IIP-14 DPI Liquidity mining #4

iip: 14
title: DPI Liquidity Mining #4
status: Proposed
author: OverAnalyser @overanalyser
created: 2021-01-25

Simple Summary

Extend INDEX liquidity mining incentives for the DeFi Pulse Index (DPI) Set for 30 days with a lower (50% reduction) issuance rate or 1,250 per day.

Abstract

Extend the current INDEX liquidity mining program for the DeFi Pulse Index Set with the following parameters:

  • Programme runs for 30 days (from ~12PM PDT, February 6th 2021 to ~12PM PDT, 8th March 2021).
  • Programme will use the same staking contract as IIP-11 and IIP-13 to remove the need to unstake and restake.
  • Programme will have reduced issuance rate (1,250 vs 2,500) compared to IIP-12 (a 50% reduction)
  • 37.500 INDEX represents 0.35% of total issuance and about 0.75% of the unallocated issuance.

Motivation

The DeFi Pulse Index currently has high liquidity on the Uniswap ETH - DPI pool. This is in part due to the liquidity mining incentive program. High Uniswap liquidity allows users and third party integrators to confidently enter and exit DPI positions.

The current liquidity mining incentive program ends on February 6th. This proposal seeks to extend liquidity mining incentives with a new liquidity mining program to continue growing distribution and adoption of the DPI.

However, it is planed to eventually stop the $INDEX funded liquidity mining programme, with long term liquidity provided by the trading fees (and 3rd party mining incentives). This will mean that $DPI becomes 100% unincentiviesd by the coop - currently ~65% unincentivised

value of $DPI activity in the pool.
Recent analysis has shown that the majority of economic activity within this pool is for transfers (trades and liquidity changes) between ~$10000 and ~$100,000 of $DPI per action.

Even so, there have been a significant number of larger value $DPI transfers (with trades upto $350,000):

image

These larger $DPI actions actions appear to be largely unaffected by the size of slippage effected (note most of liquidity deposits and withdraws). Even so, a large liquidity pool provides obvious benefits in terms of large holders confidence in maintaining a position holding $DPI.

History of $INDEX liquidity mining
The change from 15,000 to 3,864 INDEX per day in December was accompanied by a significant drop in liquidity in the pool. However, the reduction from 3,864 to 2,500 at the start of January did not result in a similar effect and with the recent increase in both $DPI and $ETH prices, the liquidity pool has grown. (The use of the same staking contract meant that no action was required to continue the farm which probably helped retention)

The current liquidity pool at ~ $48 M allows trades up to $240,000 with 1% slippage and ~$120,000 with 0.5% slippage. Note that this pool includes some staking in Harvest contracts, so ~$4 M of this liquidity is not rewarded by $INDEX.

Current liquidity, volume and income for LP’s

Looking at the last 7 days of trading, ~2/3 of the income is for the $INDEX farm is from the $INDEX liquidity mining. So a reduction of 50% in the INDEX rewards might be expected to result in the liquidity pool being reduced by ~1/3. i.e to ~$30 M.

Other DEX liquidity

Since launching DPI a number of other DE pools have opened. These add a further $ 3.7 M of DPI (equivalent to 7.4 M liquidity in a 50:50 pool)

image

Ongoing works
Work is ongoing to activate intrinsic productivity contracts to capture more income from DPI (which may be used to incentivise the liquidity pool). However, this is a longer term coal for the coop

In addition, work is underway to allow easier access to exchange issue and redemption for large purchasers. It is hoped that this will be live and available to the market before then end of this proposed liquidity mining.

KPI’s

The key KPI for this proposal is that there will remain over $30 M liquidity in the main Uniswap $DPI: $ETH pool.

A secondary KPI will be that the % fees from trading volume will grow in this pool as trade volumes increase combined with a reducing pool size.

.

FOR

  • Extend liquidity mining incentives for the DPI set according to the parameters above.

AGAINST

  • Do not extend liquidity mining incentives for the DPI set according to the parameters above.
    .

Specification

Overview

The deployed smart contract being used for the current liquidity mining program can be extended, but only for the same timer period.

The proposed smart contract for distributing liquidity mining rewards functions exactly the same way as the current liquidity mining smart contract:

Existing stakers need to take no action.

