IIP-XXX MVI migration to Uniswap v3 with Staking

Governance Proposal
1

IIP - XXX

Title: MVI Liquidity Migration to Uniswap v3 with Staking

Status: Withdrawn

Author: @overanalyser

Created: 12th September 2021

Simple Summary

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

Liquidity mining incentives for MVI:ETH on Uniswap v2 are due to end on the 19th September. This proposal will allocate 700 INDEX to incentivise LP’s to move into the v3 pool.

Abstract

Use a new Uniswap v3 staking contract and add 700 INDEX to be used over 30 days. Start date TBC, but anticipated ~27th September to allow LP’s time to migrate.

Motivation

$MVI launched with a 90 liquidity mining campaign targeting $5 M Liquidity in the Uniswap V2 pool. This campaign has been largely successful, although liquidity AUM dropped as low as $2.48 M in June, recovering to $7 M as of the time of writing.

This pool currently benefits from liquidity mining with 3,286 INDEX allocated over 30 days. At $50 this is a $5,500 cost per day and pays the LP’s ~ 28% annualised. This is an unsustainable cost for INDEXcoop.

With increased daily trade volumes (~$1 M per day), and a Uniswap v3 pool developing it is possible to repeat the process used for DPI in IIP-65 and encourage LP’s to migrate to Uniswap v3.

Note, when there was a delay in refilling the v2 LM rewards in August, we saw liquidity and volume move to Uniswap v3 without incentives. See here for more info on MVI liquidity in August.

Calculations

700 INDEX at $50 over 30 days would be ~$1,166 per day and would represent an average 21% annualised income for LP’s. This would cost the INDEXcoop $35,000 (+ Dev work to implement).

Note, If all the current main net MVI trade went via the v3 pool, and remained at ~$1 M daily, it would add a further 55% income for LP’s.

Success Criteria

The objective would be for the v3 pool to have better depth than the current v2 pool (trades upto $36,000 with less than 1% price impact)

Specification

  • To use a uniswap v3 staking contract to encourage migration of liquidity to Uniswap v3 MVI:ETH (0.3% fee).
  • 700 INDEX to be rewarded over 30 days starting ~28th September 2021.
  • LP’s will need to take action to receive the rewards.

FOR

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

AGAINST

  • No liquidity rewards on Uniswap v3.
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At 700 INDEX/day, or $1,166 per day, I am of the opinion this is a trivial value and is insignificant in terms of enticing additional liquidity to V3.

We know as soon as Index Coop stops providing incentives on V2, liquidity will leave. We know this because when Index Coop was late in topping up staking contract earlier in August, liquidity started leaving the pool by itself. When incentives were reinstated, some of the LP returned to V2.

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During early to mid August liquidity increased on Uniswap V3 organically and some started appearing on Polygon. If we know liquidity will leave V2 to V3 without incentives, then why should we spend capital and developer time if the upside is only to accelerate an existing trend.

Further to this, we know from IIP-65 that some LPs will remain on V2 even if there are rewards on V3. We know this because, we incentivised DPI-ETH on V3 and still there remains LP on V2.

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We also know the MVI-ETH staking contract is rather concentrated. Has there been any out reach to these large LP contributors ? It would be good to know if the INDEX incentives are of significant value to influence the investor decision. 20 wallets make up 70% of the MVI-ETH staking contract relating to V2.

It might be just me, but I think this is additional lift and expenses that is not needed. I would prefer to save the 700 INDEX and try incentivise increasing the number of MVI tokens in circulation.

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What is your suggestion for doing this?

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We know some of MVI-ETH V2 LPs will move to MVI-ETH V3 LP with zero spend.
So this spend is only going to increase V2 to V3 LP migration but by how much ?
IMHO it might be very little difference, thus unclear why we should incur this spend. The business case for this spend is weak and the magic numbers I would hope to see is expectations comparing the do nothing vs do something scenarios.

However, my general thought is just something that links to increasing Circulating supply of MVI…

@MrMadila is doing great work on the daily Net Dollar Flows (N$F) metrics and I’d much rather seen Index Coop pivot towards spending that increases N$F with good retention over time.

