Liquidity mining strategy - starter for 10

OK, I think it’s clear that we need to think about long term strategy in terms of token distribution and liquidity mining.

We started the Coop with a very successful 60 day liquidity mining campaign on $DPI. Since then it’s been much more ad hoc with a few IIP’s to extend Uniswap incentives and a couple of Loopring programmes that have gone via the growth working group/treasury committee. This has worked to date, but I think it’s clear that we need an ongoing strategy. particularly as we launch new funds.

I tried to kick this off a couple of weeks ago with a slide deck / proposal for a meeting, and I know @BigSky7 has been looking at liquidity mining as a business development tool but it’s probably easier to work in the forum to get some ideas.

LIquidity mining has a number of benefits:

  • Kickstarting AUM - Essential for launch
  • Distributing INDEX tokens in a decentralised way - Essential for becoming a decentralised organisation.
  • Marketing our product
  • Defending AUM against competitors
  • Reducing slippage on large trdes
  • Building links with AMM communities
  • Expanding the visible storefront for our products (@BigSky7 ).

Personally, I’ve been trying to move the coop to minimal INDEX issuance for liquidity mining while supporting a minimum size trading pool ($30 M as proposed in IIP-11). In addition, I have pushed for a reduced amount of Liquidity mining on Loopring - mainly to help facilitate small trades. We have also discussed incentivising the sushi swap pool to build bridges.

Looking at the historical data for the Uniswap Pool each week (Assuming all Uniswap LP tokens are staked for INDEX - so an underestimate of the actual rewards):

Where is the liquidity at the moment:

21feb21 Pool size ($ M) Volume ($ M) Fee income Incentive
Uniswap 72.2 9.9 15% 16%
Loopring 7.4 0.5 4% 8%
Sushiswap 2.4 0.24 11% 51%

During the Org call on Wednesday there was an extensive discussion on incentivising the Sushiswap pool with a number of objectives:

  • Building a second large liquidity pool to aid trades and increasing our visibility
  • Marketing the (expected) addition of $SUSHI to $DPI
  • Building relationships with the sushi community (who have been supporting the coop by incentivising both DPI and INDEX pools)

Sushiswap runt he Onsen programme, and it’s possible to have joint incentives (i.e. $Sushi and $INDEX), however, I think this needs a modified staking contract (i.e. outside the Onsen interface)

We have run a couple of 14 day campaigns to incentivise liquidity on looping, and this has succeeded in gaining liquidity, and allowing small trades (I think the majority of trades have been < 0.5 ETH). Loopring has the advantage in that we don’t need a staking contract, and users don’t need to stake LP tokens - it’s all done by the loopring team - However, you need to stay int he pool (/on L2) to receive the back dated rewards.

In addition to an AMM, Loopring can offer order book marketing which can be much more efficient in terms of slippage vs capital. This relies on incentivised market makers who maintain the order book spread close to the market price. Loopring think that running both an order book and AMM for the same pair will drive more volume to both (they are also planning a common interface for both markets, so spot buys would see a single interface and trades would be filled from both liquidity sources)

Exchange issue
This should allow larger trades of DPI to be done with less slippage for a given pool, size. Purchase relies on sourcing the underlying tokens and then issuing the DPI token. This costs much more gas than a single AMM trade, and so is only economic for large trades that would push the AMM off the NAV.

@BigSky7 has been asking is a single pool is better than 2 pools that are half each. I’m not sure anyone has been able to give a definitive answer (maybe a backburner question for the analytics team @jdcook ?). Personally, I think that if everyone is using an aggregator/checks both pools, then 2 are better, as there is a chance that 1 will be above NAV while the others is below. While not enough to make arbitrage profitable, they can give a better price for the trader. The doens side is if people are using a wallet that only allows use of 1 of the AMMs.

Anyway, I think that is probably enough to give some context and kick start a debate on what we want to do in terms of Liquidity mining.

I think we need a strategy for $DPI liquidity mining going forward:

  • increase,
  • reduce,
  • focused
  • spread
  • (and the elephant in the room: “wen UNI v3?”
  • Do we see this as a good way to decentralise INDEX ownership?
  • marketing and BD tool?

I’m going to reply later with a suggestion of what we could do, and I welcome anyone to suggest alternatives.

