Increase INDEX liquidity

Hello all,

Andrew here from Set and IC advocate since its inception

The current levels of DEX $INDEX liquidity after 1 year are bad, so I would like to open a high-level discussion on what everyone’s views are to potentially increasing the base DEX liquidity using our resources.

Writing this on my phone so I’ll keep it short and sweet –

Low project liquidity and why it’s bad:

  • Discourages distribution and access to INDEX due to the price impact, especially so for the larger investor who essentially needs to go OTC unless they like 5+% haircuts. OTC deals are also subtractive to positive price action whilst we maintain existing selling pressure
  • Big players create massive volatility, 25K INDEX was sold by one wallet at around $50 over multiple transactions and basically dumped the price 20-25%, I personally think it’s quite bad one party can remove that much of the market cap of INDEX. We have old DPI farmers & even the likes of large fund wallets who have sold sizable positions and the current liquidity cannot facilitate these exits (without creating a terrible price narrative around INDEX)
  • All this feeds into the stagnant price, which contrary to some people’s belief about short-sightedness, is bad. The market is fuelled by speculation, most crypto participants are investors/traders/speculators, not DAO and community evangelists. What drives growth in our products and INDEX are these majority participants. I believe every project in the crypto space should have an excellent base DEX liquidity (removing CEX listings from the equation) to enable these participants and I do believe other projects give this more merit than we do.
  • Improving liquidity around INDEX is good, facilitating more trading, activity and hopefully, price appreciation is good, our contributors are paid in INDEX, our treasury is largely INDEX, this is not short-sightedness but trying to give the basic foundations to a token that will hopefully enable more growth within the Coop. Not to mention the social and media benefits that come from more INDEX holders and those that have a vested interest in the project.

Interested to hear other peoples take

Andrew

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Thanks for getting the ball rolling on a discussion here @Tradespot. While acknowledging that there may be some discussions happening in parallel via the Index 2.0 initiatives, I agree with your take on OTC and have highlighted concerns here and here. Also suggested a direct liquidity provision that included INDEX here. I’d be interested to get your thoughts on desired outcomes and maybe means of achieving, as both Set and IC have INDEX that could be deployed.

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Yep 100, had just mentioned this last night in #treasury, seems like an easy fix e.g. Balancer or Uni v3 should be able to be executed on fairly quickly.

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Hey All,

Brian from Visor Finance here. I’ve actually been in quite a few talks with the Index team regarding potential liquidity mining for the DPI-ETH pair here: Proposal: Use Visor Finance for Liquidity Mining on Uniswap v3. We’re also in talks with regards to $JPG as well.

However, for the Index token, I would suggest a few different alternatives. A concentrated liquidity DEX like Uni v3 makes obvious sense. The capital efficiency of Uni v3 can be anywhere from 3x - 10x greater than it is on Uni v2 or Sushi. So with just a fraction of the liquidity on Uni v3, you can have equivalent slippage on Uni v2.

My suggestion would be the following. If Index has a lot of $INDEX in their treasury, it may be beneficial for Index Coop to provide that liquidity themselves on Uni v3. The only issue is getting the other side ETH without having to dump a lot of INDEX tokens. If Index has both $INDEX & $ETH that they can provide, that would be the most ideal and the cheapest way to source liquidity. There’s currently only around $559K of liquidity on Uni v2 for INDEX-ETH. If Index Coop were even able to provide $300K ($150k of ETH & $150k of INDEX) of its own liquidity on Uni v3, that would be an improvement in terms of slippage.

If the Index treasury did not have the other side in ETH, but only had $INDEX tokens, then two possible alternatives exist. We can initialize the Uni v3 pool at a slight discount to the current price on Uni v2, and have a single-sided range order consisting of only INDEX above the initialized price. The lower price on Uni v3 would incentivize arbitrageurs to come in and buy the INDEX tokens with ETH, and we can get the other side of the pair that way, in a cost-minimized way that wouldn’t affect the price of INDEX too much.

The other alternative would be to use Olympus Pro to buy back Uni v2 or Sushi liquidity at a slight premium, but manage that liquidity on Uni v3. This incurs the costs of bonding, which is currently 3.3% in addition to the premium paid with your own governance tokens. However, this could potentially lessen the impact of dumping INDEX tokens (assuming that the person who sold the INDEX-ETH liquidity for INDEX at a discount doesn’t immediately dump). Also, you retain all the capital efficiency benefits and yield-generating capabilities of Uni v3.

