IIP-52 MVI Liquidity mining - July 2021

title: MVI Liquidity Mining - July 2021
status: Proposed
author: @Overanalyser
created: 29th June 2021
discussions-to: IIP-52 MVI Liquidity mining - July 2021

Simple Summary

Fund MVI:ETH liquidity mining for a further 30 days with a total allocation of 3 286 INDEX

Abstract

Replenish the current staking contract for MVI:ETH Uniswap v2 LP tokens so that the current campaign is extended for a further 30 days (current staking contract term).

This is intended to support a sector leading liquidity pool to allow MVI to be traded with acceptable price impact (~5 ETH at 1%).

Motivation

$MVI launched ~80 days ago with a 90 liquidity mining campaign targeting $5 M Liquidity in the Uniswap V2 pool. This campaign has been largely successful, although Liquidity AUM has reduced with the recent bear market.

The Uniswap v2 pool is the main market for MVI, The current $2.9 M pool size allows 5 ETH [~300 MVI] trades with less than 1% price impact. LP’s in this pool are currently receiving (the annualised equivalent of) ~4% from trading fees and ~20% from INDEX rewards.

The current liquidity pool contains ~50% of all MVI issued.

Significant cuts in INDEX rewards (without an increase in trade fees) are expected to result in a significant reduction in the liquidity and so result in larger price impact for any given trade. In order to maintain the current liquidity (in LP token number and/or $ terms) continued liquidity mining is required.


See also here and here for further discussion on MVI liquidity. Also the recommendations from the INDEXcoop review of Uniswap v3:


Specification

Extend the current LM campaign for MVI:ETH Uniswap pair for 30-days using the existing contract (as outlined in IIP-24) for an additional 3 286 INDEX (~110 per day).

No action would be necessary for existing liquidity providers.

FOR

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

AGAINST

  • Allow the incentives from MVI liquidity to stop at the end of the current campaign (~10 July 2021).
1 Like

A quick anecdote - had someone reach out yesterday wanting to buy $50k of MVI. Price impact is about 3.5% and the same for exchange issuance ie the exchange issue is not really an option for buying large quantities. At the current size of the pool, the only option for large purchases is to buy in $10-15k chunks and wait for NAV differences to be arbed.

Basically, what I’m trying to say is that we won’t know if there demand for higher $ value trades until the pool can accommodate them. Alternatively, I’m hoping that the direct mint incentivisation program (part of the budget) will shed some light on this as well as I’m considering a 5% cashback for $50k mints/exchange issuance transactions.

3 Likes

I’ll support the continuing of MVI LM… For this.

Hi @overanalyser

With an initial 90 day campaign and now pivoting to 30 day, are we at risk here of drifting back to frequent LM discussions again?

I’d like to see a target for MVI higher than $5M. How hard can we push this product to accelerate its growth. To me $5M feels small, I’m a fan of aiming higher… or perhaps we use units in circulation to shape our target.

I’m thinking we should have a vision for this product and then determine how LM helping us achieve that vision. At 4% trading fee is to low for this product to be self sustaining. What can we do to increase the trading fees?
We need to address this. If we don’t the product risks needing continuous LM, which is not economical or sustainable.

This proposal is not targeting $5m. The current pool size is just over $3m. As proposed rewards remain the same, we will not see a meaningful impact on the size of the pool.

@verto0912 would you be in favor of increasing the incentives?

I think I’m inherently biased as a methodologist so a recommendation from me would be biased as well. I will vote for whatever proposal is put forward by the community.

I’m just trying to highlight some data points and my understanding of the market. At the current level, liquidity mining incentives have a limited impact on unit growth. No one can actually buy the product in size and exchange issuance doesn’t work for MVI due to the liquidity of the underlying. So we will continue to see retail demand and slow ramp in unit supply. This is basically what’s been happening.

As OA points out, we’ve seen no meaningful impact on units of MVI in the liquidity pool from the June’s increase in LM incentives. My take on this is that in the current market, 25% APY is not attractive to move the needle and, I believe, that there’s realistically little difference between like 18% APY and 35% APY for the MVI/ETH LP in terms of actually changing the behaviour of LPs.

