DPI Liquidity Mining#7

[george]

Title: DPI Liquidity Mining #7
Author: OverAnalyser @overanalyser George @george
Created: 2021-05-04

IIP-28 DPI liquidity Mining #6

Simple Summary

We propose reducing liquidity rewards for DPI:ETH Uniswap pool inline with IIP-28 mandate from 700 INDEX per day to 530 INDEX per day. The 30 day period from 9th May to 7th June will consume 15 950 INDEX and cost $876,150 at $55 per token.

Mandate for days 31-60 within IIP-28

• $55 M liquidity based on 7 day average to day 25 (01May21)
  • Minimum 15 000 (500 INDEX per day)
  • Maximum 30 000(1000 INDEX per day)
• 15 950 INDEX represents ~0.16% of total issuance.

Data collected

• 7 day average liquidity = $ 72.42M
• 20 day TWAP for INDEX = $37.81

Calculation of new LM rewards:

$72.42M/ $55M = 32% excess in LM pool.

LM rewards will be reduced by 32% (21 000->15 950) to target $55 M Liquidity in Days 31 -60.

Specification
30 day LM campaign for DPI:ETH Uniswap pair using the existing contract to start on shortly after the current contract ends with a total of 15 950 INDEX.

Additional Information

The below table and charts highlight what the potential slippage is for the average trade size. Slippage is the difference between the expected price of a trade and the executed amount. The trading sizes were gathered for a minimum of 16 weeks and bucketed into the different percentile groups. A trading range is calculated by deducting the 10th percentile from the 90/95th percentile. We can approximate what the slippage is vs the liquidity pool size.(Trade Size Range / Liquidity Pool)

Analysis of the trade size shows the following:

Note: * Percentile calculation includes all trades (i.e. does not exclude arbitrage where slippage = profit)

Liquidity seems to be in line with the trading range size.

The specified INDEX rewards rate of 530 INDEX over 30 days and the INDEX 20 day TWAP price of $37.81 is a 13.34% APY in mining rewards for a $55 M pool size.

In addition to the LM rewards, the LP’s trading daily fees have averaged $9 745 over the 7 days 25th April to 01 May 2021 which is 6.42% on a $55M pool size.

Extension beyond 30 days

After 25 days of the continued liquidity mining, the Product and Treasury Working Groups would review the average value of liquidity in the staking contract over the previous 7 days and agree on the ongoing reward rates for the next 30 day period.

Liquidity incentives methodology

1. 7 day Average Liquidity / Target Liquidity which determines whether we are over or under our target as %.
2. If we are over or under our liquidity target we will reduce or increase the rewards proportionately.
3. Update of the fees earned from the liquidity pool based on the last 7 days volume, this is also used as a metric when comparing to the future incentives.
4. Additional info such as the slippage calculations will also be updated.

Calculations

Next stages
This post is the formal recommendation of the rewards for days 31-60 as per IIP-28. Implementation is planned under that mandate. The community needs to take no action.

[puniaviision]

@george

Analysis of the trade size shows the following:

First of all, super impressed with this analysis and the level of consideration that was taken!I had a question about the above table^ - what does 10/95 mean? Or 10/90?

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The only think I would add to this analysis is an understanding of how much of the pool is split between incentivized vs. unincentivized. Ex. there may be people who are LP’ing into the pool but have no staked onto the contract. These people may be manipulating the “market settlement” price for liquidity.

I’m not sure if it is possible to check how much capital is staked onto a LM contract? Maybe @jdcook or @ncitron would know.

[puniaviision]

Another consideration is our competitive relationship with bDPI. Not sure what thoughts you guys have there.

[overanalyser]

Thank you @george great work.

[overanalyser]

My understanding is that the calculation subtracts the value of the trades in the 0 to 9.999% percentile ranges. So we look at the middle 80% of trade count and the size of those. I’m not sure that we are that interested in the lower 10% for this analysis. However, the Low 10% is a small number (~$250) subtracting it doesn’t have much impact.

@Gearoge is planning a forum post around his analysis and what it can tell us.

The incentivised AUM is taken from @jdcook excellent KPI dashboard. I believe that this looks at the staking contract. If you look at holders on Etherscan, it’s showing ~90% of the LP tokens in the staking contract. This is only a single time point, (i.e. Now) but I think it’s pretty consistent.

Uniswap DPI/ETH LP (UNI-V2) Token Tracker | Etherscan

The $55 M target was set to maintain liquidity at the height of the Basket DAO launch when they were offering ~400% incentives. The competitors APY has dropped to ~18% due to reduced issuance and Token value. LP’s are also seeing lower trading fees (Zapper.finance):

[george]

Hey Punia, @overanalyser has covered your queries. I will update the wording to to include that the calculations do take incentivized liquidity based off @jdcook dashboard. I am also going to write a bit more of a post around the analysis to give a bit more of a detailed picture.