It would also good to see a public discussion on liquidity mining future funds. @mcgpetch, @gregdocter @puniaviision @setoshi @Celey


Data for the chart:

Date DPI price INDEX price # DPI circulation (k) DPI market cap ($ M) Uniswap pool value ($ M) DPI in pool ( m) # DPI in Uniswap (k) % DPI in Uniswap Daily INDEX rewards Reward value LM APY (assumed all in contract)
11 Oct 2020 $88.62 $2.98 148 $13 $22 $11 $124 84% 15000 $44,651 74%
18 Oct 2020 $80.17 $2.97 171 $14 $25 $13 $157 92% 15000 $44,509 65%
25 Oct 2020 $79.93 $2.82 192 $15 $26 $13 $165 86% 15000 $42,300 58%
01 Nov 2020 $65.88 $2.49 224 $15 $24 $12 $179 80% 15000 $37,286 58%
08 Nov 2020 $70.52 $2.90 226 $16 $28 $14 $200 88% 15000 $43,537 56%
15 Nov 2020 $91.86 $5.84 247 $23 $37 $19 $204 83% 15000 $87,549 85%
22 Nov 2020 $104.61 $8.91 326 $34 $54 $27 $256 78% 15000 $133,696 91%
29 Nov 2020 $91.11 $5.27 323 $29 $47 $24 $260 80% 15000 $79,097 61%
06 Dec 2020 $104.49 $4.22 263 $28 $43 $21 $204 78% 15000 $63,328 54%
13 Dec 2020 $93.56 $5.10 213 $20 $30 $15 $158 74% 3864 $19,712 24%
20 Dec 2020 $110.33 $5.23 209 $23 $29 $14 $129 62% 3864 $20,198 26%
27 Dec 2020 $105.82 $5.00 215 $23 $27 $13 $127 59% 3864 $19,330 26%
03 Jan 2021 $116.98 $4.51 221 $26 $32 $16 $135 61% 3864 $17,433 20%
10 Jan 2021 $165.60 $7.63 230 $38 $43 $22 $131 57% 2500 $19,083 16%
17 Jan 2021 $222.64 $7.10 241 $54 $41 $20 $92 38% 2500 $17,741 16%
24 Jan 2021 $227.03 $9.60 260 $59 $48 $24 $105 40% 2500 $23,995 18%
31 Jan 2021 $323.51 $20.13 271 $88 $54 $27 $83 31% 2500 $50,336 34%
07 Feb 2021 $403.71 $23.75 282 $114 $69 $35 $86 30% 1250 $29,689 16%
14 Feb 2021 $453.24 $29.53 287 $130 $70 $35 $77 27% 1250 $36,909 19%
21 Feb 2021 $469.84 $26.69 287 $135 $71 $36 $76 26% 1250 $33,358 17%

@Matthew_Graham has done some analysis on the current liquidity rewards on Uniswap: Discord

@overanalyser thank you for the awesome analysis! I have learned an incredible amount from your posts over the last months.

With the launch of new products and the establishment of $DPI as a core DeFi product, we need to develop a long-term strategy for managing liquidity for multiple products across multiple protocols. This strategy will need continued refinement as our understanding of liquidity in the context of the AMM model model evolve. Below are my thoughts on reasons for expanding our current liquidity and steps that we could take.

In its current form DeFi is a little under a year old. Since DeFi summer, the market has started to consolidate around 10-20 leading protocols. Each of these blue-chip dApps will have a TVL > $1 billion by early June. We are one of the top-20 leading protocols right now and we will continue to be the leader in Crypto Index Funds. Barring a disaster or major market turbulence Index Coop will have $1 billion AUM by this summer.

Right now every leading DeFi project is sprinting to collaborate with other projects. They do this because each collaboration cements their place in the ecosystem by creating new avenues for token holders to deploy and buy their tokens.

Building deep and lasting partnerships with other leading communities in our space is the single largest value add for our community. This is so important that we should appoint individual community members as delegates to each of the top ten protocols to manage that relationship and grow the partnership.

