IIP-18 ETH2x FLI Liquidity Mining

[dylan]

iip: 18
title: ETH2x FLI Liquidity Mining #1
status: Draft
author: @Puniaviision
created: 2021-03-02

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:USDC to maintain a net 1x ETH long ratio for LPs.
2. Programme runs for 30 days (starting 24 hours after the FLI launch).
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.

Given the above, we believe the USDC:FLI pair on Uniswap is the correct choice because:

1. Digestible 50% increase in gas costs relative to ETH:FLI on user assumption.
2. Afforded the distribution Uniswap gets.
3. Sustainable LP pool.

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 $5M
2. 2% depth of $100k
3. Target APY of 20%

At an $INDEX price of $18 (not the final number), this would equate to 4629.63 INDEX, or about $83k/month.

An interesting thing to note is that the net exposure of the pool will be 1x ETH. This means that a LP can earn trading fees for simply being long ETH! We should see this pool develop a deep organic liquidity base after a kick start for the launch.

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.

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.

Copyright

Copyright and related rights waived via CC0.

[Matthew_Graham]

Given DeFi Pulse owns 2% from genesis on a fully diluted basis & then DefiPulse via methodologist payments has accumulated another 1.25% for a total 3.25%. This also excludes the massive LM incentives.

I propose DeFi Pulse receives zero methodologist incentives and DeFi Pulse is not to receive any benefit from Liquidity Mining purely on the basis it will concentrate ownership further.

Any LM incentives can be funded from the methodologist incentive scheme on a conservative basis.

Also, what happens if we reach the target within 1 month of launching the pool ? Do we stop incentives the following month.

How does this fit into the larger ongoing discussion around liquidity mining ?

In my opinion, this needs to go into discord, be discussed and re-worked. We don’t have an understanding as to how concentrated this will make INDEX token distribution.

The below reflects the genesis contract, reducing the Methodologist Allocation and moving it to DeFi Pulse to reflect current rewards already distributed.

[Kiba]

You say an ETH/FLI pool is the most sustainable option in a bull market yet are proposing the FLI/USDC pool, do you think we aren’t in a bull market? My perception is we don’t even need incentives for this product, I think the market is hungry for it given bullish nature and especially with volatility picking up.

I’d be in favor of 1. waiting to see how FLI plays out naturally and 2. getting other protocols to pay for incentives e.g. Sushi Onsen program which we can lobby as we do initial marketing and promo. If we don’t hit the $5M target after 1-2 months then we can move forward with LP program

Why USDC over another stable? Why uni > sushi? Why target $100k trade sizes for this product? Are you calculating fees from target trade volume into monthly APY?

@Matthew_Graham we had that discussion about concentration of methodologist rewards and Set/DFP moved forward with it anyway so no reason to rehash.

[DarkForestCapital]

Agree with the points above, this seems a little off base given the extensive discussions around LM incentives recently.

There was no harmonisation between what is already being discussed and the proposed amount here. Given we seem to be overpaying for DPI liquidity right now why don’t we recycle the roughly 150 INDEX/day required from there to FLI?

[verto0912]

Lots of good questions raised. I think this IIP is rather rushed and no discussion has taken place to arrive at any of the parameters proposed.

Personally, I have the following concerns (which align with those raised by @Matthew_Graham and @Kiba) :

• Rushed proposal. What is the liquidity mining strategy for FLI beyond the initial month? Are we going to have to pull teeth every month like we do with DPI?

• Why Uni? Given the relationship with Sushi, why not Onsen + small INDEX rewards?

• Agree with @Kiba, why USDC? This is a leverage product in a bull market. ETH pair makes more sense.

• Why 2% depth of $100k?

• Why FLI and not CGI incentives?

• Further centralisation of governance power with DFP as mentioned by @Matthew_Graham.

Recycling DPI incentives, per @DarkForestCapital, makes a lot of sense here. But the level, the pair, the venue, the target pool size should all be discussed and agreed on.

[0x_Dev]

Feels like this should be part of a larger LM strategy discussion, which I’d love to see properly hashed out and aligned on by the Coop and Sets. I think that would add a lot of value to the Coop.

