Liquidity Mining Strategy

OK, we had quite a long discussion back in February about liquidity mining, however, I’m not sure we have a strategy that is fit for purpose going forward:

So, I’m going to try and restart the discussion:


Liquidity Mining Strategy

Until now the coop has managed liquidity mining by a combination of:

  • The initial Coop launch
  • IIP’s for specific product LM programmes
  • GWG grants for loopring incentives

As time has progressed the calculation of rewards has developed into something based on the framework:

  1. A target AUM and assumed APY (for product launches)
  2. A target AUM and the current incentives (so if we have more liquidity, rewards are cut in proposition)

This approach has worked and we have managed to successfully launch products with and without LM.

However, with the launch of more products, and multiple L2 options becoming available, i think it’s time to review the coops strategy and see if we want to change it:

Why does the coop run liquidity mining?

LM can be used for a number of reasons for the benefit of holders, LPs and the coop:

  1. It’s a provably neutral way to distribute tokens and so help decentralise a protocol.
  2. It can generate hype for new products to encourage people to look at them.
  3. It can help offset the cost of ownership for liquidity pairs which have large risk of Divergence Loss.
  4. Large liquidity allows larger trades to occur with minimal price impact.
  5. Large liquidity means that arbitrage via the issue and redemption contracts becomes favourable at a lower discount / premium to the NAV.
  6. Large LM rewards will drive an increase of AUM.

#1 is essential for a DeFi protocols early days. A period that I would say the coop has passed as we have > 14% of total tokens circulating on the open market…

#2 The marketing impact of launching a product and offering xxx% LM rewards and the associated early growth in AUM is clearly a benefit to the coop.

#3 Divergence loss can be reduced by creating pairs that are expected to be reasonably correlated over time (DAI:SYI, ETH:DPI), or where the LP is expected to be reasonably happy with either token (BTC2-FLI:BTC). Where the use case results in a higher risk (e.g. sUSD:SMI) then rewards may need to be higher.

4# For standard xy=k (uniswap v2, Sushiswap etc) DEX’s. Larger pools allow larger trades for a given amount of price impact. The introduction of Uniswap v3, means that these simple calculations become invalid.v3 is reported to be 10x (???) more capital efficient - a $1M pool on v3 can provide the same purchase experience as a $10M v2 pool.

With the availability of exchange issuance (i.e. ETH → underlying tokens → fund token), there is an upper limit to trade sizes where further increases in pool size have little impact on the user as the purchaser would be better using the contract than the DEX liquidity.

#5 Cost effect arbitrage via the issue and redeem contracts is a factor of the number of tokens in the fund (impacts the gas cost of the issue), the gas price, the size of the pool and the premium / discount to NAV. A pool that needs a $500,000 transaction to return to NAV is much more likely to be arbitraged than one that needs $50,000.

Note: Index products are different to single tokens, for single tokens, arbitrage is between the different markets (DEX’s and CEX’s) based on the difference between them. For index fund tokens the reference point is the NAV and the cost of issue / redemption.

#6 is an interesting one to think about, if we increase LM massively, will we induce more AUM, or move non incentivised AUM into incentivised AUM?

What is the optimum customer experience for holders?

I would say that the optimum experience is for the customer to have access to buy or sell the index fund as close to the NAV as possible with the lowest cost.

  • For very large purchases, this would be direct exchange issue/redemption on L1.
  • For large trades, this may be a large liquidity pool on L1.
  • For small trades this may be a smaller pool (with more slippage / premium / discount to NAV) on a L2 / side chain (or even a CEX) where gas fees are lower.

To me, this means we need a large L1 pool so that the issue and redemption arbitrage is effective, we also need effective arbitrage between the L1 and L2 pool - Which I’m not sure is happening yet.

What is the optimum customer experience for LP’s?