Lastly, Index Coop could incentivize liquidity through a liquidity mining campaign. It need not be too robust, but just enough to gain the requisite liquidity. Again, on Uni v3, you don’t need as much liquidity as you would need on Uni v2 or Sushi, so even then the liquidity mining rewards would be less expensive in that you wouldn’t need as much liquidity.

Happy to talk more with the Index Team on a phone call to discuss these alternatives in more detail! But those are what I see as the best solutions to this issue. Visor provides a liquidity mining infrastructure on Uni v3 as well as treasury management solutions that help protocols to source liquidity themselves and manage that liquidity on Uni v3.

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I like the idea of providing liquidity provision of INDEX on Uni v3; however, I would be cautious of using the 0.05% fee tier. 0.05% is best used for stable to stable swaps & high volume pairs such as WBTC-WETH & WETH-USDC. Because the impermanent loss on Uni v3 can be at times greater than Uni v2 or Sushi, you need enough fees to offset that impermanent loss in order for liquidity provisioning to be self-sustaining.

For that reason, lower volume pairs such as INDEX-ETH may be better suited for the 0.3% fee tier. It can strike the right balance by providing a fair price to traders as well as allowing the INDEX-ETH LP to be self-sustaining & able to scale with increased volumes.

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Looking at how existing liquidity is used for a 5000 INDEX sell on 1inch, Uniswap V3 is used for 68% of the order in this instance whilst only having $986k in the LP. So with that being known, I would also be interested in exploring the concentrated liquidity option using V3 Uniswap considering most volume is being routed there currently. Also thank you @bp333 for the detailed response regarding how Visor could facilitate this - I think it’s definitely worth exploring (and clearly already is for DPI-ETH & JPG).

@mel.eth kudos to you for raising this previously in those posts you linked, I think you’re completely right in your sentiment. Hopefully, improved liquidity is something we should as a DAO be able to move more quickly on considering it’s a basic fundamental need for any project.

In terms of my desired outcome, it would be to use a small % of IC treasury funds with a capital-efficient method (concentrated liquidity) - in terms of amount, I would like to see it at least doubled from what is currently a $986K LP to $2-3M, which I think is the point where all parties, buyers and sellers, are facilitated.

e.g.
If a large seller or old DPI farmer wants to exit their INDEX position? That’s fine, they won’t tank the price 20%
If a large investor wants to gain exposure to INDEX, that’s also fine - he won’t necessarily go OTC and become subtractive to the INDEX market

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Tagging relevant owls… whom I feel would add value to this conversation;

@overanalyser (DEX Liquidity Guru* :stuck_out_tongue: )
@Matthew_Graham & @AcceleratedCapital (Treasury)
@BigSky7 & @Mringz (BD)

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@bp333 thanks for jumping in with your expertise here!

As for current INDEX liquidity, at the time of writing this, I am seeing:

Liquidity - Pool - AMM
$1.5m - INDEX/ETH 1.0% - Uni v3
$1m - INDEX/ETH - Sushi
$500k - INDEX/ETH - Uni v2
$1.2m - INDEX/ETH 70/30 - Balancer

These pools have done the following volume in the past 24 hours:

Uni v3: $310k
Sushi: $6k
Uni v2: $51k
Balancer: $40k

This, to me, just says we need to move our liquidity around. If we can move liquidity currently on Uni v2 and Sushi to Uni v3, we would be in a great place. So how can we migrate it? I would love to use Olympus Pro to run bonds and buy the liquidity on Uni v2 and/or Sushi - then once the bonds run out, we can migrate the liquidity we now own over to Uni v3. I do recognize it will take time/effort to get onboarded onto Olympus Pro - I have reached out to Olympus to try and start that conversation/partnership.

We could also consider running a short-term incentive via the v3 staking contracts to migrate liquidity (or at least attract new liquidity) to v3.

And we could also just deploy liquidity directly from treasury to Uni v3. I like the bonds because it gives us an elegant way to go from INDEX to the LP tokens. If we go directly from treasury, we will need to sell INDEX for ETH to then add liquidity to the pool. It also just feels like a bit of a waste all around for ~2.5m+ of liquidity to be sitting in v2, sushi, and balancer - so inefficient for everyone involved imo.

So, just to re-iterate, I would love to go the bonds route with Olympus. I think bonds can become a key tool in our liquidity strategy across all of our products long-term. I will hopefully be having conversations with Olympus soon to see how soon that could be a reality.

