IIP-18 ETH2x FLI Liquidity Mining #1 (Draft 2)

Governance Proposal
1

IIP: 18
Title: FLI Liquidity Mining #1
Status: Draft
Author: Punia @puniaviision
Created: March 23rd, 2021

Simple Summary

Start liquidity mining incentives for the ETH2x Flexible Leverage Index (ETH2x-FLI) Set for 30 days.

Abstract

Create a new $INDEX liquidity mining program for the ETH2x Flexible Leverage Index Set with the following parameters:

  1. Asset pair will be ETH2x FLI:ETH to maintain a net 1.5x ETH long ratio for LPs.
  2. Programme runs for 30 days.
  3. Programme will use a new Smart Contract with the same functionality as the one currently used for DPI liquidity mining.
  4. Programme will have an issuance targeting certain pool parameters described below and calculated using the 20-day average price of $INDEX prior to launch.

Motivation

The ETH2x FLI will be the first leverage token of its kind. It will allow retail traders to access leverage without having to worry about the overhead required in maintaining their position. Because it is a token that is meant to be traded and not held long term, transaction costs to buy the ETH2x FLI need to be minimized in order to keep the retail audience.

Currently, to mint an ETH2x FLI costs almost 4x as much as buying off of Uniswap. This will still be tenable to larger retail investors, but not accessible to the broader base. A highly liquid initial secondary market would help FLI achieve it’s product vision.

Secondary Market Parameters Consideration:

Assumption: People will want to buy an ETH leverage token using ETH.

ETH:FLI USDC:FLI 33%FLI:66%ETH
Protocol Uniswap Uniswap Balancer
Gas Costs 1 hop: 130k 2 hop: 200k 350k
Distribution Automatically integrated with wallets. Automatically integrated with wallets. No or few wallet integrations.
LP Net Exposure 1.5x ETH 1x ETH 1.3x ETH
LM Sustainability Cheap in a bull market, unsustainable in a bear. Easily sustainable. Paying people for longing ETH. Easily Sustainable. Paying people for longing ETH.
Liquidity Balanced Balanced 2x Sell Side

Given the above, and based on community feedback, we believe continuing to support the ETH2x-FLI:ETH pair on Uniswap is the correct choice. While a Balancer pool is interesting, implementing it would cause drastic technical overhead up and down the technology stack that is not worth the pay-off. Alongside the liquidity skew.

The Uniswap pool will calculate the issuance of $INDEX based on the trailing 20-day price of $INDEX prior to launch targeting the following parameters:

  1. A Uniswap pool of $10M
  2. 2% depth of $100k
  3. Target APY of 25%

At an $INDEX price of $20, this would equate to 10,416.67 INDEX, or about $208k/month.

An interesting thing to note is that the net exposure of the pool will be 1.5x ETH. This means that an LP can earn trading fees and LM reward fees for being leveraged long ETH! We should see this pool develop a deep organic liquidity base after the program helps attract capital.

A secondary reason is for the marketing and customer acquisition benefits of running a liquidity mining program. As we saw with DPI, we were able to keep supply of DPI up while we slowly reduced incentives. Similarly, with ETH2x FLI, the liquidity mining program will serve to expose the product to a large initial customer base, a majority of whom will continue to use the product even as rewards are reduced.

We intend to aim high and potentially overshoot for the first month while we learn and attract liquidity. Like the DPI, we will taper down after.

FOR

  • Start liquidity mining incentives for the ETH2xFLI set according to the parameters above.

AGAINST

  • Do not start liquidity mining incentives for the ETH2xFLI set according to the parameters above.
IIP-18
  • FOR
  • AGAINST

0 voters

Copyright

Copyright and related rights waived via CC0.

1 Like
2

I see some people are voting against. Would be helpful to have clarity as to why before this goes to snapshot governance.

3

I voted FOR and I strongly support this proposal. This is the exact kind of tailored liquidity mining @Matthew_Graham and @verto0912 have worked so hard to design. Highly focused, short term LM campaigns are exactly the strategy we should be pursuing to quickly and efficiently grow the size of our liquidity pools.