I would say that LP’s would like a combination of:

  • A desirable pair to own long term - I’m happy to hold ETH:DPI long term, I would not like DAI:DPI.
  • High trading fees - which implies large volume compared to the pool size.
  • High LM rewards - although this is largely set by the market, if we double the incentives, we can expect more liquidity the LP would get a similar reward APY.
    • Note a Low APY is a good thing for the coop, it means that the market place for LP assets is happy to sit in a pool containing our products. I also means that we get maximum impact for our
  • Rewards paid in a token they desire - not something they plan to harvest and dump frequently - Whales will farm and dump quicker.
  • Unvested rewards
  • Low maintenance staking - i.e. no need to unstake and restake every x days.
  • Clarity on the length of staking / rewards. [I’m much more likely to enter a pool that says 100 + days to run than one that ends in a week].
  • L2 / sidechain LP’ing and staking has obvious gas savings.

What is the optimum customer experience for the coop?

If we think of the coop as the customer, what do we want from liquidity mining?

  • Good holder experience
  • Good LP experience
  • Cost effective
  • Predictable costs
  • Does not require excessive governance / smart contract dev / web UI dev.
  • Minimises questions / questions in the forums.
  • Drives Coop vision:
    • $500 m AUM
    • 400,000 DPI units
    • New products > $200 m

Note,

  • I suspect some of these are pulling us in different directions. So we need an agreement on which we prioritise.

Where are we at the moment?

The current situation is that each product has IIP’s related to liquidity mining which creates work and uncertainty over the length of LP rewards.

IIP-24 and 28 produced 90 day campaigns with three x 30 day periods and a mandate to modify the rewards to target a liquidity value. I think that this has been an improvement for both LP’s and the coop, but I think that there is still scope for further iteration.

With the ongoing discussions around multichain (which may include liquidity mining) and delegation of responsibilities within the coop I think there is likely to be some move to delegate/automate the management of liquidity mining for the coop (before we are swamped by IIP’s)

I don’t have all the data to hand, so we will need input from the analytics team (and @geroge’s analysis of trade sizes).

But, before we can do any such delegation, we need a Liquidity mining strategy.

Options for potential strategies include:

  • Allocating target Liquidity for each product over an extended period (90 day, 180 days) and modifying the rewards every 30 days to target the liquidity
    • Target could be flat, increasing or decreasing
  • Allocating a fixed number of INDEX tokens to Liquidity mining over a period and then a delegated group allocates it to different products / pools
  • LM incentives are focused on product launch, and removed within a set period.
  • Liquidity mining rewards are increased to drive AUM to $500 M
  • The coop moves to curve like tokenomics with planned token inflation focused on liquidity mining to drive AUM / growth
  • Liquidity mining is cut to make each product a net cash generator for the coop.

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There is also the multichain discussion to consider:

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One Idea that @snasps and I have worked on would change to a top down strategy:

  1. the coop allocates a set number of tokens to LM for an extended period (e.g. 25% of year 1 allocation) per month = 50,000 INDEX, for 3 months.
    2)For each 30 day period the different products are scored against a number of criteria:
  • Current AUM
  • Target AUM
  • New launch
  • Current liquidity / LP token attractiveness
  • Pool fee income
  • New L2 pool
    *Competition in the market place for that product
  • Coop goals
  • protocol bridge building / co-incentivation
  • Cost to exchange issue
  • Current trade sized in liquidity pools
  • Trade volume
  1. then the available tokens can be allocated based on the scores.

This has a number of advantages in terms of reduced governance and the coop would know the INDEX budget (not the $ USD) for a period, and the scoring should give some predictability for rewards for each pool (it’s unlikely that there would be major swings each month).

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Wow - incredible work on this @overanalyser. This is a major step up in how we think about liquidity mining. I need to read and digest further over the next couple days - amazing analysis!

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Awesome post @overanalyser - great read and sums up a lot of what I have been thinking about really well :fire:

I’ve shared some of my thoughts below and apologies for the wordy reply.

I really like this approach and building on it over time as we deepen our understanding. The concept of having a target gives structure and purpose. New targets can be set and capital allocated. For instance, if the strategy is to pursue L2 - then we can pursue that independent of other objectives. Our ability to set goals and forward plan becomes increasingly important with this approach. I think the DPI trial is successful base on the data to date. The emphasis is on setting the right targets and then pursuing them which should relate to the overall goals and KPIs of Index Coop.