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Ahh I didn’t realize there was so much liquidity already on Uni v3. Another suggestion is that you can provide a single sided, ultra-concentrated range order of 100% INDEX above the current price tick on Uni v3. It may take a bit of time, but as people buy into INDEX with ETH, the single-sided order will convert to more ETH. Once the position reaches 50/50, we can rebalance the position automatically over a wider range.

The benefits of this approach is that it doesn’t involve depressing the price of INDEX when swapping for ETH, but instead incentivizes buying of INDEX at a higher price point by reducing the slippage for all buyers who buy into your range order. As people buy into your position, you will have more ETH. The cons of this approach is that, until people buy into your position, you won’t be earning fees. Additionally, it will take a lot more buys to move up the price of INDEX.

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Hello,

I think another way to increase the INDEX liquidity would be to give the token more value, for example with buybacks, dividends or something. But it seems nobody here is even thinking about that side of possible solutions. As an INDEX holder i have to say it’s quite frustrating to see the value of the government token go down the drain while the products itself are great. I think there need to be other incentives to hold the government token, except for voting rights.
Can others please give their opinion on that? Is there something i could personaly do?

Hi All,

INDEX liquidity has long been the neglected compared to our products. The absence of INDEX liquidity mining was a deliberate choice to avoid the common pool 2 problems seen with project launches, and so we managed with a Small Uniswap v3 and then Siushiswap pools.

Thin liquidity was great when the price was pumping, but not so good with stagnant or propping prices. In addition, as we have low liquidity, it makes it hard for some people to buy a sizable position (with the confidence that they can sell). Volume / liquidity is also a factor in getting used as collateral on other protocols (e.g. Rari Fuse pools).

I’m hesitant to recommend liquidity incentives for INDEX (i.e. Pool 2) as I think there are other ways we can improve our market depth.

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@overanalyser, what are the other ways to improve our market depth you are thinking about?

Hi @slowowl,

There have been many chats around this topic and I can list out a few of the options considered to varying degrees to date.

  • Bancor listing - IC would only need to provide single sided liquidity but downside is we would much rather prefer INDEX to be paired with ETH. Having a ETH trading pair enables easier integration within defi.
  • CEX listing - IC would probably need to provide liquidity for INDEX and maybe the trading pair as well. If we could achieve this, it would be fantastic outcome, as it would help meet the Chainlink oracle listing requirements.
  • Ohm BOND - @jdcook mentioned this idea earlier in the thread. This has the affect of IC paying for all the on-chain liquidity including a fee.
  • Ondo Finance IC can provide INDEX liquidity and Fei Protocol can provide FEI, this could be an option. The cost here is 5% fixed interest to Fei Protocol and IC takes all the IL risk. Similar to the Bancor idea, a INDEX-ETH pool would be better.
  • Uniswap & Sushiswap Both DEXs are valid options for creating liquidity. The V3 pool design, versus Trident and SUSHI incentives is the discussion to be had.
  • Index Coop Treasury If we provide the liquidity ourselves, we need to find the ETH to pair the INDEX with. Which ever way to come at this, without using debt or spending our USDC balance we end up incurring significant opportunity costs. There is limited non INDEX & USDC funds to be deployed and a fair few ideas floating around as to how best to deploy this capital.
  • Marker Makers There exists an opportunity to use MM to provide on-chain liquidity on IC behalf. We would need to consider the cost of this, whether it be a DEX or CEX. The later is very appealing IMHO, especially if we only provide one sided liquidity.

Something to keep in mind, we do need to work towards attaining a Chainlink Oracle INDEX-ETH and/or INDEX-USDC price feed. To achieve this we need $2M to $3M daily trading volume, a CEX listing and good on-chain liquidity. This is the latest feedback we heard from Chainlink and we know from our discussions that the requirements for attaining the oracle price feed are going to become more stringent in the future. The $2M to $3M minimum daily trading volume needs to be achieve over an extended time horizon, at least 30 days.

Other things to consider, there is a lot of VC interest around future INDEX purchases. I am lead to believe some VCs have been buying on market. I know of folks who have built sizeable VC like holdings solely through on market buying. The point being there is no shortage of demand and large positions can be acquired over time.

If there are any DPI/MVI farmers who didn’t adequately take into consider the thinly traded INDEX conditions when apeing into DPI-ETH, then they can reach out via the OTC channel in discord and we can link them up with some folks looking buy larger parcels of INDEX tokens. VC and individuals alike.

Index Coop Full Timers have the ability to sell INDEX back to the treasury. We will also be considering rewarding contributors in either USDC or INDEX. This will reduce sell pressure as folks selling INDEX each month to cover living expenses will no longer need to do so.

