Really appreciate the technical expertise you bring to this @ncitron. Given we’re in agreement on the subject of directly seeding liquidity I hope we can keep the conversation going in this regard no matter the outcome on this proposal; I like to think that it all goes toward informing the best possible solution. Whether here or offline I’d like to get your thoughts on the desired outcomes for a liquidity provision and the best path to getting there.
Thank you for the explanation on the routing algo that Uniswap provides. I was not aware and thought the Uniswap protocol was agnostic within its own ecosystem. This consideration effectively limits the utility solely to DEX aggregator users (assuming they do not similarly whitelist multi-hop tokens). Overall this detracts heavily from the use-case being as effective as contemplated initially. Thank you for bringing this to light and I welcome your thoughts on an effective solution.
To your second point, I can assure you that this proposal being put forth for your consideration is deliberate, so I’ll speak to these points in more detail:
I don’t agree. Taking MVI as the example, over 96% of the v2 liquidity is incentivized:
. . . suggesting that there is just north of $200k in unincentivized v2 liquidity on the pair. With v3 having roughly the same amount of capital at the 0.3% fee level; granted, being utilized more efficiently. Assuming north of $400k of unincentivized liquidity on MVI/ETH, deploying just shy of 1/3 more at 1/3 the effective fee level would have a noticeable impact to the fees charged to users for a majority of swaps and help keep MVI closer to the peg. Who knows, maybe it turns out that most LPs stay when incentives end, but research by @overanalyser suggests that greater liquidity is necessary than would be organically provided, with arbitrage currently effective at the 1-2% range I believe that any reduction in liquidity would have an impact on spot/nav.
So when considering a strategy for increasing liquidity, I judged the best approach to be one that spreads the low-fee-level liquidity equally among simple index offerings. I think it sends the right message (that we have full and equal faith in our product offerings, equally deserving of a baseline liquidity level that’s not designed to capture fees, but rather improve the swap experience) and avoids extensive debate on what the right allocation strategy is. The proposed strategy is sufficiently complex, and while I agree that it could be even more effective than proposed, removing the complexities of a rebalance strategy debate and subsequent execution was a design consideration, not an oversight.
While estimates in terms of required contributor time and gas costs are included in the proposal, I welcome additional feedback as to the characterization of overhead costs as significant relative to the fees that would be generated. The typical rebalance is envisioned as quarterly, and the proposed strategy requires no engineering work. Contrast that to the current strategy requiring monthly contract fills and periodic contract creation, typically for each product offering in some different fashion. I view any process change that removes non-productive work from the EWG notion board as positive. Again I note that the bands proposed are very conservative and shouldn’t require frequent rebalancing.
In terms of Impermanent Loss, it is higher than v2 or a full-range position. v3 effectively provides a way to leverage liquidity in exchange for earning increased fees and that comes with risks, at which point it becomes a consideration of benefits vs the status quo; continue to spend INDEX to incentivize liquidity with no hope of a return, or provide the liquidity that is most useful and at least have a decent chance at growing that pot of tokens as our products perform well and INDEX valuation increases. I’d strongly prefer the latter as it’s not just about capital efficiency in a choice of liquidity provision, it’s about how efficiently The Coop wants to invest it’s INDEX in having the desired outcome this proposal is striving for, which the greatest improvement in user experience at the least cost to IC.
In terms of moving the needle on liquidity, I would again refer you to the example of v2 ($3.375MM in liquidity/$287k trade volume) vs v3 (96.11k in liquidity/$175k trade volume) on MVI. MVI has 2.8% the amount of liquidity available in v3 compared to v2, and sees over 38% of the trade volume. The proposed provision would double the amount of v3 liquidity available. The impact to the effective amount of liquidity in the system would be noticeable. At current INDEX valuations IC spent over $150k on MVI liquidity incentives from July to August and that’s just one product and the INDEX tokens are now gone; the proposed solution here would have a one-time cost of $1MM, likely be perpetual and grow, and be significantly more effective.
This is how I see it, I welcome feedback especially if I’m missing some technical nuance as I had above. I really enjoy that we’re trying to get to the same place and see multiple paths; I’m optimistic about where we’ll end up. Thanks again @ncitron.