Author(s): @jdcook (Index Coop) @bp333 (Visor)
Discussions-to: PROPOSED: IIP-109: Deploy Protocol-Owned INDEX/ETH Liquidity into Managed Visor Vault on Uniswap v3
Created: 19 November 2021
There is (at the time of writing) ~$1.55m TVL in the INDEX/ETH 1% Uniswap v3 pool. Roughly ~80%+ of that liquidity is placed above the current price. A 10 ETH buy comes with a 2.51% price impact. Capital is discouraged from entering positions in INDEX due to the lack of liquidity. The INDEX token is susceptible to major price swings caused by relatively minor buys and sells. We need to facilitate a more liquid INDEX market.
We also have an opportunity to build protocol-owned liquidity - this gives us more control to manage INDEX liquidity as well as turns INDEX and ETH into fee-earning assets for the Treasury.
We propose the following:
- Exchange ETH2x-FLI currently in the Operations Account for ETH
- Pair ETH with the requisite amount of INDEX
- Deploy INDEX/ETH concentrated liquidity into a managed Visor vault on top of the INDEX/ETH 1.0% Uniswap v3 pool
Visor will manage our protocol-owned INDEX/ETH liquidity to optimize for price impact, yield, and availability of liquidity.
This will allow us to:
- 2-4x the INDEX liquidity on the most capital efficient INDEX/ETH pool we have (targeting ~$3m in liquidity post strategy)
- Build protocol-owned INDEX liquidity (targeting ~40-50% of the pool post strategy)
Why focus on INDEX liquidity now?
- A 10 ETH buy on 1inch (aggregator) comes with a 2.51% price impact - capital is discouraged from entering positions in INDEX due to the lack of liquidity
- INDEX is susceptible to major price swings caused by relatively minor buys and sells
- The more illiquid and suppressed INDEX is the less healthy our treasury is - the less healthy we are overall as a project.
- INDEX drives momentum to our products
- INDEX doesn’t realize its gov and meta-gov power if it is illiquid
- Facilitating trading will increase flow to INDEX and outside liquidity provision - providing liquidity now can kickstart a more sustainable foundation for INDEX liquidity
Why Uniswap v3?
- Capital Efficiency - by concentrating liquidity around the current price we can lower price impact much more significantly with the same amount of capital (when compared to non-concentrated pools such as Sushi, Uni v2). The example below shows that by concentrating liquidity around a +/- 50% band, as opposed to providing liquidity at all prices, you can achieve ~4x capital efficiency.
- Higher Fees - by concentrating liquidity, the liquidity provider can potentially earn a higher fee multiple than on Uni v2 or Sushi. Additionally, the added TVL to the Uni v3 pool will absorb more volume as price impact is lowered for traders. This will signal to outside LPs to bring more capital to the pool - concentrated liquidity becomes much more sustainable.
- Uniswap v3 Price Oracle - the performance of TWAP oracles has improved significantly. It is faster and cheaper to check the recent prices of assets. If requested, all the recent TWAPs calculated within the last nine days can be checked.
Why protocol-owned liquidity?
Historically, we have been at the mercy of the decisions of others to facilitate strong liquidity for INDEX and Index Coop products. We will likely always have that dynamic to an extent, but our past experiences incentivizing and migrating liquidity should prove that those are not sustainable patterns. By owning and/or controlling liquidity we have levers to pull and push to ensure we meet our liquidity targets. We also open up an additional revenue stream that can create a sustainable liquidity flywheel as we re-invest revenue from trading fees back into protocol-owned liquidity.
Visor is an active liquidity management protocol. Concentrated liquidity pools bring increased capital efficiency, but they also bring increased sophistication and management. Visor takes on the overhead of managing liquidity such that it stays effective and continues earning trading fees. Visor takes 10% of earned fees, which get distributed to VISR stakers - the other 90% of earned fees will be automatically invested into the LP position upon each rebalance. Visor covers all gas fees for rebalancing positions and re-investing earned fees.
As we set off on our protocol-owned liquidity journey - it is paramount to have a quality partner such as Visor to help us ensure our liquidity stays effective and efficient, as well as to help us minimize impermanent loss.
Exchange ~$700k USD worth of ETH2x-FLI (or all ETH2x-FLI if USD value is below $700k) in the Operations Account to ETH. The requisite ETH and matching INDEX (in rough USD amount, estimating around ~34,000 INDEX and ~170 ETH) will be sent to the Operations Account from where the liquidity will be deployed.
Supply the ~$1.4m liquidity to the Visor position manager contract called the Hypervisor. The Hypervisor will mint fungible ERC-20 LP tokens to a whitelisted address provided by Index Coop. Only the whitelisted address provided by Index Coop will have the right to deposit / withdraw assets to and from the Hypervisor. The Hypervisor has the right to a few managerial functions which are to set price ranges, set range orders, collect fees, rebalance, and mint/burn LP tokens to the whitelisted address. Therefore, the Hypervisor contract is non-custodial in that only the provided whitelisted address may deposit/withdraw assets into and out of the contract. The vault will remain private initially at least until an APR can be established, after which, it will be open to the public on Visor’s UI for depositing by public LPs.
Gamma Strategies (Visor-funded research organization) will manage the price ranges according to an autoregressive strategy which will widen the bands during periods of high volatility and narrow the bands during low volatility periods.
In terms of price impact, the current price impact at the time of writing this proposal is 2.51% for a 10 ETH buy order. After this deployment, the buy-side price impact for a 10 ETH order will be approximately 0.7 - 1.7%, depending on price volatility and range. However, all of these approximations are subject to change based on the characteristics of external liquidity and the price of ETH relative to INDEX.
See and toggle calculations [here].(INDEX Calculations - Google Sheets)
Outside of not provisioning any INDEX/ETH liquidity from the Treasury, one other alternative was strongly considered. If it turns out there is stronger appetite for this option - we believe it would also be an effective way at initiating a protocol-owned INDEX/ETH position. A simple summary (don’t want to distract too much but want to offer the alternative):
Place a single-sided range order from one tick above the current price tick to 20% above the current price tick. As the current price of ETH/INDEX moves into the range, the position will gradually convert to ETH. Once a 50/50 ratio of ETH to INDEX is reached, the position will be rebalanced over a wider range and managed. This would allow us to initiate a position using only INDEX from the treasury (no need to exchange any assets). It would also cause some short-term price suppression by creating a lot of liquidity above the current price.
Exchange ~$700k worth of ETH2x-FLI for ETH and pair with INDEX to deploy protocol-owned INDEX/ETH liquidity into a managed Visor vault on Uniswap v3
Do not exchange ~$700k worth of ETH2x-FLI for ETH to pair with INDEX to deploy protocol-owned INDEX/ETH liquidity into a managed Visor vault on Uniswap v3