IIP-65 DPI Liquidity Migration to Uniswap v3 with Staking

Title: IIP-65 - DPI Liquidity Migration to Uniswap v3 with Staking

Status: Proposed

Author: @overanalyser

Created: 30th July 2021

Simple Summary

To encourage LP’s to migrate DPI:ETH liquidity from Uniswap v2 to v3 using a short term v3 staking contract.

Liquidity mining incentives for DPI:ETH on Uniswap v2 are due to end on the 13th August. This proposal will allocate 2,000 INDEX to incentivise LP’s to move into the v3 pool.

Abstract

Use a new Uniswap v3 staking contract and add 2,000 INDEX to be used over 15 days. Start date TBC, but anticipated ~20th August to allow LP’s time to migrate.

Motivation

The Uniswap v2 pool was the first on-chain liquidity for DPI, and with extensive liquidity mining by INDEXcoop it has been the largest and highest volume pool. However, continued liquidity mining for DPI has been our largest discretionary cost since the end of the initial 60 day campaign in December 2020. As such it has always been the goal to stop INDEXcoop liquidity mining of DPI and allow trading volume to sustain the desired liquidity.

A recent review found that there are 3 other pools with over $2 m AUM and sufficient depth to allow $15,000 trades with less than 1% price impact. These are either supported by DEX rewards ($SUSHI / $BAL) or concentrated liquidity and trading volume (Uniswap v3). In addition there is further liquidity available via trade aggregators.

With the availability of the Uniswap v3 pool since May 2021, trade volume has partially migrated with recent activity capturing an average of 26% annualised income for LP’s.

The availability of audited Uniswap v3 staking contracts (Developed by Uniswap labs) means that we have the tools available to encourage migration to v3 (as recommended by the INDEXcoop research group) and for LP’s to become more capital efficient if they wish.

A single v3 liquidity mining campaign is proposed running for a short duration (15 days) and starting ~ 1 week after the end of v2 Liquidity mining. This should allow LP’s to collect all the potential rewards and then reposition.

This was the recommended option during the liquidity mining community call on the 29th July 2021.

Specification

To use a uniswap v3 staking contract to encourage migration of liquidity to Uniswap v3 DPI:ETH (0.3% free).

2,000 INDEX to be rewarded over 15 days starting ~20th August 2021.

LP’s will need to take action to receive the rewards.

FOR

  • To reward Uniswap v3 DPI:ETH LP’s using the specified method.

AGAINST

  • No liquidity rewards on Uniswap v3.
10 Likes

Strongly FOR. We have seen from last cycle of LM and on today’s Liquidity call that there is strong consensus within the Coop to move to V3 and reduce LM rewards.

Big thanks to @overanalyser for taking lead on this effort and ensuring all parties have been kept in the loop

3 Likes

Bash me on the head for being Captain Obvious here, but, just for the sake of being on record: We are talking about the Uniswap v3 DPI:ETH 0.3% pool here and not the 1.0% pool, right?

Edited to remove typo pointer.

Hi @overanalyser

Help me understand as a simpleton on the LP user experience. 2,000 INDEX @ $26 is about $52,000. Over 15 days that is $3,466 per day.

This to me feels like an insignificant value, any meaningful pool size is going to push the ROI for an LP to near zero. I therefore conclude this is not actually an incentive, but rather a gesture. An APR this small is unlikely to influence the user decision to LP. After playing around with V3 LP positions, I personally read this and I instantly though this is a nice gesture but not something I should consider for LP’n returns.

If we think of this as a gesture, could we perhaps go with an airdrop. Airdrops create a lot of hype and I suspect his could drive more liquidity to V3 than the LM proposal presented above.

Looking at how to invest my DPI, I know BAL rewards are out on V2 and a DPI would get a good APR (Free LM rewards) and similar is available on Sushiswap (see below). The logic I am using is retail noob like myself should follow a KISS philosophy and I honestly think my UX is going to better on another DEX. I’m not going to wake up and find myself 100% in ETH…

I tend to think V3 is for whales who can more actively manage a position. I think whales will find the fees APR attractive. I think whales will go to V3, noobs like myself will go somewhere else. Looking at the staking contract for V2 Uniswap LP, this is heavily concentrated in a handful of LPs. These select few LPs make up the majority of the staking contract and therefore the majority of the underlying liquidity pools. Greater than 90% of the V2 LP tokens are staked and the majority of the stake contract tokens are owned by a select few.

What type of DPI holder are we targeting with this burst of incentives ?
I think an airdrop will create more hype for retail and a better LP experience with APR is available elsewhere for this type of holder. I think the whales are not going to consider this gesture in any longer term investment decision. It is a nice gesture, don’t get me wrong, but I don’t see this having any meaningful impact.

The below is meaningful and IMHO what is proposed above is not.