I’d also ask:

• Why LM for FLI and not CGI?
• ETH is in a bull market and this is an innovative, new product people want: so I agree with @Kiba that it could be worth letting this into the wild naturally at first and seeing if others will pay for the incentives. The success of DPI helps us here

I’m also concerned about the further centralization of governance power at DFP that this proposal would drive, per @Matthew_Graham, and think funding LM incentives via the methodologist incentive scheme could represent a fair balance given significant monopolization of methodologist rewards for last six months - which will continue for a while.

[puniaviision]

@Matthew_Graham

I propose DeFi Pulse receives zero methodologist incentives and DeFi Pulse is not to receive any benefit from Liquidity Mining purely on the basis it will concentrate ownership further.

To emphasize something here, we aren’t doing liquidity because we think it would benefit DFP, we are doing it because we think secondary market liquidity would provide significant value add to our users.

Your other points we are touching on the call and on the Discord so I won’t address them here.

@Kiba

You say an ETH/FLI pool is the most sustainable option in a bull market yet are proposing the FLI/USDC pool, do you think we aren’t in a bull market?

Markets feel volatile and in those conditions and I think if the pool were to have a net 1.x exposure, we wouldn’t have the nimbleness in the liquidity mining governance process to provide the best experience to our users.

Furthermore, we’ve done some research with traders/whales about each pool option, and the ETH:ETHFLI ones tend to illicit the most confusion around net exposure as it relates to IL.

@Kiba

I think the market is hungry for it given bullish nature and especially with volatility picking up.

I’d be in favor of 1. waiting to see how FLI plays out naturally and 2. getting other protocols to pay for incentives e.g. Sushi Onsen program which we can lobby as we do initial marketing and promo.

It sounds like the problem you are considering here is preserving $INDEX and/or not spending too much. To me, that isn’t an actual problem the Coop faces so the extra overhead with what you mentioned isn’t worth it.

@Kiba

Why USDC over another stable? Why uni > sushi? Why target $100k trade sizes for this product? Are you calculating fees from target trade volume into monthly APY?

With the FLI product, when you deposit ETH to mint FLI, you get back FLI + USDC. So a USDC would be a natural flow for a stablecoin pair.

We chose Uni over Sushi because Uni has automatic distribution to every wallet.

We identified high 5-figure/low 6-figure traders as the target persona for such a product (especially in context of alternatives).

We are not considering target trade volume.

@DarkForestCapital

Given we seem to be overpaying for DPI liquidity right now why don’t we recycle the roughly 150 INDEX/day required from there to FLI?

Thats about 4500 INDEX/month? Versus the 4600 that is proposed given a $18 Index. I am working backwards from what liquidity levels we want to provide the customer (with secondary consideration given to customer acquisition) as opposed to anything else.

@verto0912

What is the liquidity mining strategy for FLI beyond the initial month? Are we going to have to pull teeth every month like we do with DPI?

Thats hard to answer and I’d be curious to know why you think that is important to answer today. I like the idea of having the first month to test and see what the relation is.

Your other questions have been largely addressed above, let me know if anything is missing.

@verto0912

• Why FLI and not CGI incentives?

Here is the link to the discussion on Discord with @Matthew_Graham: Discord. Let’s follow up with any questions here because it is important to address and Discord is a chaotic place to do it.

@0x_Dev

I’d also ask:

I believe most of these have been answered above! Let me know if anything is missing.

---

Btw the typo status of the IIP has been changed to draft which we should have had in the first place. Definitely important to have alignment here so let’s continue the discussion!

[verto0912]

thanks @puniaviision

It seems to me that preference for USDC-FLI pair has to do with 1) mint flow (minting results in USDC in wallet) and 2) ease of explaining 1x ETH exposure of the USDC-FLI pair.

I’d like to challenge both of these points. ETH-FLI would offer 1.5x exposure. That’s pretty simple to explain. Same as with the USDC pair, that number would fluctuate between say 1.3x and 1.7x based on collaterlisation. Most people will not use the mint flow, but will buy instead. Whales might, but are we just building products for whales or mass market?

This all comes around to who the customer is. I would much rather buy FLI, LP ETH-FLI for 1.5x exposure and free up some ETH this way to take other positions. Do we believe our customers want to use FLI for 1x exposure? I don’t think so. As a leverage product, I see the customer wanting to have a leverage position, without having to manage collateral. USDC-FLI will essentially eliminate that leverage, making LPing that pair go against the design of the product.