Sushiswap is about to be listed on $DPI. This creates an amazing opportunity to start building a strong partnership with them. Our Sushiswap liquidity pool, the primary markets where consumers go to buy our product $DPI, only has $2 million of liquidity right now. We can use this opportunity with Sushiswap to grow our presence on their protocol and to welcome them to the $DPI family!

These are steps that we can take:

  1. Appoint a community member to build and own the relationship with Sushiswap . Ideally this community member has a pre- existing relationship with Sushi.

  2. Talk to Sushiswap and identify opportunities to collaborate and work with them. This work will help us build a picture of what kind of action is possible, what if any the cost is, and what the reward will be.

  3. Leverage our data analysis team to help us build better models for analyzing and maintaining our cross-protocol liquidity

Work with Sushiswap to craft a proposal for our community.

DeFi is young - we have barely scratched the surface on what is possible. We are building the most sophisticated index that has ever been built. Index is on the verge of capturing an absolutely massive share of the DeFi market cap, I am beyond excited for us to make that happen.

Thanks @DarkForestCapital and @gregdocter for helping develop and focus my thoughts on the subject


Follow on point - I think what this conversation really illuminates is how little we understand about managing liquidity in the context of AMMs. It is important not to forget that this is a market structure that has only really existed in its current form for a year.

We simply don’t have the answers to many of these questions, and the only way to arrive at a better understanding is through conversations like this.

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@BigSky7 has been asking is a single pool is better than 2 pools that are half each. I’m not sure anyone has been able to give a definitive answer (maybe a backburner question for the analytics team @jdcook ?).

I can’t imagine there being a downside to having great liquidity across multiple protocols.

Both Sushiswap and 1inch are adding new users month / month and the importance of tapping into that user base can’t be understated.

Sushiswap seems like a great next step — as mentioned by @BigSky7 — considering the size of their community, their focus on innovation, and their past collaborative success (e.g. Yearn x Sushiswap).

If the goal is decentralized distribution, a multiple DEX strategy is the most effective method. IMO: The important step is figuring out how much and for how long.

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OK, this is one was we could approach it:


  • To have a plan for $DPI liquidity mining for the next 60 days so the LP’s know what is coming.
  • To maintain at least $30 M liquidity on L1.
  • To build our relationships with other protocols
  • To not overpay for the liquidity we get.
  • Maintain $DPI as the largest AUV and most liquid DeFi fund.
  • Move significant liquidity / trading volume to L2


By my calculations, our rough INDEX outgoings to date is:

LM Community Other Total %
Oct 450,000 7,460 100,000 Airdrop 557,460 5.6%
Nov 450,000 3,600 453600 4.5%
Dec 115,920 7,895 127,235 1.3%
Jan 75,000 + 2,000 6,334 3,420 Creative 83,334 0.8%
Feb 37,500 + 1,000 37,500 0.4%
Total 1,131,420 (11%) 25,289 (0.3%) 103,420 (1%) 1,259,129 12.6%

If we omit the initial 60 days liquidity mining as that had the goal of massive token distribution, then the community has decided to spend 2% of the available INDEX on Liquidity mining $DPI. There was 37.5 % of INDEX allocated at launch (2% to DeFi Pulse, 28% to Set, 1% Air drop, 9% Initial LM and 7.5 % to the methodologists). So we have had 62.5% to allocate ( and to be decentralise, at least 37.5% within the first 3 years).

If we assume the Liquidity mining is going to remain the largest part of our outgoings (and this is certainly up for debate), then we have a significant amount of gas in the tank (but multiple products coming).

The proposal for the first 30 days:

  • 350 INDEX per day on UNISWAP - Same contract (72% reduction)
  • 350 INDEX per day for Sushiswap LP’s - coop hosted contract
  • 140 INDEX per day for Loopring LP’s (100% increase i.e. back to the level of the initial Loopring rewards)
  • 30 INDEX per day for Loopring orderbook market makers

Total =870 INDEX per day which is 70% of the current incentive. This would be 0.26% of the total INDEX supply ($780,000 at $30…).

The second 30 day period would use the same proportions, but a further 30% reduction in USD value (potentially an increase in INDEX if the price drop by 30%.