Has anyone looked at the upcoming V2 to V3 migration proposal for Uniswap to see if DPI is eligible ? I may be that Uniswap incentives the DPI-ETH pool and Index Coop can just enjoy the DEX liquidity battle…

Apologies in advance, but his proposal is a AGAINST for me.

3 Likes

I agree with Matthew here. An airdrop will be much more suitable. The follow on the question here would be how to implement it effectively.

Is this the Uniswap proposal? Consensus Check - Begin Uniswap Liquidity Program v0.1 - Consensus Check - Uniswap Governance I don’t see DPI there or how DPI could be in it without bias.

I think Matthew raises a good point that Uniswap V3 is a whales game. I think this is absolutely correct, but we need to be thinking about our LM strategy a little differently.

The Coop is not in the business of creating LP opportunities for investors. We are in the business of creating attractive structured products. In order to create successful products, it needs to be easy to purchase. This is why we need a LM strategy.

By migrating to V3, we will be able to make our products easy to purchase with a low price impact. It will almost certainly benefit those who can actively manage a large position, but these people will be providing an invaluable service to the Coop. They will provide the deepest liquidity at the lowest price to the Coop.

TLDR: We pay LPs to do a job (provide cheap swaps). Uniswap V3 allows us to pay them less and achieve the same results.

6 Likes

I completely understand this view and it must be given context in terms of the profitability of Index Coop.

It is not economical to provide continuous LM rewards on a 95 basis point revenue generating product. LM >95 basis points, becomes a negative return product and thats not considering the streaming fee split. With this in mind LM has a place in the product launch phase, but shouldn’t be viewed as a sustained cost throughout the product life’s. I like the LM rewards on migrating as a gesture. It is like a thank you for migrating and allows the coop to build competency in-house.

If we really, really want to eliminate LM - Products that generate sufficient trading fee APR, in a self sustaining way are going to be more lucrative revenue sources for the community. I think we are seeing this with the FLI series.

1 Like

@mrvls_brkfst yes the v3 pool with 0.3% fee (and typo corrected)

@Matthew_Graham yes it’s a small reward. It’s an incentive for people to move. Most will be captured by whales who position liquidity tight to the price - which is exactly what we want for our trades.

Some LP’s may move and go wide, the staking contract will not allocate them a large reward. But they will get something (but it may not cover gas costs).

There are other options for LP’s (Shushi / Balancer / Sushi on polygon), these may be a better option for smaller LP’s.

We will need to communicate this as part of our plans to migrate liquidity.

Re fragmenting liquidity - I don’t see a huge problem in there being liquidity in 4 pools. IF this migration works as planned, we will get more depth in uniswap v3, and that will attract the majority of the trade volume. At which point the v3 pool becomes self-sustaining (and may well become a whales game)

Whales, we want to move liquidity to v3, and we want the LP’s to learn that it’s profitable and stay (with no further INDEX spent).

As far as I understand DPI was not selected for the first wave of UNI liquidity mining. I’m not a party to the reasoning for that, and given the Uniswap governance system, I have no idea when such UNI rewards would start. I know that we can do an IIP and ask INDEX holders to run v3 staking in late August.

An airdrop would take more coop resources to plan and execute as we would have to inspect the LP data and assign rewards. We could tailor such a drop to allocate more to smaller LP’s however, the goal is concentrated liquidity to capture trad volume. The staking contract is designed to do that.

It’s entirely possible that INDEXcoop could be one of the first protocols to use v3 staking. Something we can hype.


The video from the call can be found here:

https://drive.google.com/drive/u/0/folders/1xNUU0GdchSnVt3DklXqkz8aymTQ0Hmhf

Rough times:
00:00 Dylan on v3 Contract work
05:00 OA overview of liqudity
05:00 ETH2-FLI
06:00 BTC2-FLI
06:40 BED
08:45 MVI
12:20 DPI
27:30 Polygon
36:20 v3
37:00 Delegated liquidity management
38:00 Next steps

1:05:00 DPI conclusion
1:31:42 MVI wrap up
1:34:00 Wrap up


I think this is the best way to frame the v3 staking. It really is a small gesture to encourage migration.

3 Likes

Great post @overanalyser. I am really happy with how Index Coop has managed and thought through LM incentives. This definitely reflects our continual learning as a community :slight_smile:

2 Likes

@Pepperoni_Joe can this IIP be given a number and scheduled for snapshot next week?

I’m not expecting any edits but I can explicitly confirm on Monday morning if you want to schedule to start Monday Afternoon.

1 Like

I have updated this as IIP-65 and changed status to proposed.

Creating a discord channel next :+1:

This vote is now live:

https://snapshot.org/#/index-coop.eth/proposal/QmRF2jTSxHuK5vyHj4RHk8NBZYdoZvqbvqUnUokCE39jcW

[just the messenger :mailbox_with_mail: ]

Confirming this IIP has successfully passed :ballot_box_with_check:

3 Likes

Awesome – look forward to this starting tmw!