To me this becomes restrictive and reduces our ability to respond/react to market conditions. This might be a good approach for budgeting until we have something better, but in terms of addressing user experience and growing AUM - I don’t really see how placing the restriction of having a fixed budget on ourself helps us achieve our KPIs better than alternative options.

I really like the delegated group approach - this is scaleable and efficient for Index Coop. I would suggest oversight to ensure consistency and work groups have everything they need to be really successful.

Although the business models are different, both use LM to attract liquidity and improved user experience. Something to note here, is CURVE is not eligible for DPI due to the inflation schedule. When thinking about Aave & Comp style approaches, those that use the protocol do with a long term time horizon. ie: loans are normally over extended time periods. If we go with a continuous LM across all products then I would frame Index Coop as being similar to Curve from an inflation schedule perspective.

I like this approach provided it is capital efficient. For instance each dollar we spend on LM could be spent on Growth or Business Development initiatives that may yield higher ROI and create a more sticky client base. Framing LM as the tool used to drive Index Coop to $500M AUM perhaps needs context. Maybe this is more an initial drive/push taking the product to a place where it becomes easier to integrate with other protocols/CEXs.

Ultimately, this needs to be an Index Coop goal. We can’t have net negative cash indefinitely on our products - we will go broke! That said, there is a time and place. I would not rush to become profitability if we can continue investing and growing revenue with high ROI. I think we need to have some kind of minimum return on liquidity mining. Otherwise, that capital can be used more effectively by other working groups to grow AUM. There is an element of evaluating capital efficiency and how effective LM is as a tool. My personal opinion, is I suspect LM has diminishing returns over time.

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Thanks OA.

I think this post misses several important points.

  1. Liquidity is a tool for achieving our goals, not the goal itself. The actual goal is to grow AUM which is achieved through unit supply growth.
  2. The impact of V3 on liquidity mining. In my mind, V3 is a paradigm shift for LM and it doesn’t make sense to me that it wouldn’t be a major component of any liquidity mining strategy.

So, let me dig into these two points as I see them overlapping quite a bit.

Liquidity = user experience

As you said, our customers want to buy our products with low slippage at different trade sizes and LPs want clarity and to be properly rewarded for the service they provide.

With Uni v3, we no longer need to pay for liquidity itself. If we assume that DPI-ETH pool is even 5x more efficient on V3, then we only need a $10m pool. If the pool is $10m, supporting between $5 and $10m in daily trading volume, that swap fee APY is going to be very attractive and drive more LPs into the pool. So, we will get a much better outcome in terms of customer experience (the pool will be deeper) and we won’t need to spend anything to incentivise liquidity. With Uni V3, deep liquidity is no longer a competitive advantage.

So we should be giving notice to LPs that we will be turning off LM incentives for DPI in 2 months time (or whatever notice we want to give) and shifting the pool to V3. It frankly baffles me that we have a liquidity mining strategy that doesn’t consider this.

So if we no longer have to incentivise liquidity we can turn our attention to what we actually want to be incentivising. Which is unit supply growth. Looking at DPI, for example, we recently cut incentives. What did it do to unit supply growth? Well, nothing really, unit supply growth actually went up. We are hitting all-time highs for DPI unit supply. Again, liquidity is a tool for achieving our goals, not the goal itself.

Couple other comments but basically all of them revolve around the fact that Uni V3 allows us to significantly de-prioritise liquidity.

This is problematic because most of the criteria are subjective.

We shouldn’t be targeting liquidity, as explained above. The situation is somewhat different for new products that we need to bootstrap. This was discussed in the post looking at liquidity mining through the lens of a product life cycle. Essentially, it makes sense to have a 90-120 day LM program to bootstrap initial liquidity and adoption.

These are the experiments we should run. What is the impact of increased LM incentives on unit supply? Is there a strong correlation? If LM incentives really drive unit supply growth, how sticky is that supply?

To sum up, I think we are having a wrong conversation here. This approach to liquidity mining doesn’t take into consideration the most important development in LM to date - Uni V3. Uni V3 allows us to focus on unit supply growth and shifting funds to directly incentivising unit supply instead of liquidity. For new products, incentives could be a good tool to bootstrap the product, but should run for a limited amount of time.

