Simultaneous Liquidity mining - Things to consider

I think that Liquidity mining sits pretty much at the centre of the coops products / customer experience, with significant overlap with growth and treasury.

We are coming to an interesting time in the coops development from a single product to many products, so I think it’s work starting a discussion on a few things.

Within 10 days we will have 4 funds on chain at different stages of their live cycle.

DPI is our cornerstone and dominates the DeFi fund space. However, it’s not profitable as the LM incentives are greater than the streaming fee. I think we have a consensus that we want to reduce incentives with the goal of DPI becoming profitable while maintaining dominance of AUM and liquidity.

CGI Has a different strategy with more direct sales. However, Liquidity mining without full coop commitment is being considered

ETH2-FLI is enjoying a staged launch with the supply cap being increased as we gain better insight into how the code behaves in the wild. The fund appears to generate sufficient liquidity without incentives, so the question will be, what happens when we add incentives.

MVI Is being launched as a community methodology with an INDEX Liquidity Mining strategy proposed.

So, it looks like we are going to be opening the taps on liquidity mining, so we need to think about whether we start to start fighting against ourselves. i.e. will mining MVI cause LP’s to sell DPI to chase INDEX token income (I’m certainly considering it…).

So some thoughts


DPI

  1. I would like to cut rewards on DPI, it’s our biggest cost and we have been consistently above the $30 m Uniswap target (and further liquidity on Sushi, Balancer and others)
  2. Exchange issuance for DPI will help larger trades.
  3. I think I would feel comfortable with ETH:DPI on Uniswap dropping to $20 M, so long as there as another $5 M in other pools.
  4. If we consider the current incentive of 700 INDEX per day started 21 days ago then we have maintained ~x2 the target liquidity, and the INDEX price is x3. So we could expect that a reduction in rewards by a factor of 6, could result in the Uniswap liquidity dropping to ~$25 M.
  5. We might even consider stopping LM rewards entirely on ETH:DPI

However, with MVI LM about to start, we could damage the DPI liquidity if we stop entirely.

So, a continuation for 30 days at 100 INDEX per day might make sense.

MVI

Is about to launch with LM mining shortly after it goes live. The strategy allocates $140,000 to the first 30 days, and the 20 day TWAP was looking at $24 and 5,700 tokens. However, given the recent price increase in INDEX, it’s likely that the TWAP will be closer to $40, so 3,500 tokens or 116 per day.

A suggestion
With MVI going live on the 7tth, and DPI rewards ending on the 9th April. I wonder if the following makes sense:

  1. Set the 20 TWAP for MVI rewards on the 5th (Monday)
  2. MVI launches on the 7th.
  3. MVI liquidity mining starts on the 9th +/- a few hours of the DPI liquidity mining.
  4. MVI and DPI LM rewards are set at the same level (100 to 116INDEX per day)
  5. We communicate the schedule.

The aim is that:

  • We allow some LP’s to be informed and lazy and stay in the DPI pool without FOMO.
  • We protect DPI liquidity by having comparable rewards for the next 30 days (and I expect DPI to have much higher average trade volume)
  • We learn more about the sticky ness of LPS - do they move DPI:ETH to Suchi/ others, do they move to MVI:ETH
  • We cut back heavily on daily INDEX issuance for the total liquidity mining programme (700 → 250)

FLI and CGI
I’ve not touched on ETH2-FLI and CGI liquidity mining in my suggestion. My initial thought is that ETH2-FLI would be less likely to pull LP’s off DPI:ETH. I think that CGI:ETH could be more likely to cannibalise INDEX farmers, so it’s something we should consider when planning the size and timing of the LM programme.

ETh2-FLI may need a different strategy for liquidity minings, something that targets bear markets when FLI unit numbers could be expected to drop.


@LemonadeAlpha @Matthew_Graham @puniaviision @DarkForestCapital @jdcook @Mringz @MrMadila @gregdocter @BigSky7 @reganbozman (and anyone I’ve forgotten :thinking:)

I would appreciate your thougths.


