics.

If you want a shorter version, a more formal proposal structure, or adjustments (e.g., hybrid burn + distribute), just let me know!

5 Likes
6

Thank you for reading my propose

My purpose when writing this is not to increase prices in the short term. Liquidity on Balancer AutoRange has been severely depleted (it was $2 two hours ago).

My idea is temporary (4 weeks - 240,000 USDC x 60% = 144,000 USDC) switch from Neverland’s revenue to burn, so Liquidity Pool can receive USDC to work normaly.

7

I want to say that your proposal is very thoughful and well written. I just think the Uniswap V3 got us into a huge mess in the early days and I personally don’t want to go back there. And I have never seen buybacks really work in crypto, its just throwing away USDC.

The token price will be low in the short term, the users can choose to wait out the liquidity crunch or lock their tokens long term. We should not be using protocol revenue to fund exit liquidity.

4 Likes
8

That’s exactly right. This proposal only temporarily sacrifices 4 weeks of veDUST’s benefits in order to rescue the liquidity situation right now.

illiquid DUST is also not good for the future of veDUST

And we could also adjust the parameters a bit, for example, 35/35/30.

9

Current problem is that DUST has become illiquid.

I think we need liquidity support in short term, however small, to ensure the economy continues to function normally.

Stablecoin loops are disappearing; Total Value Borrow has lost $90M.

10

Hi team! I have a couple of questions:

  1. The personal one: I hold the largest single LP position in the Balancer AutoRange DUST/USDC pool now and have suffered significant losses as the pool depleted its USDC side. I am now holding a large amount of DUST with effectively no exit liquidity.
    My question is direct: the proposed $144K buyback over 4 weeks is meant to absorb sell pressure, but if I attempt to exit my DUST position, I alone will almost exceed that entire buyback budget. How does this proposal create enough liquidity for large holders to exit without crashing the price further? And if it doesn’t, what is the protocol’s plan for restoring meaningful exit liquidity for positions of this size?

  2. The technical one: Why would anyone provide liquidity to the DUST/USDC pool on Uniswap V3 if the protocol has already shown that DUST can become illiquid and the IL could be catastrophic?

No offence, but an extreme situation calls for direct questions.

1 Like
11

I’ve maintained for a long time now that concentrated liquidity, while more capital efficient, is a death spiral for small cap coins. It limits price discovery by forcing size to move the pool in either direction and when it hits the edge the price move is harsh and fast. When you have a token that is printing in its early days like DUST this vastly benefits farmers who can sell without taking much slippage and in turn requires buyers of DUST to beat out farmers and the deep LP to find any upward movement.

By adjusting the USDC rewards to these new parameters we will basically be having the USDC rewards support the price for DUST farmers while veDUST and LP holders take the hit.

The price of DUST is getting pushed down by farmers but its also not getting bought by speculators. Now we ask the question why? Why do people not want to buy a token that pays 175% APY in USDC? I’d assume because they do not believe those rewards will last long enough to realize that value. This can be because they do not believe TVL will stick around Monad the L2 or other big players will join and pull TVL away (like pendle).

Thea real solution is providing quality deposit tokens that users will deposit and borrow against. I believe there are 2 easy W’s that can help with this, WSTETH, and SUSDS. Both tokens have large TVL and native yield and are backed by teams with a long history of success. These 2 factors would open up size for TVL to deposit into the protocol and allow them to borrow against it without the need to fully subsidies borrows with DUST. This would increase TVL and fees for the protocol and I believe that would bring more trust to potential DUST buyers that the protocol is worth the risk to buy DUST and earn the USDC rewards.

TL;DR Convert LP incentives back to v2 and onboard high quality deposit tokens like WSTETH and SUSDS. This allows for proper price discovery and building the protocol with high quality options for TVL to increase protocol rev and bring in more DUST buyers.

3 Likes
12

An alternative direction for the DUST/USDC liquidity problem

I want to offer a different framing for RFC-06. The diagnosis in the original proposal is careful and the incident is real. My concern is that the remedies address the symptom (a depleted pool) while leaving the cause untouched, and that they cost the protocol more than a set of governance parameter changes that would address the cause directly. I am writing this to start a discussion, not to dictate an outcome.

(Numbers that i got when i researched)

The problems, stated with the actual numbers

  1. Emission dependence. On this pool, daily LP income is approximately 1,454 USD in DUST emissions against approximately 105 USD in real swap fees. Roughly 93 percent of the yield is freshly printed DUST. Annualized, that is on the order of 530,000 USD of DUST printed for this single pool against roughly 38,000 USD of real fees earned.

  2. Rented liquidity. The USDC side of the pool is now about 0.9 percent of the pool (3.96K USDC against 1.81M DUST). Pool TVL fell from 808K on Jun 25 to 455K, a decline of about 44 percent in a few days. The liquidity left because it was incentivized to be there, not because it was owned.

  3. Reflexive design. The yield that justifies locking into veDUST is itself funded by emissions. When DUST falls, that yield falls with it, which weakens the incentive to lock at the exact moment selling pressure is highest. This is the loop that produces the incident, and it repeats unless the design changes.