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@verto0912

You are absolutely right, I still have a blind spot when it comes to Uniswap V3 and how, when managed correctly, the fees become sufficient to sustain liquidity to minimise slippage / deviation from NAV.

At the moment I view v3 as a whale game as you need to manage the boundaries of your liquidity. I’m hoping that we will see automated solutions that will allow the smaller LP’s to join in - either incentivised / unincentivised.

A question occurs:
Does that mean that we should be looking at a two-pronged strategy for LM:

  1. migrate the main on-chain liquidity with V3 uniswap (when available as an automated solution)
  2. targeted liquidity campaigns (30 / 60 / 90 day) for multichain / network growth.

Then #1 is a lead by the Product & Treasury Working Groups on the basis of slippage [/data] and #2 is lead by growth / BD on the basis of growing network effects / AUM.

[I suppose there is a third prong to target AUM growth without LM - again coming under Growth / BD].

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This is a big and important area for the Coop that can affect everything it does. Like @Matthew_Graham says, the sustainability aspect is ever present, I also agree there is a time and place for incentives and cutbacks. But, I also second @verto0912 — v3 has changed the game: in some cases doing the same volume as v2 on just 6% of the TVL, and that is before managed positions come into play.

Visor.finance is in the process of launching vaults which follow where the action is and which will also allow loaning out of positions which can allow for using them as collateral, perhaps.

Also, Omar Bohsali is coordinating the release of v3 staking contracts - https://twitter.com/omarish/status/1394377393868099584

My impression is that very little expenditure on liquidity mining will be needed, if any, and that the money saved can be spent other growth initiatives. However, the possibility to liquidity mine will still be there if necessary.

Until v3 is factored in, we should be careful of committing to even 3 months of incentives. I strongly suspect that returns on a good position on v3 could be higher than any incentives we’d be prepared to offer on a v2 pool. If people don’t realise or don’t want to move, then we could be subsidising unnecessary liquidity.

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I disagree on a number of points in this analysis:

The market interacts with assets based on their liquidity. Liquidity is the framework where traders and assets interact. When liquidity levels go down the size of trades that happen with an asset also go down. As liquidity in a market decreases so to does our ability to interact with that market. For example if you are in a Liquidity Pool with $50,000 of liquidity you will be limited to extremely small trades. Even marginally increasing your trade size from $1,000 to $2,000 makes the trade much less profitable because of price impact. No only is trading much less appealing, trades over a certain size are simply impossible.

This principal works the other way as well. Hedge Funds are extremely hard to scale, running a $10 billion dollar fund is exponentially harder than running a $50 million dollar fund. The reason for this is that the universe of assets with enough liquidity to support >$500 million sized trades is drastically smaller. A Mega-Cap Hedge Fund manager has about 100 stocks with enough liquidity to support large trades without disrupting the market- the smaller fund does not have this problem.

Liquidity is also security. The hedge fund needs to be able to liquidate its holdings quickly in the event of a big down turn. Imagine trying to de-lever last week if you were only able to trade 5% of your portfolio a day without changing market conditions. This is also the reason that VC investors with a fund lockup period in our OTC Sale will receive a significant discount from spot price - that discount compensates for the temporary loss of liquidity - trading equity for liquidity.

Another way to think of this is the interest rates paid on bonds. LPs provide liquidity and in turn are paid interest. Interest rates are the risk premium for providing liquidity. The less likely they are to get their liquidity back, the higher the risk and the higher the interest rate. Low liquidity = risk of not being able to exit a position. On the other hand think about the most liquid bond market on the planet the US 10-Year Treasury. There is so much liquidity in this market that interest rates are close to zero - this is both the most liquid and safest ( or at least used to be considered safest) market. Investors can always enter and exit the market.

Implications of V3

Uniswap v3 is a big improvement on v2. I think of it as the jump from a 1960 diesel truck to a modern hybrid car. The significant improvement in efficiency in v3 does not remove the need for liquidity just as the invention of hybrid cars did not remove the need for energy.