So, really, it all comes down to what we are trying to do with the product. If we want to grow it, we should consider increasing incentives. If we are happy with where we are at the moment, because we are waiting for the market to turn for example, then we can reduce incentives which I don’t think will make much of a difference to LP behaviour.

The way the current proposal is written, it lacks purpose and a sense of direction for the product.

2 Likes

Got it - this is all very helpful context coming from your perspective as a methodologist. Something I was thinking about now that the Uni v3 liquidity mining contracts are audited and deployed - what if we were more aggressive with a move to v3 with MVI paired with an incentive program on v3? Moving all liquidity there along with the smaller volume we are seeing now by incentivizing could create much more attractive APY in the short term and we could actually start using liquidity to grow this product. I just don’t think we are gonna be able to achieve that as well on v2.

EDIT: For what it is worth - I want to GROW MVI!

I think this would make a lot of sense. But I don’t have much visibility into when using V3 liquidity mining contracts will be possible. If the goal is to wait until that point then I think that actually reducing incentives now could be a better option.

Agreed, not without a meaningful increase in incentives. Although, at this point, the proposal calls for $65k of incentives per month so even another $60k would be meaningful. Would give us circa 50% APY which could be attractive.

@overanalyser what are your thoughts here? Feels like we might actually want to drop the MVI incentives this month with hopes that by next month we can re-purpose those INDEX towards a more aggressive incentives plan on v3 (which might also be a relatively short program). MVI LPs have proven to be very sticky, so it might not affect the pool much…

@ncitron you have looked at the v3 LM contracts closer than anyone most likely, ya? Not trying to put pressure on ENG, but would love your opinion so we can get a sense of whether or not incentivizing MVI liquidity on v3 is within our reach in the short-term (1-2 months) or not. I want to emphasize that I am not asking for a prioritization, but rather how difficult will it be to implement these contracts for the v3 MVI pool.

What is your thinking about trying to boost V2 liquidity and then continue the rewards on V3 as a means of transferring LPs across.

The risk I see is without a known schedule for an automated and battle tested V3 liquidity mining product, we at risk of reducing V2 to then be left waiting an unknown amount of time for the V3 product to emerge. For me personally, I would like to see something battle tested. I am also thinking there are some knock on dev considerations to moving to V3.

I think it just comes down to if we are trying to grow the product now or take a breather, wait for the market to turn, and grow it in the future. If we are trying to grow now then we need to increase the liquidity to make bigger purchases possible.

I suppose there is a risk that as we wait for v3 we remain sort of in limbo for several months. I don’t have the information to judge how likely it is though.

We have just begun the process of speccing out and implementing the required changes to allow for migrating liquidity to V3. I think it is reasonable that we could have V3 LM implemented in a month or so, given that we choose to prioritize it.

2 Likes

I’m very much in favor of this proposal and this thinking.

What’s the situation with the underlying liquidity? I think we should wait on spending on growing until that fundamental barrier to high AUM changes.

Why are the options to only grow or shrink? What’s wrong with simply maintaining? Providing a decent level of liquidity for most retail members to enter the position.

2 Likes

I can tell you what’s happening with the underlying liquidity but I can’t tell you how much we can reasonably push AUM w/out too much impact on rebalances (complexity & costs). We just don’t have the visibility or feedback into rebalances currently. Understandable given the constraints.

Here’s what I know:

  1. The only thing I’ve ever heard about the capacity to grow AUM (from a liquidity perspective) was that we can safely 2x it. That was in May with AUM at around $5m. Since then, units grew about 20% so it seems that we have some room.

  2. @jdcook helped us look at the units, not dollars in the pools for the underlying. From the 15 tokens in MVI, 4 have lower units today than at launch, one is flat and 10 have more. Out of the 4, the fact that we have a V3 adapter that can be used for rebalances addresses 2 of them.

So, basically, based on the information I have, we have some capacity to safely grow AUM. But my information could be out of date or incomplete.

There’s nothing wrong with maintaining. I just think that we can maintain the pool in its current size with a reduction in incentives based on OA’s analysis and my perception of the LP behaviour.