These three points are the actual problem. A second pool, a temporary buyback, or a change to the fee number does not alter any of them.

Why RFC-06 does not resolve the cause

The Uniswap V3 split divides already thin liquidity across two venues, which makes execution on large sells worse rather than better, and it does not answer who supplies the USDC on either venue. The buyback and burn spends USDC and then destroys the DUST it buys, so the pool is no deeper afterward, and at the proposed size it mostly provides exit liquidity to the first sellers out. Reducing the veDUST share from 70 percent to 20 percent weakens the lock sink during a confidence crisis, which increases net selling. Each of these also carries cost: a new pool deployment, two incentive programs, and direct treasury spend.

The direction I propose, using only governance levers

The highest leverage fixes here are also the cheapest, because they are governance parameters and treasury allocation rather than new contracts. None of the following requires an audit or a new deployment.

  1. Reduce DUST emissions on a managed path toward the level that real revenue can sustain. Emission rates are governance set. Lowering them reduces the sell pressure at its source and costs the protocol nothing. It also extends runway, since fewer tokens are printed.

  2. Redirect protocol revenue into protocol owned liquidity instead of buyback and burn. Protocol revenue is already collected in real assets through the reserve factor and borrow interest. Supplying that as USDC and DUST into the existing pool deepens the bid with liquidity the protocol owns and does not withdraw under stress. This uses the existing pool and a treasury action, with no new contract.

  3. Preserve the veDUST share and move it over time toward a claim on real revenue rather than emissions. This keeps the lock sink intact now and makes locking worthwhile even when the DUST price is falling, which is the long term fix for reflexivity.

On swap fees and the dynamic fee idea

The only attribute editable on the current pool is the flat swap fee, currently 1 percent, set through the delegate manager. Because it is symmetric, raising it taxes buys exactly as much as sells, and buys are what refill the USDC side. So the flat fee is not a useful lever for this problem in either direction.

A fee that charges only the destabilizing direction, that is, a surge on sells when the USDC side is depleted, is the correct mechanism and would compensate the liquidity providers who are currently absorbing the losses. It cannot be applied to the existing pool, because it requires a custom hook set at deployment, which means a new pool and an audit (probably). For that reason I am not proposing it as part of these low cost actions. It belongs in a separate decision about whether to redeploy the pool, and only if the governance levers above prove insufficient.

9 Likes
[RFC-07] DUST Claim Reform: Commitment-Based Release
13

I agree with everything stated by danielf15.

14

In @danielf15 I understand how the protocol revenue is used to re-inject USDC into the pool.

With the original proposal, I am not so clear what the increase ‘burn + buyback’ is going to do. Is the idea to use the buyback to buy DUST and try to offset the sell pressure?

15

I couldn’t agree more. Repurchased DUST should be distributed to veDUST holders. You achieve two things in one stroke - reduce selling pressure and reward long term believers.

4 Likes
16

Right. So instead of buyback + burn, we would do a buyback + redistribute.

I could definitely get behind that.

1 Like
17

I am not a member of the Neverland Team, just a veDUST holders. And this is just the RFC phase; changes/additions may occur.

The purpose of this proposal is to increase liquidity for DUST over a wider range, allowing DUST to fall to price where selling pressure balances buying pressure.

Balancer AutoRange provides liquidity within a narrow range of ±2%, while Uniswap v3 provides liquidity in wider ranges.

1 Like
18

To be fair, I am not sure any design could sustain having the top LP holder exit without crashing the price. Today anybody trying to sell 300k DUST will crash the price. Fair and simple.

Now ideally we make the LP attractive enough so people like you and I don’t have to exit the pool all at once (maybe DUST goes back up to where your position is being profitable again, or the fees add up to where your gains can offset your losses, etc…)

1 Like
19

Hi OP and everyone,

V2 Pool Over V3 Pool

I see a V3 Pool as similar to the Balancer Pool but without an automation, relying instead on monitoring by the LPers. This means that price collapse is still a very real risk if LPers fail to adjust their ranges en masse. It also means that LPers may face having to adjust multiple times during the slippage period, which makes V3 unlikely to be resilient.

I would suggest the resilience layer to be a V2 classic pool as per what we previously had. It stays flat and unchanging, offering the same protection from slippage regardless or price range. Yes, it was inefficient in the past as the sole liquidity layer, but it will function well as a passive safety net when DUST is sold every Wed and Thurs once the Balancer Pool is temporarily exhausted. This is exactly what we want for a resilience layer, and I think both should be incentivised properly. 50%/50% for each pool is a good start.

Buyback + Redistribute to veDUST Holders instead of Buyback + Burn

I second this, but only very strictly that the redistribution is directly into existing veDUST NFTs or as a max-locked NFT, not as liquid DUST that can and will be dumped back onto the market by recipients of it as free money or exit liquidity. That will achieve nothing better than buy and burn.

2 Likes
20

oh man, definitely. I thought it was implied all along, but definitely better be 100% clear so as to avoid confusion.

I would suggest the resilience layer to be a V2 classic pool

An interesting idea. An escape valve which could be very handy when we reach the edge of the balancer pool. Definitely easier to manage that’s for sure.

1 Like