Right now if Goldman Sachs wanted to spend $500 million investing in DeFi - they would not be able. Essentially no asset in DeFi is liquid enough to support a trade of that size (what do you think would happen to the price of AAVE if someone bought $100 million worth of tokens tomorrow?). No amount of AMM capital efficiency allows you to buy $30 million if the pool is $20 million.

The primary reason institutions are not investing in DeFi is not a lack of awareness but a lack of liquidity. Bitcoin is widely understood to be a sub-optimal blockchain but the depth of its liquidity enables major institutional adoption. Buyers can always buy, sellers can always sell.

The market will interact with our products at the level of liquidity. Deep liquidity across products is the single most important action we can take for the long-term survival of Index Coop. When JP Morgan decides to buy $200 million worth of DeFi indexes they will not be asking which index has the best methodology or the best intrinsic yield, they will be asking which asset is most liquid.

The reason whales love to hold DPI is because it is highly liquid (@puniaviision @Matthew_Graham ). If they are bullish on DeFi they can make a large buy without major price impact, and if they become bearish they can easily exchange it for Ether.
We need to break this misconception that DeFi is all small traders making small trades (bad liquidity is also bad for small traders but that is another post) or that big funds can simply spread out their purchases over time.

Liquidity drives demand. As liquidity decrease it becomes harder and harder to buy our products. When liquidity increases it becomes easier and easier to buy our. Everything beyond this is secondary.

LM will never go away, although I foresee significant evolution. Liquidity is the core infrastructure investment for financial firms. Just like car companies need to continually invest in factories, financial firms need to continually invest in liquidity.

@verto0912 I agree that v3 requires us to re-think LM. More broadly we need an overarching Coop strategy for how we think about:

  • The liquidity of our governance token

  • The liquidity of our products

  • Our strategy our multi-chain / multi-layer liquidity.

Whew that was long- I need to get outside :joy: Have a good weekend everyone!

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In that entire essay, you fail to acknowledge that $10m Uni V3 liquidity is better than $50m Uni V2 liquidity that we are paying $700k per month for. All your analogies of GS and JPM assume our $50m V2 liquidity actually has an advantage over $10m V3 liquidity in terms of slippage. That’s false.

V3 offers superior customer experience via better depth and less slippage without having to pay an insane amount of money.

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I think we are all coming to terms as to what Uniswap v3 means for users, LP’s and the coop. I certainly missed some of the implications when I posted the above.

Standard xy=K (Uniswap v2, Sushiswap, Bancor) pools are simple, you can model trades and liquidity using a simple spreadsheet. For one thing price slippage is directly proportional to the AUM. Double a pool size, and the trade size required to hit a % slippage is doubled.

v3 is a totally different beast. Say we have 3 LP’s each with $10 M in a ETH:DAI pool

  1. full spread: (v2) between 0.01 to infinite DAI to ETH.
  2. Tight limits 100% DAI above $2,500 and 100% ETH below $2,000
  3. Tight limits 100% DAI above $5,000 and 100% ETH below $4,000

At $2,250 You have focused liquidity from $10,000 #2 and standard (v2) liquidity from #1. So this is much better for trades than a standard (v2) pool containing $30,000,000

At $3,000 pools #2 and #3 are irreverent, they are either 100% ETH or 100% DAI. So the pool slippage is the same as $10 M in Uniswap v (Even thought we have $30,000,000 in the v3 pool).

So what does this mean for coop / and MVI:ETH pool?

I think there are a few thing required for v3 to work:

  1. Automated v3 LP contracts, so the liquidity can sit close to market price to capture the trade volume without constant gas / attention.
  2. Staking contracts based on #1 to let us pull liquidity into the range.
  3. Analysis / visualization tools so people can get a feel for v3 liquidity / behaviour / slippage.
  4. Education around the fact that v3 is different and £10M v3 pool MAY be better than $50 M (v2 or v3)
  5. Education around the best time to use exchange issuance

Most of this is a priority for DeFi in general, so tools will be built in the coming weeks. Some will become areas that the coop needs to spend some time on it.