OK, I’ll be honest, and say that maintaining the current level of rewards is mainly due to my not seeing a strong argument in either direction.

At the moment I am becoming more focused on units, and not $ value. We have no control over the $ value of MVI.

This leads to one opinion that I strongly hold:

MVI is not stagnating!

  • MVI unit supply 1st June = 79,278
  • MVI Unit supply 1st July = 90,929
  • 11,651 growth in unit supply
  • i.e. 15% growth in 1 Month :rocket: during a BEAR market

This is a testament to the methodology design and the work that @verto0912 and @DarkForestCapital are doing on MVI.

4 Likes

The is a small uni v3 pool so I’ve done some comparisons [Disclosure - I’m currently LP’ing both 1) to learn about v3, 2) to make some income]

01Jul21 Unit Uni v2 Uni v3
AUM Million $ $3.090 $0.030
MVI in pool MVI 41,139 416
ETH in pool ETH 727 7
MVI in pool $ M USD $1.540 $0.016
ETH in pool $ M USD $1.544 $0.014
Sell ETH for 1% price impact ETH 5.15 0.19
Buy ETH for 1% price impact ETH 5.12 0.93
Sell ETH for 2% price impact ETH 12.58 1.01
Buy ETH for 2% price impact ETH 12.35 1.73
4 day average volume $ $121,975 $9,015
4 day average fee $ $366 $27
Annualised fee return (at current AUM) % 4.3% 32.9%
INDEX rewards (01Jul21) % 26% 0%
Combined rewards % 30% 33%

So, it’s early days but some initial observations:

  • v3 AUM is ~1% of v2
  • trade size to 1% slippage varies significantly for v3 depending on direction.
  • Trade size to 2% slippage is 8 to 14%
  • Trade volume is ~7% of v2. (i.e. a x7 improvement on AUM)
  • Total % rewards are comparable
  • Divergence loss on v3 is expected to be higher, but I don’t have a good estimate.

Looking at transactions I’m seeing:

  • Small sales direct form uniswap
  • 1inch splitting trades across both pools.
  • Arbitrage between the pools.

Looking an exchange issuance I think the threshold for it becoming cost-effective is about 5.5 ETH (gas currently ~ 10 gwei).

  • 1 inch 5.5 ETH → 309 MVI (1% Slippage)
  • Tokens sets buy 5.5 ETH → 309 MVI


image


Finally, I think that the most recent exchange issuance of MVI was an arb trade ~36 hours ago:

  • 5.912 ETH → components → 5.97 ETH received → 0.058 ETH profit.

If we are assuming 1% slippage is ~5 ETH, then Arbitrage looks to be profitable around +/- 1% of NAV.

I think that this also supports my observation that Exchange issuance is cost-effective for purchases greater than ~5 ETH.

1 Like

Is it worth adding a pool to see what the broader community thinks about trying to grow, maintain or reduce incentives?
Perhaps linking this back the number of MVI units in circulation or entering the pool to provide liquidity.
I personally lean towards trying to grow the number MVI units and size of the liquidity pool. I think we should be aiming to push this product for at least a few more months and then reassessing where we are at.

Also conscious there are other products in the pipeline that are competing for capital. Which leads to think tapering DPI to increase on MVI and future products is prudent from a treasury management perspective.

I wonder if we could use options to incentives liquidity. A call option with a strike price of $30 expiry date 6 months into the future. Could be an experimental idea to consider.

I want to move away from a culture of low context polls to inform decision making. Especially this late in the process. Fundamentally, we need to empower certain leaders to make decisions and be accountable to the consequences.

I know OA has mentioned and built alignment around keeping the MVI LM reward levels the same through PWG calls and messaging the MVI methodologists. With that work done, I strongly recommend against adding chaos late game and disempowering the PWG to be effective against our mandate.

1 Like

@puniaviision

Can PWG outline the strategy for MVI? Something beyond 30 days with some structure and planning behind it would be helpful.

What are we working towards here? Because I honestly can’t find conviction reading over this chat. It seems to raise more questions than answer for me.

If LM is PWG, then when will we see a 3 month budget provided for quarterly reporting?

I think the next three or four product launches occur next quarter, when can we expect forecasts for this?