  • I would expect to see a significant migration of liquidity from Uniswap to Sushi with some movement to Loopring.
  • As the Uniswap fees are currently ~ to the INDEX rewards, I would expect Uniswap to keep 50% of the current liquidity.
  • The overall reduction in rewards means it’s unlikely that we would see an increase in total liquidity, more of a distribution (and mainly the whales averaging the different pools out)
  • I would us the current Uniswap staking contract to save passiv LP’s gas.
  • While Sushi do discuss combined rewards (sushi + INDEX this would require the coop to host the contract. I think it’s simpler to deploy a contract that just rewards with INDEX, and let Sushi LP’s decide if they want to stay earning Sushi, or restake for INDEX. - Again, I would expect market forces to produce comparable yields.
  • Loopring ring doesn’t need a skating contract.
  • Orderbook trading is much more capital efficient than AMM’s with less slippage for large trades. The spread is maintained by market makers who would earn the orderbook rewards. Loopring plan a common interface so trade use both the orderbook and AMM pools. At the moment there are only 4 orderbook pools live on loopring (with the stable coin pools incentivised by LRC @ $1,500 per day). $DPI would be added if we agreed to fund liquidity mining. The combination of orderbook and AMM, could capture lots of volume for loopring.

KPI’s TBC, but I would look for similar liquidity on Uniswap and sushswap, similar volumes on both, and a significant volume on loopring. I would expect continued growth of smaller trades on loopring. I’m uncertain of what the orderbook will do, so thats more of an experiment.

I’m looking forward to the discussion and any alternative approaches we should consider.

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What do you mean by joint rewards requiring the coop to host the contract?

It is my understanding that if you are earning sushi within Onsen, you use the sushi staking contracts. However, if there are two incentives, the staking contract is different (and needs to be hosted by somone else). e.g.

I’m happy to be corrected if I’ve got it wrong.

Oh, I see. I’ll reach out to 0xMaki / their community to get a better understand of the flow.


please let me know what you discover.

I believe @DarkForestCapital spoke to Maki on this several weeks ago when the initial conversation about Sushi incentives came up. Maybe he can opine on smart contract requirements for a combined program.

One interesting thing to think about re liquidity mining is what do we think happens if there are no incentives? Do we think liquidity dries up to the point where it’s a problem? If we do think that, then perhaps our end game shouldn’t be the complete removal of incentives over time.

Another thing to think about is - we are currently paying nearly $1m per month for liquidity (just Uniswap, ex Loopring). That’s quite a bit, especially considering that we are overshooting on how much liquidity there is on Uni vs. what we thought was a good target at $30m in December (although if you remove price appreciation from the equation then the story is a bit different). Could we spend this money elsewhere, with more significant impact?

Below is how I think about liquidity mining. I operate under the assumption that whale trades will be done through exchange issuance so the need to reduce slippage on trades will be addressed with a circa $30m pool.

  • I agree with @overanalyser that we should pursue minimal INDEX issuance, for the purposes of achieving a $30m pool on one DEX. We can try to find this point gradually or cut rewards on Uni significantly and calibrate accordingly based on market feedback;

  • Beyond minimal issuance, we should still use incentives. But they should be used for integrations and partnerships with other DeFi projects. This enables us to think holistically as it relates to our entire product line up, not just DPI. It also allows us to respond to events in the market (example being PoolTogether launching a token, their TVL going up more than 10x - this is a great opportunity to set up DPI pool and capitalise on the hype). Integrating our products across the DeFi and wallet ecosystem would have much greater impact than incentivising liquidity beyond what is necessary. We’ll also be introducing our products to communities across the space.

  • L2s are crucial. I know I’m making trades on Loopring that I wouldn’t be making on L1. The more pairs they add, the more the L2 clout will grow. We should be focusing on this.

With this in mind, I would agree with OA’s proposal.

I would allocate the remainder (the difference between current rate of rewards and OA’s proposed rate of rewards) to potential partnerships and integrations. This would fund things like PoolTogether, or Dharma/Zapper promotions, etc. There’s no urgency to rush these funds out, but it makes sense to have a sort of “ecosystem fund” from which we can draw capital.


@verto0912 this is a very good point. I imagine two things happen.

A) Once liquidity is established in a pool with a good product (i.e. DPI) it will tend to stay there. The time of DeFi summer and people chasing 100000% APY on food coins is likely over. With the reduction of rewards some capital may migrate but most will stay because they appreciate the dynamics of LPing DPI vice LPing one of the more volatile underlying assets.