However, I think that in a few weeks /months we should be at a position where the inherent capital efficiencies of v3, mean that a smaller pool ($2,000,000 for MVI ?) can provide trade size without slippage to bridge the gap to exchange issuance. A smaller pool, means that the fee income is larger, so there is a chance that it becomes self sustaining .

Then, the coop, can look at other ways to use capital (INDEX tokens) to grow AUM. (This could be Liquidity mining uni v3 / sushi / Balancer / L2, or none liquidity mining initiatives)

Note: one case where exchange issuance is not this answer could be collateral liquidations - maybe we need a bounty for a liquidation bot that utalises the redemption contracts.

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The point I am making is that there is no free ride in liquidity. Yes - v3 is far more efficient than v2 but that doesn’t mean we can stop worrying about liquidity. $700k a month to support liquidity is a huge amount, I couldn’t agree more. We spent that much because that was the only way to support liquidity on v2 due the in-efficiencies of that specific AMM model. Those in-efficiencies have been significantly improved so naturally we will have to spend far less to support liquidity.

While the market may be evolving away from 2020 style LM - some form of incentives will likely always be needed to build large amounts of liquidity around our products.

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That’s an open question because trading fees could generate high enough APY on V3. Assume we need a $10-15m V3 pool for DPI-ETH which at 5x efficiency will equal a $50-75m V2 pool in terms of execution parameters. Let’s assume the swap fee on the V3 pool is the same as V2, at 0.3%. The current 7-day average trading volume on V2 is $12m per day and since the beginning of the year I’d say we averaged about $7m. That equates to about 76% trading fee APY on a $10m pool (V3) and about 51% on a $15m. That doesn’t even include the ability to concentrate liquidity and capture the majority of these trading fees. So, I don’t see why we need to incentivise anything here.

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Curve Finance uses an AMM model very similar to Uniswap’s v3 ( using narrow bands of liquidity to support trading within specific ranges). Their AMM model enables high capital efficiency when trading between mean reverting pairs - stablecoins and other like to like assets.

Traditional AMMs do not function optimally when trading between like to like assets. Price slippage is extremely high when trading stablecoins using a constant sum function AMM. Traditional AMM stablecoin pools need extreme amounts of liquidity to support trading without high price slippage. For example a $10 dollar trade in an LP with $50 DAI and $50 USDC will reset that pool to $40 DAI and $60 USDC. Arbitrageurs will then trade into the pool to stabilize it. This impact is fine for volatile pairs where the price of the two assets is constantly diverging but not for pairs with the same price.

Curve (and Uniswap v3) solve this by using an amplification coefficient that operates sub-optimally the further the price moves away from equilibrium. This invariant allows for liquidity to be provided in very narrow bands. Uniswap v3 is a massive AMM step forward bc it allows for similar banded trading for non stable pairs such as MVI <> ETH. V3’s concentrated liquidity means that you need far less liquidity for the same level of trades.

Even with high capital efficiency Curve still aggressively pursues liquidity. The reason for this is scale. Increases in capital efficiency enables bigger trades and less slippage for less liquidity - it does not remove the need for deep liquidity. Even small slippage becomes a big deal when trading $10 and $100 of millions and limits trading to pairs with extremely deep liquidity. If you have even $5 million and wanted to deploy it in DeFi today you would be limited to around 50 assets.

@verto0912 I agree that we need to rethink our liquidity mining strategy. I agree that we are likely overspending and that we should spend less moving forward. Where I disagree is on the idea that liquidity is just something we do for our “customer experience”. Liquidity is the core driver of how market participants interact with assets - every incremental decrease in liquidity makes it more difficult to buy and sell our products.

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But that’s just not true. It’s true only if that decrease in liquidity leads to less depth and higher slippage. With V3, it doesn’t. It leads to more depth and lower slippage making it easier NOT more difficult to buy and sell our products.

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Yes we can support the same sized trades on v3 more efficiently than on v2 with smaller pools. 100% agree there. However - that does not remove the need for deep liquidity around our products. If we have a $5 million MVI pool, v3 will offer concentrated liquidity and far less slippage than v2. No one is debating that. But no amount of capital efficiency will enable for a $10 million dollar buy from a pool with $5 million in liquidity.