@puniaviision

We chose Uni over Sushi because Uni has automatic distribution to every wallet.

Do you think FLI will be bought via wallets? I kind of see it as a more niche, DeFi focused product. Why is wallet distribution important for a one-month liquidity program?

If the goal is to generate liquidity for FLI, getting it included in the Onsen menu with INDEX incentives on top would yield the best liquidity outcome.

@puniaviision

Thats hard to answer and I’d be curious to know why you think that is important to answer today. I like the idea of having the first month to test and see what the relation is.

This sort of goes back to the bigger conversation about liquidity mining. We need a strategy. We are overpaying for DPI liquidity and w/out a strategy for FLI, we will likely be overpaying for FLI liquidity as well. We’ve been following a similar framework to the one outlined by Mechanism Capital and you have also followed it with this proposal. But I think we need a more comprehensive scenario analysis for potential outcomes after the first month and what that translates into with regards to liquidity mining. That’s what I mean by pulling teeth with DPI. Every month, we scramble to figure out what to do, instead of having a strategy and acting accordingly. Wouldn’t want that to happen here.

@puniaviision

Here is the link to the discussion on Discord with @Matthew_Graham: Discord. Let’s follow up with any questions here because it is important to address and Discord is a chaotic place to do it.

Just quickly on this, I certainly acknowledge your point and thanks for providing some colour. Not many of us have visibility into this. And if CoinShares chose a certain approach that’s on them. We can still discuss, as a community, if we want to incetivise the product though. Again, having a coherent strategy and process for liquidity mining would be great.

[Matthew_Graham]

As DFP is providing some liquidity, that is good. Has DFP communicated they zero intention to support the launch beyond seeding a liquidity pool ? Is DFP doing any marketing & distribution efforts ?

It would be great to understand what DFP is bringing to the table, so this conversation has context.

I don’t yet understand why DFP can not use the methodologist incentives to support the launch of the second product. By having 2 of 3 established products, and CGI not receiving methodologist incentives like DFP - this positions DFP to have a commanding position to receive future INDEX incentives. Given this, I believe it is very reasonable to ask DFP to fund any liquidity incentives.

Given the engineering workload in bring this to market, i understand it is very complicated, and the streaming fee balance of FLI relative to DPI favours DFP, has Index Coop / SET not already been more than generous already ? I would of expected a more complicated product, within heavy engineering up front and minimal thereafter would be on more favourable terms for Index Coop. Also, Index Coop is not DAO it was in October 2020. The value proposition that Index Coop brings is lot greater now. The streaming fees don’t seem to reflect this view.
It would be great if DFP engaged in the discussion.

With regards to this statement, this positioned me to think we may be targeting a wide variety of potential users. Smaller holders are more affected by gas costs interacting with Smart Contract but investors larger investors are a lot less sensitive to gas prices. Gas becomes an insignificant cost of doing business, a $2 more in the ETH price is probably more significant to large holders.

Given the target user group is $100,000-$1,000,000 purchasers, which is less than 1% of users in DeFi. They are probably the user group least incentivised by APY on something that replicates the pay out of a leverage trading position. The mint/redeem function represents a very practical way for users with $100K+ to enter and exit a position.

To help flush this out, if we assume a gas price 150 gwei, $100K trade, what is the mint and redeem cost roughly ? How expensive is this smart contract to interact ?

If incentives are critical to bootstrapping this product into existence, then what happens at month 2 and liquidity in the pool falls away and that $100K trade incurs +2% slippage, surely the mint/redeem functionality becomes more favourable. If that is the case, I don’t see the value add by providing initial incentives.

This topic has dominated multiple meetings and has seen widespread discussion with varying views. Why should we repeat the mistake to launch LM without a clear set of goals and plan in place.

I see this as a cheaper, or less dilutive option, to achieve the same objective. If Sushi supplements APY, and incentives are shown to be needed, then surely it is only a good thing for build liquidity. But given the target user group, again I think APY is by far a secondary consideration given the nature of the product.

[puniaviision]

@verto0912

I’d like to challenge both of these points. ETH-FLI would offer 1.5x exposure. That’s pretty simple to explain.

This is an example of some of the research we’ve done when evaluating the pools. This person is a very well known crypto whale and influencer. Yes, the net exposure is clear, but how that affects IL is less clear.