B) We can assume liquidity will not dry up with the reduction of rewards, however we may need to maintain some minimum amount of rewards to keep the pools growing and attractive.

The question then becomes how do we design a liquidity mining system that supports liquidity across multiple products (DPI, CGI, FLI, Metaverse) while remaining sustainable over the long term?

My sense is that we do two things - partner with protocols like Sushi to help us incentivize our liquidity AND develop a conservative long-term model for liquidity mining that significantly reduces outflow and is designed to lead to price appreciation of Index.


My 2 cents

I think this is something we need to tease out. When we talk about distributing INDEX widely, what is the goal that is centered around?

Secondly, I think there is a definitive answer regarding 2v1 Liquidity pools of equal sums. Fragmented liquidity = worse slippage = worse price. The point about NAV is interesting, and I do think we should use aggregators, but I don’t think there’s a strong case to target 2 liquidity pools over 1.

Am indifferent on continuing Loopring rewards but I still think there is lack of clarity on progress to goal after 1 month.

Agree with Verto’s point that we could still broadly cut Uniswap rewards without much effect on customers (my vote would be to continue to taper down to an ever-decreasing amount and let incentives run out for DPI at ~8-12 mos)

I think expanding liquidity mining for DPI at this point is unworthy of pursuing for a number of reasons, mainly:

  • It’s expensive ($1m/mo)
  • I’m skeptical lightly incentivizing a 2nd pool increases AUM
  • It obfuscates real demand
  • It puts downwards price pressure on INDEX
  • It’s not solving any customer pain (DPI holders aren’t benefitting from newly incentivized liquidity pools)

I’ve identified several areas I think are more likely to impact AUM (more importantly, unincentivized AUM) growth than LM:

  • Top of Funnel Activity
  • CEX Listings
  • Product (Exchange Issuance, Aave/Maker, Retention Mining e.g. Pooltogether)

All are definite ways we should be using out INDEX treasury.

I’m wanting to taper off the liquidity mining for $DPI, but I also want to use some of our firepower to build relationships, I think the time to builds Sushi liquidity is Early March to coincide with their inclusion in $DPI.

Re-2 pools, I think there can be a benefit with having multiple pools as they will have slightly differing prices at any time and people really need to use an aggregator:

At the moment, large purchases are pushed to Uniswap. If we incentivise both, then it will obviously change.

The only downside I can see for not encouraging a single massive pool is that some wallets don’t access via an aggregator. However, I don’t see that as being a deal breaker.

@LemonadeAlpha I think this emphasis on un-incentivized AUM may be the wrong way to look at things. As my thoughts on DeFi liquidity have evolved I’ve increasingly come to see the management of multi-protocol and multi-layer liquidity as a key driver for protocol success.

I believe shooting for zero incentives hurts us in two ways.

  1. It prevents us from reaching full decentralization. Liquidity incentives are important tool for our community and providing liquidity is one of the most important things our community members do.

  2. It significantly hurts us in the DeFi battle for liquidity

The DeFi summer era of extreme drops in liquidity as LPs chase endless APYs is clearly over. We are now fully in a more mature phase where LPs back the strongest protocols and are more than willing to trade some APY for month on month certainty. While DeFi summer is over the stigma of liquidity incentives remain- but this stigma is mis-placed and fundamentally misunderstands the role of liquidity in the DeFi ecosystem.

Across DeFi and crypto in general there is a massive massive battle for liquidity going on. This battle is driven by the gravitational pull of liquidity in the Ethereum ecosystem. Large amounts of liquidity attract more liquidity.

Put simply if we do not have strong liquidity support for our products they will not succeed. Liquidity providers are just as much a part of our community as other members. Right now they are exposed to a high amount of risk to provide a service that is necessary for the growth of our community.

Without strong liquidity we will not be able to grow to $1 billion AUM and beyond.

The economics of DeFi protocols are fundamentally different than traditional public companies and we should not be applying the same lense to them.

