@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
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