Looking at DPI liquidity from a product point of view.
TLDR
- DPI liquidity is spread across multiple pools including uniswap v3.
- The is an opportunity to encourage the main liquidity to move to uni v3 which should allow a significant reduction in INDEX rewards.
- We need to agree on the preferred route/speed of change as the current liquidity mining campaign finished in 2 week.
OK, I’ve been saving the best for last. $DPI is our largest product, with the most liquidity and has enjoyed significant liquidity mining incentives since launch. As such, it’s one of the coops largest costs with 567 INDEX being given to LPs every day ($8,505 per day = $3,100,000 per year @ $15 INDEX).
However, with the availability of uni v3, and the existence of a v3 pool there are more options available to ensure our users have access to liquidity while reducing cost to the coop.
The uni v3 research team has already recommended some options for DPI on-chain liquidity
Current on-chain liquidity
| 27jun21 | Unit | Sushi | Uni v2 | Uni v3 |
|---|---|---|---|---|
| AUM | Million $ | 2.89 | 29.9 | 2.07 |
| 14 day average trade | Million $ | 0.17 | 1.61 | 0.20 |
| 14 day average fee | $ | 432 | 4,828 | 594 |
| Annualised average fee income | % | 5.5% | 5.9% | 10.5% |
| LM incentives (current) | % | 12.9% | 12.1% | 0% |
| LP rewards | % | 18.4% | 18.0% | 10.5% |
| DPI in pool | # DPI | 6651 | 69,204 | 7,620 |
| ETH in pool | ETH | 793 | 8,221 | 232 |
| DPI in pool | $ M USD | $1.4 | $14.8 | $1.6 |
| ETH in pool | $ M USD | $1.4 | $15.0 | $0.4 |
| Sell ETH for 1% price impact | ETH | 8 | 58.5 | 9.6 |
| Buy ETH for 1% price impact | ETH | 8 | 58.0 | 11.8 |
| Sell ETH for 2% price impact | ETH | 16.3 | 143.0 | 25.8 |
| Buy ETH for 2% price impact | ETH | 15.9 | 140.0 | 24.0 |
Note, that the uni V2 liquidity pool is significantly lower than the $55 M we have been targeting for the last 90 days. This is primarily due to the drop in both ETH and DPI prices. Looking at the number of LP tokens we see a steady reduction by about 30% since early April (28,405 LP tokens on the 4th April compared to 20,269 today)
Recent trading volumes have been lower than we have typically seen. Even so, the uni v3 LP’s are getting higher fee income than the v2 or Sushi pool, however, the average fees on v3 are not sufficient to exceed the effect of INDEX or SUSHI rewards.
In part, this is due to the liquidity being spread very wide, and a significant amount in ranges that do not cover the current price:
The flipside uni v3 calculator calculates a fee-only yield of ~60% for liquidity +/- 8% of the spot price.
Previously the focus for liquidity mining has been on the price impact of large trades. With the goal being to have a large pool that can allow large trades to be carried out with minimal price impact, and efficient arbitrage trades to keep the price close to the NAV.
However, when looking at recent trades, its clear that many large purchasers are making full use of aggregators who split the swaps over multiple pools. These aggregators also access stablecoin:DPI liquidity on 0x protocol to give the best prices.
If we look at 1inch, for large trades (100 ETH), many liquidity sources are used. In this case, less than 12% of the total volume was routed through the Uniswap v2 pool!
So, for educated whales, the size of the uni v2 liquidity pool is not of critical importance.
(Anything less than 24 ETH was routed through Uni v2, v3 and sushiswap)
Secondary effects of migration to uni v3
As discussed in the uni v3 research, moving DPI liquidity to uni v3 is expected to increase the depth of the market close to the spot price and the increased earnings for focused LP’s should allow INDEX rewards to be discontinued.
However, there are a number of secondary effects to be considered:
- Having a massive AUM of on-chain liquidity raised the profile of DPI and gives comfort to holders that they can exit whenever they wish.
- v3 is still new and people are still building tools to analyse each pool/build understanding of the behaviour of the pool.
- The iNDEXcoop and Tokens sets buy process uses the v2pool (and exchange issuance for larger purchases), so that pool shrinking will produce more price impact for our users (until we get the UI updated).
- Issue/redemption arbitrage currently happens via the v2 pool, so bot maintainer will need to update their bots. (I think the other pools are arb’ed against the v2 pool)
- Automated v3 liquidity services are in development, but it’s still early days.
- Staking contracts for v3 are under development, but have not been released.
Personally, I think that moving DPI liquidity to v3 will be good for the coop, and token holders. There will be more work for LP’s but those that do the work will continue to receive income from providing liquidity.
The main question is how quickly we want to move, and a key consideration is the fact that the current liquidity mining for DPI:ETH on v2 ends in about 2 weeks and an IIP will required to release INDEX funds into the staking contract.
I am looking forward to hearing your thoughts.