I don’t think as a community there is appetite to offer incentives on INDEX-ETH to incentivise liquidity. The cost of doing so would be greater than some of the other options mentioned above. Any path that leads to a CEX listing is being explored. Further to this, without a clear pathway to a Chainlink oracle, then it would be hard to justify spending on INDEX-ETH liquidity.

There is limited non INDEX and non USDC holding in the treasury. Using the non INDEX and non INDEX holding to provide DEX liquidity would have a pretty significant opportunity cost and we would need to give this a lot of consideration. I am for improving trading conditions, but I am more for growing the value of our AUM and developing a clear runway to attaining a Chainlink oracle. The low INDEX price, is the time to be building a position. Those holders with weak hands will sell to those with longer investment time horizons.

The Chainlink oracle unlocks a lot of integration possibilities. The most obvious is the lending markets and then inclusion in DPI.

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I am surprised that nobody here is talking about Wintermute Market Making Proposal (IIP 83), approved one month ago.

From the proposal it was clear that Wintermute would provide market making service for the INDEX token on dexes as well:

We propose to Index Coop Community appointing a third party agent (Wintermute Trading) to act as the Index Coop Community Agent to market-make $INDEX across cefi, defi and OTC

Isn’t it the job of Wintermute to answer to @Tradespot’s point? @fallow8 @wishful_cynic @Metfanmike

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I tend to agree with OA. Also if we increase liquidity we run the risk of more negative sell pressure. INDEX was heavily rewarded and farmed so there is a lot out there that can be dumped. We should really try be doing OTC sales with old farmers and VC’s that want exposure not increasing liquidity will just compound the dumping problem.

I think going forward when forum posts like this are put in the forum the pro’s of the current situation should be highlighted as well as the cons of the initiative proposed so enough information is out there. At the end of the day we should be encouraging people to hold index long-term and increasing liquidity doesn’t do that.

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I’m not sure I agree with the mindset that we should keep bad liquidity to encourage holding positions, also people who want to dump farm rewards will dump into bad liquidity if they are looking to exit. Considering our treasury is largely INDEX and one whale knocked 20% of the market cap off IC because they dumped 25K INDEX, I don’t think that’s OK.

Would be interested in what’s being actioned from the market making proposal @trx314 highlighted, are Wintermute due to be doing anything here soon? I might not have visibility of it. cc @wishful_cynic

  • Index Coop Treasury If we provide the liquidity ourselves, we need to find the ETH to pair the INDEX with. Which ever way to come at this, without using debt or spending our USDC balance we end up incurring significant opportunity costs. There is limited non INDEX & USDC funds to be deployed and a fair few ideas floating around as to how best to deploy this capital.

With regards to this point, providing single-sided liquidity above the current price tick on Uniswap v3 negates the need for finding ETH to pair INDEX with. If the thesis is that VCs will buy into the market and that there’s no shortage of demand for INDEX, then this may be the ideal approach.

How this would work is that we would provide only INDEX tokens from treasury above the current price tick at say $32. We can provide up to 15k of purely INDEX tokens in a concentrated range from $32 - $32.10. As people buy INDEX tokens, the liquidity position will eventually convert to ETH. Upon 50/50 ratio, we can auto-rebalance the position over a wider range.

The single-sided limit position is ideal because (1) it doesn’t involve dumping INDEX tokens at a discount (2) it allows the treasury to obtain the other side in ETH without having to pay a premium.

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I’ve had this brewing for a while:

I’m a big fan of Bancor, so will be an LP in this pool.

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Really great suggestions in this thread. The answer is most likely multi-pronged.

It is, indeed. Token2049 was the focus last week, but now that is in the rearview mirror, we’ll be having a strategy meeting with Wintermute (likely next week), a next step outlined in the recent IBWG proposal. We’ll be taking in perspectives from Treasury and Product on what the goals should be on the liquidity front and come back to this thread with a properly baked/vetted response and game plan.

Regarding dividends, I’m not aware of any yield-producing governance tokens that have successfully been listed on, say, Coinbase…are you? The prevailing thought has been that adding dividends/yield would alter the token to a point where it would be viewed unfavorably by many Tier I CEXs for regulatory reasons. Getting a centralized exchange listing seems more consequential than paying out a dividend. Also, the Coop is barely a year old. Early-stage startups don’t pay dividends because they’re in growth/re-investment mode. The Coop is no different, imo.

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yes, you are right, i wasn’t aware of the way forward that @Matthew_Graham described. Sounds like a good plan to me.
Is it clear what the main problems with getting listed on a cex are?

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