@verto0912

This all comes around to who the customer is. I would much rather buy FLI, LP ETH-FLI for 1.5x exposure and free up some ETH this way to take other positions.

The FLI and the LP Token should be considered two totally orthogonal products.

The FLI token is meant to be short-term traded by traders who we estimate would have somewhere between mid/high 5 figures and low 6 figure individuals. It is not meant to be a buy and hold.

The LP token is not meant to be used to move in and out of positions. It is meant to be more of a buy and hold because we want a consistent level of liquidity. That is why it is important it not itself represent a leveraged position.

@verto0912

Do you think FLI will be bought via wallets? I kind of see it as a more niche, DeFi focused product. Why is wallet distribution important for a one-month liquidity program?

Yea I definitely think it will. Financial products win on distribution and Uniswap has all the distribution, without spending UNI tokens, while Sushiswap has none while spending SUSHI every month.

Furthermore, our buy/sell flow currently right now is hooked up to go through Uniswap. To transfer it to Sushiswap would require technical changes up and down the stack. What you are solving for by going with Sushi is spending less INDEX, which is not a core problem for us to solve anyways.

@verto0912

This sort of goes back to the bigger conversation about liquidity mining. We need a strategy. We are overpaying for DPI liquidity and w/out a strategy for FLI, we will likely be overpaying for FLI liquidity as well.

I agree with this! However, I don’t think our inability to come up with a strategy should be a blocker for our customers having a good product experience. It doesn’t feel like every month we’ve been scrambling to figure out what to do for DPI. Its actually felt like a pretty smooth taper led by @overanalyser and only this month it has been more complex as we’ve added in more variables with Loopring and Sushiswap.

@verto0912

And if CoinShares chose a certain approach that’s on them. We can still discuss, as a community, if we want to incetivise the product though.

This is definitely true, if the community wants to incentivize CGI, we certainly can. I just wanted to provide a perspective on why it hasn’t been done yet.

@Matthew_Graham

As DFP is providing some liquidity, that is good. Has DFP communicated they zero intention to support the launch beyond seeding a liquidity pool ? Is DFP doing any marketing & distribution efforts ?

DFP has spun out a company called Pulse Inc. Till today, they have made 3 hires: a CEO, Nassim for BD, and Graham for partnerships. On a part time basis, Scott helps with product research and leverages his network for distribution, Chris helps on operations, and Chaz is helping out on marketing.

That’s about 3 FT hires and 3 PT contributors. I don’t know if more are coming.

Their other contributions are along the digital real estate they own with their website, Twitter, community, and mailing list.

For the DPI, they provided somewhere between $250k-$500k in initial liquidity. Not sure if there is a firm number for the FLI.

@Matthew_Graham

I don’t yet understand why DFP can not use the methodologist incentives to support the launch of the second product.

They certainly can! They can do whatever they want with their tokens. It seems like they don’t want to. This gets into some hard emotions, but generally I don’t think it is a good idea to punish our customers and our products for relationship dynamics with our partners.

@Matthew_Graham

Also, Index Coop is not DAO it was in October 2020. The value proposition that Index Coop brings is lot greater now. The streaming fees don’t seem to reflect this view.

Ultimately, everyone voted FOR in DG2 and the vote passed given the fee split. We do need to figure out a way that the DAO can engage in negotiations going forward. I believe that may be something you and Verto are working on.

@Matthew_Graham

Given the target user group is $100,000-$1,000,000 purchasers, which is less than 1% of users in DeFi. They are probably the user group least incentivised by APY on something that replicates the pay out of a leverage trading position.

Think it is more so $50k - $200k. Roughly that order of magnitude, as opposed to $100k - $1M.

Here’s some context:

1. Mint is about 400k-500k in gas transaction.
2. Minting is geo-fenced. We cannot allow leverage tokens on our platform for US entities.
3. We expect this product to be traded, not bought and held. Similar to the dynamics of leveraged indices in TradFi.
4. Like what we saw for the DPI, LM incentives are great for customer acquisition.

@Matthew_Graham

If incentives are critical to bootstrapping this product into existence, then what happens at month 2 and liquidity in the pool falls away

We taper down liquidity for the FLI as we did the DPI.