New stakers would need to:

  1. Users deposit ETH and DPI into the Uniswap ETH - DPI pool and receive Uniswap ETH DPI LP tokens.
  2. Users deposit their Uniswap ETH DPI LP tokens into the proposed Index Coop liquidity mining contract.
  3. Users receive INDEX tokens in proportion to the quantity of ETH DPI LP tokens deposited.
$INDEX rewards for DPI:ETH Uniswap pool - #4 - 30 days at 1,250 INDEX per day
  • For
  • Against

0 voters

2 Likes

Voted For - it’s important to slowly remove incentives. last reduction didn’t see much change in liquidity on Uniswap and it’s likely that inertia will lead to no meaningful changes this time around.

4 Likes

Even though I am a new INDEX farmer, I can support this direction. How long do SUSHI rewards last on this pair?

Agree here, think we could taper down pretty slowly fwiw

the DPI/ETH ratio has been oscillating the last few weeks, so no need to make up for IL. Though, I could see LPs pulling liquidity if DPI starts to outperform ETH (as anticipated)

After a rocky start, the ratio has been pretty good.

Hopefully we will see DPI number grow (+10% this week), and DPI and ETH price increase, so more trade volume and fees.

I think sushi Onsen program is 60 day cycles, so maybe late feb?
Looping will be shorter, only 14 days.

3 Likes

Hey OverAnalyser, thanks for putting this together for the next round of liquidity mining.

I think there is an opportunity here given the increase in liquidity for ETH/DPI in Uniswap to $48m, to split the rewards between there and Sushiswap. I posted my thoughts regarding the benefits here back in December. They are already running a DPI:WETH pool as part of the Onsen program which is incentivised by Sushi rewards at 52% APY and is seeing $2.1m in liquidity as a result. Adding in our own incentives could lift the pool and reduce the burden on Sushiswap to provide all the incentive.

With the advent of aggregators into the space, and now the exchange issuance contract being built out, the Coop can shift to pointing people to these options depending on trade size. That should mitigate concerns about larger trades taking place, and given what we’ve seen so far the reduction in rewards shouldn’t cause too great a drop in liquidity.

Perhaps we could keep the total reward the same going into February, but split some towards Sushi, increasing the amount to Sushi over time while reducing the absolute number of INDEX tokens. Each Onsen programme lasts 90 days with Sushi so it could make sense to taper rewards in 3-monthly blocks.

2 Likes

I don’t see any benefits from splitting the rewards to Sushi, I would rather save the tokens and pay you guys. The marketing benefits are rather nominal and “Retention analysis will give more info, but if we assume DPI is a sticky token, the more users we get holding it, the greater the potential for retaining them” - seems quite tenuous too.

Few people are really using Sushi, even fewer (if existed) are using Sushi and not Uni.

2 Likes

Poll closed @23.57 01feb21

Poll has passed.

1 Like

As the vote passed super majority, there was no snapshot vote.

Liquidity mining at the reduced rate has resumed.

1 Like

Thank you for creating this wonderful project guys. I think it make sense to gradually deplete the rewards, that’s a wiser move.

Question. For example the current APY is 19.61%, if we halve it further from March till April does it mean the APY will go 8.3% if $INDEX price stays the same.

2 Likes

Yes, if we cut rewards by another 50% and liquidity in the pool stays the same. It is likely though, that as rewards are reduced some of the liquidity will exit the pool. Which would lead to a smaller reduction in the APY (assuming, as you said, that INDEX price stays the same).

2 Likes

I’ve been LPing DPI/ETH for the past three weeks, and the INDEX rewards are about 2x that of the trading fees with a $30 token price. The fees are barely outpacing IL over that time, so depending on people’s pool size and transaction costs, some might be in the red without incentives.

I’ve also been LPing since early December and my INDEX reward is just about covering my impermanent loses. In fact I’d say that I lost out slightly by LPing than just holding DPI alone. Granted ETH prices did drop quite a bit recent days and that’s part of the reason but I agree with @Uncle that many people’s pool size will be in the red, my LP pool ETH/DPI was about $40,000 when I exited. And my only harvesting was done today when I unstaked, had I did more unstaking the TX fee would have stacked up more.

So yes, Indexcoop team has done a wonderful job but will need to find ways to incentive people to stay in the pool as I am pretty sure that with the next reduction in March it some will start suffering more ILs.

Good luck guys and keep up the good work!

Interesting. If LP fees stay at this level and also the absolute liquidity will, I will do 45% APY only on 0.3 uniswap fees if I look back on an 30 day average of the fees. So it is really important what performance the LP pool has managed.
If Pool price stays on a certain level and token have divergence to each other then it’s not fun to play that game. (That doesn’t mean I understand to play it)
So I am not sure what will happen if there is no incentive anymore. I think there will be some hodlers that will keep it just for the fees.