[puniaviision]

@overanalyser

The $55 M target was set to maintain liquidity at the height of the Basket DAO launch when they were offering ~400% incentives. The competitors APY has dropped to ~18% due to reduced issuance and Token value. LP’s are also seeing lower trading fees (Zapper.finance):

Are you concerned that they were able to drop their APY that much and still hold that amount of secondary market liquidity? Does the market’s response to incentives look like a curve or do you think it would be more of a stepwise function given competitive dynamics?

Curious about your thoughts too @george.

[george]

I think it’s an interesting question around the loyalty of liquidity. I think there are other factors to consider such as market conditions and the underlying products. Inclined to go with a stepwise function as liquidity improves/reduced at incremental moves in incentives. bDPI at the height was around $90 M in liquidity.

[snasps]

Thank you @george for submitting this proposal and for all the thorough work behind it.

I will summrise my thoughts below:

1- What is the point we are trying to achieve by reducing incentives now. Is that part of a longer term strategic goal? If it is, I would prefer we formulate our goals on a broader strategic level, and then apply the approach to each product. (I have worked on a proposal with @overanalyser that addresses this, and will be posted very soon).
2- I can see that the liquidity mining APY returns for DPI are not particularly high. It does not seem to me that we are overpaying on this front, especially VS what competitors are doing, although I agree that liquidity levels are more than adequate.
3- I have previously voiced concerns about continuous & unpredictable changes to LM incentives, and how this might affect the “loyalty” of our Liquidity providers. I would rather we approach this problem in a more consistent & predictable way. (My proposal with OA mentioned in #1 is also an attempt at providing this type of consistency).
4- I also share @puniaviision concern that a competitor can have better liquidity levels than DPI, which has always been one of our strongest moats in the market.
5- Finally Uniswap V3’s launch is also another variable that we need to monitor for now, and see how the migration unfolds. I would rather we wait till we have a clearer picture and have better context to take action, especially that for a while there might be some liquidity fragmentation.

[BigSky7]

Great work here @overanalyser and @george - it is clear to me that we are absolute market leaders when it comes to analyzing and measuring the effects of liquidity mining. Here are some high level thoughts around our LM.

• I strongly agree with @puniaviision and @snasps that the depth of $DPI liquidity is one of our strongest moats. Our investors at the institutional and large individual level are laser focused on liquidity. Large investors who want exposure to the $DPI theme are looking to make market buys in the $1 - $10 million range.

• Our current level of liquidity supports frictionless retail and small whale purchases it is still too little for major players. We want $DPI to be a product that major global financial institutions are comfortable buying - we should never be in the position where we have to tell a fund manager that he needs to DCA into $DPI in order to avoid slippage.

• $MVI and $DPI both need continued liquidity mining support to enable those products to grow and thrive - this is not a bad thing. We need to view this support the same way traditional companies view CAPEX - an investment in the long-term success of our products.

We need to expand our time-horizon on LM - these projects take time to fully take hold and we should not be caught in short-term thinking around supporting our products. If we can support multi-year LM for our flagship products we absolutely should. $MVI will be an absolutely dominant product over the next two years, we need to ensure we are supporting it as it grows into its full market potential. Two years from now some of our Indies films will be major blockbusters and we need to recognize that the market doesn’t always react immediately.

I firmly believe that we need to aggressively invest in growing the liquidity for our core products. We already are underpaying for liquidity in comparison to basically every other protocol in the top-20 - we should commit to growing $DPI to $100 million of liquidity on Uni.

TDLR We need a long-term strategic vision for our LM. We need to commit to supporting core products through LM (specifically MVI and DPI). Liquidity is one of our most important moats.

[LemonadeAlpha]

They are running a vesting scheme as well

[dylan]

I think the next steps here are to implement the top-up of the DPI LM rewards according to @george’s spec above. IIP-28 was voted in by the community, and until another IIP is voted in to override that decision, it seems the Coop should honor that decision.

If we want to update the LM parameters for day 60 - day 90 of DPI/MVI Liquidity Mining, I suggest someone draft an IIP!

[overanalyser]

@puniaviision

Are you concerned that they were able to drop their APY that much and still hold that amount of secondary market liquidity? Does the market’s response to incentives look like a curve or do you think it would be more of a stepwise function given competitive dynamics?

I think it’s a case that for many people they enter a staking contract and they are pretty sticky, we have managed to cut incentives a few times since the end of the initial liquidity mining campaign without huge losses (although I’ve not looked at the number fo LP tokens).