@Matthew_Graham

This topic has dominated multiple meetings and has seen widespread discussion with varying views. Why should we repeat the mistake to launch LM without a clear set of goals and plan in place.

Looking through the threads, I don’t think anyone talks about DPI LM as a mistake. The debates have been about Sushi and Loopring incentives which are different. Maybe this is a good time for you to chime in here @overanalyser with your thoughts.

@Matthew_Graham

I see this as a cheaper, or less dilutive option, to achieve the same objective.

See my response to Verto for context.

---

For transparency @Matthew_Graham and @verto0912 - a lot of the points I make here, DFP doesn’t even agree with. They are unsure about LM and if LM happens, they are currently leaning towards the Balancer pool option.

Any points I make above are not directed against somebody or in favoritism for another party. It is purely based on what I think will add most value to the customer, and therefore bring more value to the IC.

[overanalyser]

@puniaviision

Minting is geo-fenced. We cannot allow leverage tokens on our platform for US entities.

This is something that I wasn’t aware of. Being restricted upon how we can trade adds friction (which is probably unavoidable until we reach the end goal of being fully decentralised).

Obviously maintaining some secondary liquidity helps US based customers.

---

With regard to DPI, I think that the overall profile and / or liquidity has exceeded my expectations when we started. Back in November we were 90% + incentivised and fearful of what would happen on the 6th December. So to do what we did can only be considered a success. I (along with others) see extending that to sushi swap as a worthwhile experiment with the only thing at risk being that we may have wasted some INDEX in return for learning a lesson on the market behaviour.

However, it’s clear others want to be more rigorous in the approach to such things. In some ways it’s a culture clash in attitudes / personality and education (I would imagine a Solidity Dev needs to consider any potential exploit, while an experimental chemist has a different perspective on risk). There is merit to all approaches and it’s clear we are all trying to make the coop the best success we can.

---

I think we missed a trick when designing the product onboarding system and we should have included LM assessment / working group / strategy finalised between DG1 and DG2 so that the final DG2 vote is informed by the LM incentives. I think I need to look at the DG process to see if we can modify it to help get us all aligned behind a product that we release.

At times it seems like the coop is lacking an agreed common vision on tokenomics and how liquidity mining fits into that. But it’s clear that there is both a need and an appetite to have this discussion.

---

I bet you weren’t expecting me to be so philosophical in my answer.

[puniaviision]

@puniaviision

To transfer it to Sushiswap would require technical changes up and down the stack

This statement was incorrect. It is UI and some support components.

@puniaviision

Minting is geo-fenced. We cannot allow leverage tokens on our platform for US entities.

This statement may also be incorrect. Currently, we are geo-fencing buy/sell. Unclear if mint/redeem will be geofenced.

[verto0912]

hi @puniaviision

How do you estimate that a $5 million pool will have 2% depth of $100k?

Here a $5 million Uniswap pool and a trade of about $55k has 2% of slippage.

It looks like we need a pool of close to $10 million to achieve $100k with 2% slippage. YFI-ETH pool ($9.3 million) is an example here.

Just checking if there’s something I’m missing.

[Matthew_Graham]

Help me understand something, if the objective is to create a secondary market for FLI and it is difficult for people to understand the Impermanent Loss (IL). Would it make more sense to construct a pool that reduces IL ? Would this then reduce the need for incentives offsetting the risk of IL.

I believe we spoke about SushiSwap which would add there own incentives in addition to INDEX incentives. UniSwap was also discussed, I believe they have the best non incentivised AUM. Balancer was also discussed, and I think that was DeFi Pulses preferred AMM.

Does it make sense to consider a Balance pool that is majority ETH with some FLI ?
This would reduce IL and after LM incentives run out the pool is more likely to be self sufficient as the Fee Generated APY will be have less IL to offset.

If the risk of IL is low and the pool is majority ETH, Index Coop rather than providing LM incentives, could actually use that same budget $83k for 3 months = $249K to seed liquidity for the pool. This is about 5% of the desired pool size and with a low IL the LP token serves as a proxy for ETH diversification of the treasury…

If DeFi Pulse was to chip in $250k-$500k on FLI similar to DPI, then 5.0% to 7.5% of the desired pool size is attained by seed capital. Then any other funds become a bonus.