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Thanks OA, one thing I would like to see alongside costs is the associated revenue in order to make relative comparisons. IE MVI’s current daily revenue = ~$550 (7dma etc)

For anyone unfamiliar with “Net Dollar Flows” this is the daily net mint/redeem x price on the day of unit supply change. This metric filters out the market noise associated with TVL as well as comparing unit supply over time. (IE 1 unit of MVI sold in June @ $30 is not the same as 1 unit sold in Sept @ $146)

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Agreed. Some will move, by providing v3 Staking rewards we can expect to get more to move over and so become sticky in v3.

To be honest, I don’t think anyone can present hard numbers that can withstand any scrutiny. (There would be so many assumptions about MVI price, ETH price, trade volume, gas price etc…). By giving an incentive we produce the best chance to get the most AUM transferred to v3.

I take the view that this incentive is to reduce the risk of having a partial migration and neither pool generating sufficient trade to make them self sustaining. For me, the worse case is losing too much liquidity AUM and trade depth then MVI buyers get caught with premium/discount to NAV and arbitrage becomes less effective.

Migration of MVI liquidity is a much higher risk than DPI. DPI had multiple deep pools, so even if we got it wrong, there would be liquidity, and volume on the market. MVI is a much more fragile case.

I’m a cautious man, I would much prefer to look back at the MVI migration and think “Maybe we didn’t need the staking contract” than be thinking “How do we get MVI liquidity back”.

I think this proposal is the best option, if INDEX holders prefer to hold the INDEX in reserves, they can vote against it.

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Hi @overanalyser

A couple questions to help me understand what is being asked:

  1. If we assume the same fraction of the MVI-ETH pool remains on V2 as we currently experiencing on DPI-ETH V2 and we use the percentage of liquidity that departed V2 for V3 when MVI-ETH rewards stopped in early August - What size will the MVI-ETH pool on V3 be then ?
    We can assume the price is constant and we can ignore trading fees as these are second order variables.

  2. What size pool on V3 are we targeting ? As in how much do we need to transfer from V2 to V3.

If we know what size pool we want to achieve and we can crudely estimate what pool size we will create naturally from migrate V2 to V3 without incentives, then we will be easier to determine if any incentives are even needed. At this point in time, we can do more to justify the spend.

I encourage PWG to present a clear justification for this spending request to Funding Council which falls outside of the current Q3 PWG budget.

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I agree with most of the questions already raised. To me there are two seperate questions:

  1. Will V3 suit our needs better than V2 long term? If so:
  2. What is the most tactical way to transfer to V3

On question 1: Though I don’t have the numbers to back it, my feeling is we can create a V3 programme that is cheaper than it is for equivalent liquidity on V2. If that is the case, the discussion changes to being if this proposal makes sense, to how it should be implemented. Might make sense to build alignment on question 1 before proceeding to a deep dive on question 2 (unless that already has been done then ignore my comment).

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@overanalyser said today in the Leadership Forum that he was going to be sunsetting this IIP and the plan would be to let things migrate naturally - I wanted to share that I am aligned with that plan, however, I don’t know if the proper mindset has been considered here.

The whole point of a short-term incentive boost on a concentrated liquidity pool isn’t just to get a target # for liquidity, but rather to bloat the pool for a short period of time to allow for volume / demand discovery and then let it fall naturally back down into equilibrium with fees - if we don’t bloat the v3 pool, we risk not pulling as much volume to v3, thus not signaling the fee potential for LPs on v3.

This ^ in fact can and will affect unit supply not just if enough liquidity doesn’t migrate, but also if we don’t allow for that volume / demand discovery.

DPI migrated very successfully to a much more efficient v3 pool, and since that has happened:

  • unit supply up 25%
  • trade volume is up generally ~50% on the 7-day MA

I cannot say that this is causal, but my hunch is that unlocking the next level of liquidity efficiency has given DPI new tailwinds. I think that MVI could benefit from a similar unlock at this stage of the product, and if we don’t try and bloat the v3 pool we may miss on that opportunity.

For more context, this was the general playbook that emerged from our research around Uniswap V3:

  • short term bloat of the pool
  • increased volume goes to the pool, with increased fees
  • volume / fees / and liquidity fall into equilibrium with the demand of the product

The main point to emphasize is that “the demand of the product” could be hampered by the current liquidity constraints and we just aren’t even aware. This playbook gives the true demand of the product an opportunity to reveal itself. I think we are seeing this play out with DPI right now.