With that said - I am strongly in support of developing sustainable long-term liquidity incentives that sustain the Coop, help push us towards full Decentralization, and support liquidity across multiple products. I am also strongly in support of being extremely judicious with what protocols we support through our liquidity mining. I would rather have very strong liquidity in one or two protocols for all of our products than weak liquidity across many protocols.

I think we can do this very very economically and in such a way that we create strong price support for $Index - which is a core goal that we are all shooting for.

I also don’t disagree that $DPI may have sufficient liquidity - it very well may. But that does not remove the need for us to have a better understanding and plan for supporting long-term multi-product liquidity.

I agree wholeheartedly with the pursuit of liquidity.

I don’t think DEX incentivization on our end is necessary at this point. Many large liquidity pools exist without incentivization because the assets have demand and the trading volume provides a return for LPs.

The flywheel is something like this:

DPI Demand > Trading Volume > Liquidity > DPI Demand > Etc

Essentially, everything flows from DPI demand. So, instead of artificially injecting incentives into the end of the loop to support DPI demand, we should focus on sustainably widening the top of funnel, and making DPI more available and more useful.

Liquidity incentives seem an ideal case to bootstrap a pool or a new token but I don’t see how they help DPI at this point. The Uni pool is sufficiently liquid and liquidity has been increasing even as we lower incentives. To capture larger trades, adding Sushi isn’t going to help–exchange issuance, OTC maturation, and CEXs will help.

Adding to Sushi would split the UNI pool. It would make the price of slippage on trades worse in general. I also don’t think its worthy to pursue paying money to an app’s users (who proceed to dump it) in order to build relationships.

The downside (which actually seems pretty likely) seems to be we would be paying out of pocket to fragment our liquidity and provide worse pricing for users.

I agree. And I want to make this clear - you may by right that current $DPI liquidity is sufficient and we only need Uniswap pool.

A couple points though - first we need to stop viewing liquidity incentives as sunk costs. The liquidity we build with these incentives is there to stay. Sure some of the froth at the top may drop off in pursuit of APY but we sell a quality product and people want exposure to our product.

Liquidity pools are one of the keys drivers for demand and one of the main ways that users interact with DeFi protocols. Liquidity pools are one of the main things that make $DPI more available and more useful.

I don’t think it is a coincidence that Badger DAO has one of the largest most active communities with one of the highest TVL’s has 4+ liquidity pools with +$50,000 million. There liquidity mining has been very generous to LPs with significant price support.

I strongly disagree that building liquidity on Sushiswap would split the pools. The APY needed to justify the gas costs of switching from DPI <>ETH on Uni to DPI <>ETH on Sushi would need to be huge. I LP DPI on Uni and I would not switch because it does not make economic sense to switch. What it would do is drive adoption with the Sushi userbase.

While there is a drop off after the end of liquidity mining incentives this presents a false dichotomy that all liquidity that comes through Liquidity Mining is somehow “less good” or more mercenary than other forms of capital. With the consolidation of the DeFi ecosystem the majority of users are centering around a few core products. Many users may buy DPI in pursuit of an attractive yield, but they will stay because of the quality of the product we offer.

Strong liquidity is one of the primary drivers of $DPI demand and demand for DeFi protocols. There is a reason liquidity is so aggressively fought over. If we don’t fight for it someone else will take it.

While we have strong liquidity for $DPI right now we should not become complacent. There is a reason that many of the biggest protocols continue to incentivize liquidity for their tokens. Regardless of our resolution on Sushiswap liquidity mining - the competition for DeFi liquidity is only going to get tougher and more aggressive. If we dont develop a plan now someone else will.

I agree with the items on this list. CEX listing will move the needle for us more than almost any other activity and that is a huge focus. I also agree with driving partnerships with other DeFi protocols.

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I would ask for some explanation as to how this helps the customer solve a problem:

-Does adding liquidity to sushi make DPI cheaper to buy?

-Does it make it so some large unserved portion of demand can now access it (I’d argue the people who know uni and sushi is almost 100% overlap)? This point is doubly hammered home when we discuss aggregators.

If the goal is to make DPI more easy to buy, the right course of action would actually be to increase Uni rewards again, as that would make the liquidity pool larger and provide better pricing. I don’t think that’s the right way, either.

All this said if Sushi gives us a broad enough bonus incentivization I could be swayed for a fixed, short period of LM.

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