Reading over AG’s post, if a $10M pool is needed then to achieve the same target APY of 20% we will need a lot more INDEX tokens. If we double the proposed incentive rate, then the new distribution rate is 9,259.26 per month and over three months that is 27,777.78 INDEX tokens or a flush $500K.

For me, if we are going with LM then we should define some KPIs and a decision process we go through end of each month to determine the amount of INDEX to be spent the following month. The prospect of investing this much capital requires some forward planning. For me that was one of the key lessons from DPI, was how can we simplify future conversations around LM and I think we need to do that before starting LM on FLI. We have plenty of time to flush this out.

At 20% APY for 3 months, $21,500 worth of LP tokens would earn $1K worth of INDEX incentives. Fees would be an added bonus on top and with a lower IL on Balancer, I personally would be a lot more willing to invest as a LP. Even at 20% for 3 months, on a $21.5K investment, the gas costs say 10% and the IL does represent a risk. It would not take much of a fall in the ETH price to offset any gains. Thinking it through this way, I tend to lead towards seeding the pool rather than providing LM incentives. I’m not sure 20% APY is enough. I also think 20% APY is to low for a USD-FLI pool and probably to low for FLI-wETH pool on UniSwap or SushiSwap. Holding the LP token has a very different payoff profile to holding FLI itself.

[mrvls_brkfst]

A lot to take in here. FLI is an exciting, radical product. With liquidity mining it is two products: FLI for the those seeking managed leverage, and an FLI LP token for those long Eth and wanting to capture what looks like a good yield — 20% will be better than staking for Eth2.

For the Index Coop, here, I only see two immediate tasks: research DFP’s preference of a Balancer Pool (urgently but not necessarily for launch), and to launch FLI smoothly. The other questions sit outside these immediate responsibilities and, as @overanalyser says, modifying the tasks before DG2, to include launch requirements, will help align interested parties for future products.

The coop can launch a product well. Liquidity mining isn’t just a economic question, it is also advertising, and we know it. The coop has said it wants to be the Blackrock of DeFi, so, what would Blackrock do? The knowledge, experience, and opinions in this thread would make make for an appealing and interesting discussion. One I would like to have, and that is deservedly happening across posts. Certainly, I don’t know what Blackrock would do but I do know that FLI is already a novel product. Launching with an unfamiliar or exotic LM program is unnecessary from an advertising point of view and could even look overly risky, surely not a Blackrock characteristic.

From a sustainability point of view, yes, liquidity mining is uneconomic, but it does bootstrap and act as an announcement. Here, however, it is triply important because of the ‘2nd product’, the FLI LP token. Without an LP, that product doesn’t exist.

A standard Uniswap stablecoin pool would say ‘safe’, and be as close to familiar as possible for DeFi players. They can come in without adding questions beyond ‘What is FLI?’. It also means the launch can be sooner rather than later. And, it isn’t saying ‘Hey look! We’re Index and we can be creative with liquidity mining.’ The spotlight remains on FLI, and novel mining can be a second wave advert and display of coop competencies. I imagine many exciting and enticing Index initiatives will come out over time, and I look forward to them.

Here, DG2 is passed, the product needs a liquidity pool, and we should launch well for the sake of methodologists in general. Tuning mining over time, and sorting governance must be done, but outside of a product launch.

I feel that this reply is a bit spikey and assertive. My aim was to be short and clear. And, to be clear, it is one the most interesting and thought provoking threads I’ve read, a credit to all involved. Thank you.

FWIW, I would like to see FLI fly, one day a version with DPI LP tokens could be spun up, but that’s for another day.

[puniaviision]

@verto0912 @Matthew_Graham @overanalyser @richard want to reopen this conversation here.

Some contextual data:

1. Natural unincentivized liquidity sitting at around $1.9M
2. Vast majority of people transacting through the Uniswap pool instead of minting/redeeming
3. Minting/redeeming flow confusing due to the debt positions
4. 38% natural APY

The hope is more liquidity directly translates into un-proportionally more volume as people can move in and out with larger sizes. However the data is confusing to me.

Personal open questions:

1. Is $1.9M unincentivized liquidity with 38% APY good?
2. Do we have enough evidence for or against preserving the ETH-FLI pair as opposed to others?
3. Do we know what APY is needed for people to LP into the pool? Do we need 80% APY to get the total liquidity to $4M?