Also, I fear that the “natural migration” from the v2 incentives being late to re-fill might not be as strong as suggested in this thread. From what I can tell, almost all (~$500k) of that liquidity that went from v2 → v3 in that week was from one LP.

If we look at the DPI migration, which obviously was incentivized:

  • DPI v2 pool went from $50m - $14m ($36m diff)
  • DPI v3 pool went from $2.5m - $20m ($17m diff)

So ~72% of the v2 pool has left. If we were to assume that all of the incoming liquidity to v3 was coming from v2 (which is probably an over-assumption), then ~50% of the liquidity that left would have migrated to v3.

At the time of writing this, the current MVI v2 pool was ~$6.5m. If the same scenario played out, then roughly $4.7m would leave v2 and $2.4m would go to v3, leaving us with a $2.5m v3 pool for MVI.

But MVI has no incentives, so we may not get quite that number… hard to say (obviously why we are having this discussion). And we may be less likely to influence new, sophisticated LPs to the pool.

All this to say, that I don’t necessarily agree with the thinking that this is just short-term cost that could be better spent elsewhere to grow unit supply. We passed IIP-48: MVI Growth Budget (which I don’t believe any of the funds have been used?), and it included $50k to directly incentivize supply growth and test whale demand. By incentivizing this pool, I think that we are testing whale demand and incentivizing supply growth in a better way than what we passed in that IIP. Creating ultra-efficient and deep liquidity might be the most important foundation for supply growth - DPI has always had it due to aggressive LM. MVI has had it to a degree as well with LM. I think I just fall on the side that spending 700 INDEX to try and bloat the pool is less risky than not spending it and potentially not knowing if we could have better growth in MVI.

As I said at the top, I am ok if we decide not to incentivize the pool, and will be watching closely to see if we need to intervene. But I do think this migration should be seen in a bit different light.

And, I have ideas of how to dig into this more from an analytics perspective (looking more closely at the DPI migration $ flow and LP flow). If this becomes an important discussion again, I will commit some time to that. But as long as the decision is a wait and see approach then I will hold off.

cc: @Matthew_Graham @MrMadila @oneski22 @DarkForestCapital @verto0912 @Cavalier_Eth

y’all let me know if I am tripping

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I generally agree with this thinking @jdcook. The V2 program has 3 days to run so we haven’t really been communicating that incentives will end or provided any advice on V3 provisioning, in terms of the best range, as @overanalyser did for DPI. Ending the program under these circumstances has some risks, namely splitting liquidity between V2 and V3, and ending up with worse execution overall. Worst case, if we see $1.5m in V3 and $4m in V2, for example, we can run a V3 program at that point.

So, personally, I would prefer a 2-week V3 incentive program given the success of the one we did for DPI, but no program is okay as well.

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Thanks @jdcook and @verto0912.

As I said in the leadership call yesterday, feedback I had received (here and privately) was that the proposal was either:

  • Too small to make a difference to LP’s
  • To small to justify the Eng work involved.
  • Too expensive on INDEXcoop treasury.

The requirement from treasury to justify the proposal via the funding council added further work, and time cost to a proposal with marginal benefit.

As such I’ve decided to withdraw the draft IIP.

I will be watching the liquidity and if we see a failure to transfer the volume to v3, then We may need to reinstate it.

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Thanks @jdcook and @overanalyser. Have we had a standardised approach to LM / incentives, or a rubric that helps decide whats appropriate? I need to learn more, but having sufficient liquidity for each of our products feels like a strategic consideration for our growth.

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An update on this:

  • On September 19th, the V2 pool had about 30,000 units of MVI. Today, we are at 19,800 so we lost ~10,000 units (~$1.3m single side liquidity) of liquidity

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  • We have seen limited, if any, migration to V3 and I’m not sure the “natural migration” is / will play out

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I think there’s an interesting dynamic when it comes to MVI. We continue to see strong growth in addresses / holders (now above 4,000) but that is coming from small holders (under 10 units). For this cohort, the liquidity we have now is sufficient. However, it looks to me like the current liquidity is insufficient to accommodate bigger holders and wallets.

For example, our largest holder cohort by (AUM) is those holding like $6.5k and $33k (50 to 249 units). Enabling these buyers to trade with minimal slippage could be a good strategy. At the moment, $33k trade has 1.3% price impact.

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Just some things to think about.

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Please see

by @Matthew_Graham and myself for an updated version of this proposal with the same intention.

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