We already know that capital is especially sticky with our projects and that the liquidity we acquire during these LM campaigns sticks around long-term. As @puniaviision said, the economics of the pool make a ton of sense now and we can expect many LPs to remain after incentives have ended.

I understand that the primary concern may be concentrating too many INDEX tokens with any one entity, specifically the providers of seed liquidity. In my opinion this concern conflates short-term tactical actions around building liquidity with our long-term strategic goals of building a diversified ecosystem of investors and partners.

The purpose of Index Coop is to build and release the best crypto-funds in the world. This is our only job. The fact of the matter is this, our large partners are just as much a part of our community as we the individual community members are. Tailoring our LM or product strategy to limit their participation in LM is unfair and short-sighted. If community members are concerned about control within the community becoming too centralized - then we have that discussion. But we have that discussion directly instead of using proxy issues.

TO build on that point - with so much to build and so much energy behind our community we need to push forward and not become mired in debates around governance issues that are both unavoidable and essentially irrelevant to our ability to function as an autonomous community.

That doesn’t mean we ignore these issues - it does mean that we do not become shortsighted and reactionary.

We will always have partners (including members of the Set team and DFP) who have a lot of power due to their holdings of the INDEX token. This will always be the case within any DeFI community. We are fortunate because all the key stakeholders are both known to the community and incredibly supportive of our DAO.

The efforts being done by @Metfanmike and @fallow8 regarding institutional sales of $DPI will likely also lead to the eventual purchase of a large number of $Index tokens by an institutional sized entity that dwarfs any of our current partners. Our DAO needs to become comfortable working with and communicating with large outside investors. You simply cannot run a business without these kinds of investors and the benefits they add.

The difference between a truly mature and established DAO and group of people on a discord is the ability to navigate these complex relationships. What makes good businesses work is building good partnerships - partnership is based on communication and conversation between the engaged parties.

4 Likes
4

Voted FOR.

I also think we shouldn’t be worried about concentration of INDEX so much as we are the success of our products.

One thing, @puniaviision could we update assumptions of INDEX price as now almost double the above?

5

I’m using the 20-day rolling which is around $20 still: Weekly Planning Metrics - Google Sheets

1 Like
6

When I first considered Liquidity Mining FLI:ETH I thought it would be hard work as the divergence loss could be huge. So I was worried that we would see a small pool for a given amount of rewards.

Now I see that we have 1M of unincentivised liquidity which is ~33% of the tokens issued. Trade volume is huge so the pool fees are over 200% which probably dwarfs any liquidity mining programme we might consider.

Earlier today I was thinking that there is no point giving incentives to a pool that earns over 100%. This was based on the assumption that if the fees don’t attract LP’s, then nothing will. However, I’m coming to the conclusion that considering LP rational is likely a mistake. (more to come on that thought over the weekend…).

I think FLI:ETH LP’s will behave differently to DPI:ETH. So we will need to think of some KPI’s / strategies for long term LM management. - Again thats probably for a separate post.

It’s entirely possibly that some potential LP’s are more attracted to a LM reward than fees (which we know vary over time), so by investing $200,000 over a 30 day programme, we could kick off even more liquidity. More liquidity improves the product in two ways - larger trades can happen without moving the price and arbitrage happens at a lower offset to the peg. The issue and redemption fees could become our main income from FLI.

So, I’ve voted for because I want to see FLi fly and a boost now could do something spectacular, and I want another data point for trying to understand LP’s.

4 Likes
7

I voted against but it is more a wait and see. I followed since launch the evolution of LP and it has a good organic growth IMO.

I have personally “bought the dip” converting eth to FLI and pooled everything to enjoy some good LP fees.

My holding target is roughly a month or two (or a specific exit price point). And considering current LP fees, saying YES for the proposal would not incentive me to pool more but just gain an extra reward for an already good investment.

But maybe during the time waiting for UNI V3 and a better capital allocation for AMM, having a bigger liquidity to limit price impact pool through liquidity mining might be a way to bootstrap FLI even more. and when UNI V3 launch reassess this proposal

1 Like