[overanalyser]

One simplistic view is that the market is pricing FLI:ETH liquidity at around 40%.

So if we double the total income for LP’s (i.e. pay the same value in rewards as the pool currently makes in frees) then the pool size should double to equalize.

This assumes that the size of the pool has no impact on trade volume. If we think that a larger pool will allow more people to trade, then the volume should increase so we should be more fees which will incentivise more LP.

However, this is a simplistic view.
There may not be more liquidity that wants to sit in this pool.
Trading volumes may decline over time. (So we need more incentives to produce a $4M pool).
LPs may have entered the pool expecting higher fees, but are waiting a few days to see what happens.
Some LP’s may not want to stake /pay gas to stake.

DPI trade volume varies over time. I expect FLI will do the same. There will be an initial rush as people try the new protocol out. (And people.will exit when the ETH price declines…).

If we want to target $5M then a reasonable plan would be to mutiply the total income by 2.5. so we need.rewards ~1.5* the current trading fees.

However. I’m not sure we have enough data to be 100% sure. Uniswap is showing about $600 k volume per day. 600,0000.0031.5 is $2,700 per day so liquidity mining 100 INDEX per day for 30 days looks reasonable to produce $5 M liquidity.

If trade volume doubles and the 40% apy assumption is correct then we may get a total of $7 m liquidity.

[BigSky7]

@puniaviision

Is $1.9M unincentivized liquidity with 38% APY good?

In my mind this level of unincentivized liquidity for a new and complex product is awesome. This indicates a high level of natural demand and lots of market demand for FLI. It will take time for market participants to fully incorporate FLI into their leveraged positions.

@puniaviision

Do we have enough evidence for or against preserving the ETH-FLI pair as opposed to others?

I don’t know if we have enough evidence - but in my mind it is a natural pair and provides and awesome way to manage risk while maintaining leveraged exposure to ETH. Any other pair would introduce significant complexity to an already complex product. While a FLI <> Stable pool would be very interesting, I believe LPs would find this pool less attractive. This is just speculation - but as a FLI <> Eth LP I personally would not have entered a FLI <> Stable pool.

FLI as a product is awesome because it allows market participants to quickly and easily enter and exit leveraged positions. A highly liquid pool makes it easier for large investors to enter and exit a position in FLI. For a product which we expect to be actively traded with lots of buying and selling it makes sense to ensure we have enough liquidity for those trades to happen.

FLI is the perfect candidate for month long liquidity mining as suggested by @overanalyser. The demand is clearly there and LM will help push the pool to a level where large investors can easily enter and exit positions.

FLI is a strong enough product that we don’t need to incentivize liquidity mining, but a well timed month of LM could seriously accelerate its use and adoption.

[puniaviision]

Got it, thanks for the thoughts here @overanalyser and @BigSky7. Perspective makes things a little clearer.

Following our previous liquidity mining strategy, it feels like we should aim to overshoot and taper down in the following months while having some liquidity be sticky.

Given that we have seen people in the Discord asking for high 5 figure to 6 figure buy amounts, lets target a $10M pool for the first month? We can see how volume reacts to liquidity and if it is asymmetric and adjust from there. Given OA’s calculations above, it would come out to about 200 INDEX a day? So about $160k for the first month.

@Matthew_Graham doing a pool on Balancer will simply be way too much dev work up and down the stack and be a unnecessary burden so lets stick with Uniswap and Sushiswap pools for now. @verto0912 want to be sensitive to your considerations as well.

[verto0912]

@puniaviision I personally haven’t seen anyone asking for high 5 figure, low 6 figure trades in Discord. Maybe I just missed that.

In my opinion, current pricing at 40% will come down once there’s some price history and people get an understanding of the divergence loss on this pool. Getting paid 20%-25% to go 1.5x long ETH, with the convenience of not having to manage collateral should be rather appealing.

So with that, I think 200 INDEX per day is a bit on the high side and that we might overshoot the $10m target. But I’m happy to give it a go for a month. Would be a good learning experience. It will also be interesting to see if a bigger pool can drive higher mint/redeem volume and fees from that.

I would prefer to see a 200 INDEX reduction in Uniswap incentives for DPI to fund this though. I know they are separate conversations, so I’ll just leave it here.