Title: BED : ETH Liquidity - Direct Provision by INDEXcoop
Author: @Matthew_Graham & @overanalyser
Created: 08 July 2021
Requires: IIP-46: Security - Operations & Investment Account
INDEXcoop to provide $250K of seed liquidity to the BED:ETH pool on Uniswap v3 until 30th September 2021. This liquidity is to be administered from the Operations Account multi-sig wallet.
INDEXcoop multisig to transfer ~$250,000 (all ETH2x-FLI, BTC2x-FLI + some DPI) from the Index Coop Treasury to the Treasury Operations Account where it will then be sold to ETH.
The Majority of the ETH will be used to attain BED via exchange issuance on TokenSets user interface. BED and ETH will be deposited into Uniswap v3 liquidity pair (0.3% Fee) with a tight range to provide deep liquidity (~1% price impact for $10,000 trade). This will occur prior to the official BED product launch.
The pool will be maintained by the treasury operations multisig until 30th September 2021 and then returned to Operations account as ETH.
The Operations Account will manage the liquidity and @Overanalyser will be added to the multi-sig and will be the primary person managing the liquidity position.
$BED will shortly be launched by Index Coop and Bankless DAO. As a three component product, with significant liquidity for the underlying tokens, exchange issuance is expected to have a low gas price and price impact. However, relying on exchange issuance as the only source of $BED means that many familiar purchase options (metamask, zapper, zerion, 1 inch, 0x, DeBank, other wallets) which rely on secondary markets will not work.
As BED is primarily aimed at customers at the start of their DeFi journey, such a limitation to exchange issuance is not desirable.
As a passive long term product, we don’t expect large trade volumes, so there is unlikely to be sufficient trade volume to make LP’ing attractive.
Previously the coop has used Uniswap v2 for liquidity mining campaigns and if we repeated IIP-24 (MVI) targeting $5M, we would expect to spend ~$140,000 per month on liquidity mining. Note: $5M liquidity in v2 allows ~$18,000 trades with 1% price impact. For BED, exchange issuance / arbitrage will be cheaper so a 1% depth of $10,000 should be sufficient (~$2.8 M on Uni v2) which is likely to require ~$80,000 INDEX rewards per 30 day LM campaign.
With the launch of Uniswap v3 we have the option to move away from LM on v2.
Concentrated Liquidity bounds
Uni v3 allows us to set the bounds of the liquidity. For example $250,000 placed at market price +/- 12.5% results in a $10,000 depth for 1% price impact. This should allow small trades to happen and efficient arbitrage to keep the price close to NAV.
The ideal pair for such focused liquidity provision for this approach is one with minimal expected price ratio change. As such BED:ETH is a very attractive pair.
Over the last 90 days DPI has ranged between 0.113 and 0.225 ETH (0.169 +/- 33 %)
BTC has ranged over 12.3 to 28.3 (20.3+/- 40%).
As an absolute worse case, BED:ETH range would been +/- 24% [(31% + 40%)/3].
What are the downsides?
- The BED:ETH ratio moves out of the range we set and so there is suddenly no liquidity available (This will result in very poor purchase experience as the market becomes very thin).
- Concentrated liquidity also means that we will suffer a larger impact of divergence loss. This means that as the price ratio moves to the limit of the bounds we hold a larger weight of the lower performing asset. This means that we could end up holding 100% ETH or BED.
- Rebalancing will cost management attention, multisig time and gas. If we place too narrow bounds for the pair price ratio then we will need to rebalance and reposition them quickly.
The Treasury Operations Account muti-sig will have the mandate to manage the $250K of ETH:BED liquidity to maintain a ~1% price impact from $10,000 trades. Signers on the multi-sig account are shown below.
|Treasury Committee||@DarkForestCapital, @dylan|
|Treasury Work Group Lead||@Matthew_Graham (Fire:fire:)|
|V3 Liquidity Manager||@overanalyser (to be added)|
The Treasury Operations Muti-sig was originally proposed as 3 of 4, with the addition of @overanalyser this will change to 3 of 5.
- Call Fee Collector contracts on FLI products
- INDEXcoop multisig transfer $250,000 of FLI products + DPI from the Treasury Wallet to Treasury Operations Account
- Swap to ETH via most liquid DEX pool
- Convert majority of ETH balance to BED via Exchange Issuance on TokenSet user interface
- Deposit BED & ETH to Uniswap V3 across a narrow range as detailed in specification section above
- Fees are claimed and liquidity repositioned (with swap trades / issuance to rebalance)
- Retrieve liquidity from liquidity pool
- Swap BED for ETH. ETH is held in the Operations Account
This Liquidity provision will stop on the 30th September 2021.
- Transfer $250K to Treasury Operations Account for use as BED:ETH liquidity on uniswap v3 until 30th September 2021
- No change.