Our customers - especially large holders need high amounts of liquidity to comfortably move in and out of positions in our products without major price impact. The market will interact with our products at their level of liquidity.

For example our DPI pool on v3 currently has $2 million of liquidity. Even with the increased capital efficiency a $500k purchase of DPI on v3 will still incur 4.79% slippage resulting in a $20k loss for the buyer. This still makes it prohibitively expensive for any large fund to trade DPI on v3. While slippage doesn’t matter as much if you are making small trades it really does matter for these larger buys.

I’m open to ideas here - but I don’t see how we can get around providing some continued level of liquidity support for our products if we want them to be tradeable at a larger scale.

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Edit to replace the table, I had miss labelled the “Fees” as Volume

I can see where you are coming from, and I agree that many prospective large customers may be looking at the size of a pool.

However, that doesn’t mean that we shouldn’t make an effort to improve things.

A quick look at the 3 main pools:

Uni v3 is currently generating more income for LP’s with out any incentives.

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Sorry, I didn’t have chance to finish this earlier…

Some additional considerations

Trade size

DPI is currently #14 in pool size on Uniswap v2:

The largest pool v2 is FEI-ETH with $800 M, compared to $58 M for DPI:ETH. If we compare that to DPI, in terms of slippage, then I would say we can currently support a trades upto $200,000 with reasonable slippage / price impact (OA definition of ~1%).

Note that @george 's analysis for DPI liquidity mining included reviewing the trade sizes:. This found that 95% of the trades were less than $75,000.

So, if we wanted a $2 m trade with < 2% slippage we would need a $250 m uniswap pool. Which I suspect would require a x5 increase in liquidity mining rewards (possibly more as I would not expect trade volume to increase x5 with a larger pool so the fees get reduced for each $ of LP).

While $250 liquidity would be a nice thing to have (“Top 5 v2 pool”, “x times bigger than the next DeFi index”, “Minimal error compared to NAV” etc), and could be expected to give AUM a boost, I think there would be a number of people arguing that it’s not the best way to spend INDEX tokens.

Rather, I would argue that anyone doing a single $2 m on chain trade for Uniswap is uninformed in DeFi best practice.

So what can we do?
I think the key for people who want to do large trades is Education:

  1. How our products work in terms of issue and redemption from the underlying.
  2. How Uniswap v2 pools work.
  3. The benefits of buying in portions over time.
  4. Use of aggregators
  5. Use of Exchange issuance
  6. Availability of OTC trades.
  7. Availability of support for people new to on-chain purchases.

We can also:

  1. Monitor trade sizes and slippage occurred (excluding arbitrage as “Slippage” = “Profit” )
  2. Encourage aggregators to incorporate exchange issuance.
  3. Calculate the point at which exchange issuance becomes economic for DPI / MVI - and then publicise this value (for a given ETH price and gas cos…).

For me the positive thing about both of these lists is that it’s something that the coop can do using our growing (non developer / engineer) contributor base. And all of them will help level up our members / customers and build our reputation.

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BD Team is working with aggregators to include exchange issuance, mint, and redeem in their flows.

The blocker for that is engineering resources at this point.

I would argue that V3 will help reduce slippage as our liquidity will be more concentrated once we move over to that.

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On additional comment.

For me the point of the discussion about v3 and slippage / exchange issuance is saying that we have / will soon have the tools available to technically manage the slippage problem without the need for ever increasing Uni V3 liquidity mining.

That doesn’t mean to say that there aren’t good reasons to maintain large liquidity pools.

I think it means that we can allocate the INDEX tokens in a different way (once we have established v3 pools and analytics - probably 2 months away ???).

Until now there has been a concern that any L2 pool liquidity mining would pull liquidity from the main L1 pool so was poor customer experience and wasteful of tokens.

If v3 does what I suspect it can (large focused liquidity without significant long term INDEX rewards being required), then this opens up much more space for BD / growth / Multichain initiatives that use INDEX tokens.

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