This is good in that it can save us cash, but it may mean that we might not see additional liquidity joining the pool even if we boosted the rewards by 100% - Index Coop shows 19% APY @ 62 INDEX. Will double the rewards result in double the liquidity? I suspect not.

The 90 day programme targeting $55 M was an attempt to give more certainty to the market. LP’s and the coop treasury. It should have been obvious that the number of tokens were going to be cut based not he design of IIP-28.

There are multiple stake holders when it comes to liquidity mining (methodologies, traders, LPs, Coop treasury) and I think we all agree that there needs to be a long term strategy.

Various members of the PWG have been discussing a few different ideas with a number of people. We are hoping to kick off a discussion around LM strategy next week and hopefully, we may have an agreed strategy by the end of the month (which would result in an IIP to supersede the current LM campaigns).

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Edit to add, we also need to consider the impact of Uni v3…

[mrvls_brkfst]

+1 to consider v3. It seems to provide giant depth with a small TVL. This could reduce the need for LM significantly and free up a lot of DPI for investment elsewhere if there are opportunities. The INDEX saved on LMing might in a short time, come late summer, be used to incentivise an L2 pool, perhaps?

[mrvls_brkfst]

Is this live yet? The dates on the site need updating

[dylan]

will update as soon as LM is live

[overanalyser]

OK, following on from @anon10525910 's question in the weekly call.

The proposal was based on calculations from the 4th May:

If we look at the supply break down when we had 68,000 units incentivised (@jdcook this is just the staked DPI in the uniswap pool correct?):

We now have 72,000 units so an increase of 6% while we have decreased the number of INDEX tokens by 32%.

@george @Matthew_Graham

[jdcook]

Ya, that looks correct. I am interested to see more of what @Matthew_Graham was talking about on the call - do you have anything to share that shows those LP distributions? You mentioned that a few players control a lot of the liquidity at this point? I haven’t ever looked at those distributions and am intrigued. That can either be a great thing (if they are sticky and want to see DPI succeed) or a bad thing (if they decide the APYs aren’t high enough and pull out causing major drop-offs in liquidity).

[Matthew_Graham]

hey @jdcook,

My charts are based on DPI-ETH LP token of which there are 27,644 in circulating supply.
25,934 of the 27,644 tokens are in the staking contract.
There are 5 wallet addresses with over 1,000 LP tokens in the staking contract. The largest sub 1,000 wallet size is like <620. There are 5 wallet address that have 13,012 of the 27,644 tokens in the staking contract.

ie: 47% of all INDEX incentives are going to 5 wallets
We have alway known Index Coop’s liquidity mining program is being gamed I raised this back in like February or something when I first looked at this data.

Wallet Address: 0x4a3e950c35c6d9c2d8f5f0a6cc03af9942134840
This address had 64,773 INDEX tokens back end of February, 5.77% of circulating supply back then.
Now it has 77,636.15 and INDEX tokens were most recently retrieved 16 days ago. So this address has at least another thousand plus index tokens.

Now that wallet address has 4,461.5 DPI-ETH LP tokens or 17% of of the staking contract pool.
ie: A single wallet address is receiving around 91.2 INDEX per day at 530 INDEX per day
This address deposited the LP toke on 7th December and hasn’t moves its capital since. Prior to that, the address originally deposited into the October staking contract on the 7th October.

I have a chart that maintain from Etherscan tracking the number of units going into and out of the staking contract. We can below there was a spike up (net inflow) around early May when the rewards were extended at a reduced rate. By comparison April had a spike down (net outflow).

[BigSky7]

@Matthew_Graham

Index Coop’s liquidity mining program is being gamed

I disagree with this sentiment - we are paying for a service (liquidity) and some of the providers of that service are large holders and investors. Everyone here is a rational economic actor intent on maximizing profit. We can expect every stakeholder to act in such a way that maximizes their profit - this is why I stake MVI.

What we need to determine is how important liquidity mining is for these five wallets - because they are all big Index holders we can assume they have some stake in the success of our protocol. If liquidity mining is not a major incentive for them to provide liquidity and if they would be supplying liquidity regardless of staking rewards, we need to ask ourselves if this investment would be better spent elsewhere.

@jdcook

That can either be a great thing (if they are sticky and want to see DPI succeed) or a bad thing (if they decide the APYs aren’t high enough and pull out causing major drop-offs in liquidity).

@jdcook sums up the good and the bad the questions I outline above.

What this discussion tells me is that we need to have more conversations with our major liquidity providers. They are clearly big stakeholders in our community and we are all working together to maximize the profitability of this protocol. If they are willing to provide large amounts of liquidity regardless of incentives it makes sense for us to start investing that capital elsewhere. While this may lower short term ROI around providing liquidity it will significantly enhance the long-term value proposition of the Coop.