Finally, I’m trying to schedule a Product WG call where Liquidity Mining is likely to be discussed. If you are interested in joining. share your availability here:

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I’m in favor of phasing out DPI liquidity mining rewards. We’re working with a market maker, more and more exchange listings are in the queue, and the product steps you mention add in natural liquidity

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The DPI<> ETH pool is one our principal strategic advantages. Maintaining a competitive lead in relation to our competitors is strongly based on the amount of liquidity tied to each of our products. While I am not opposed to significantly scaling down our LM here - we need to close track where DPI liquidity lands and ensure that our products remain at least 3x as liquid as our nearest peers.

We are fortunate to have several very capable direct competitors pushing us to innovate and improve. One of our competitors flipping $DPI liquidity with one of their products would be a worst case scenario. We have a massive lead and very strong community, but we must not grow complacent here.

I agree with this framework… Best way to co-incentivize without cannibalizing liquidity.

Broadly we need to understand if support for $DPI liquidity falls into a different bucket from our other products. In some ways our $DPI liquidity support may be analogous to CAPEX within a traditional company.

re: DPI I would say that while I agree with continuing to reduce towards a sustainable rate (ideally 0) I would not be in favor for such a drastic shock. 400/200/0 over next 3 months sounds reasonable to me.

A couple views in this dashboard just to support this conversation:

https://duneanalytics.com/jdcook/Index-Coop-Liquidity

For the past month we have hovered around ~$50m in liquidity on uniswap and ~$3.5m in liquidity on sushiswap (although sushiswap liquidity has jumped recently). The interesting thing to me is to track over time how incentivized liquidity has stayed pretty true around ~80% since we dropped off the initial large liquidity mining program. This provides an alternate viewpoint as to what we might expect if we were to drop off incentives for DPI liquidity completely. ~15-20% of the uniswap liquidity pool has been un-incentivized for the past 3 months. If we were to start with the assumption that we keep all of the un-incentivized liquidity and lose all of the incentivized liquidity, we would be looking at ~$13m in liquidity. Now, if the trading volume for DPI were to stay around the average of ~$3m per day (tracking the last month or so), then a $13m pool would yield around 25% APY for LPs (before IL). So you might start to see some extra liquidity provided to balance that out. 10-15% APY (before IL) would be ~$20m-$30m pool if the trading volume keeps up.

I think this shows we are definitely in a position to move towards removing incentives for DPI liquidity, however, I agree with sentiments here that keeping extremely strong liquidity is critical - avoiding downside of losing too much liquidity is worth the cost of being cautious and keeping too much liquidity in the short term. So I would say we take a little more gradual decrease over 2-3 months to give us a chance to monitor and learn from how the market responds as we de-incentivize the pool.

@overanalyser let me know if any of my math doesn’t pass your sniff test. I know you have the best liquidity sniffer around.

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Thanks @jdcook , I think that maintaining (possibly oversized) liquidity (i.e. more than we might want purely on an optimum trade size) may well be the best way forward for the next few months.

We don’t yet know whether the LP’s are purely farming for $, or because they want to accumulate INDEX. So it’s possible that launching other liquidity mining (MVI, ETH2–FLI, CGI) will pull some people out of the ETH DPI pool. So having more INDEX dedicated to DPI mining than any single project may be prudent.

Ya, I think being cautious while we launch other liquidity mining efforts for MVI, ETH2x-FLI, and CGI is prudent. I think we will learn a lot through the whole process. Imo, the insights we gain from launching and maintaining these are extremely valuable for the Coop long-term, so I would err on oversized liquidity to give us runway to experiment and learn.

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I believe one thing we are also missing out on is the power of co-incentivising liquidity pools with other partners. We had the opportunity to test this theory out with Sushiswap, in the future we should pursue those avenues if they still exists. Me and @BigSky7 have discovered that co-incentivising has the potential to reduce liquidity costs by half. Also if we focus on working with partners whose sole business model is too pool liquidity and farm yields it could benefit us immensely going forward.

Examples include:

  • Vesper Finance ($VSP) - $DPI, $MVI
  • Harvest Finance ($FARM) - $DPI, $MVI
  • Stakewise ($SWISE) - $FLI
  • LIDO Finance ($LDO) - $FLI
  • Yearn ($YFI) - $DPI, $MVI, $FLI

I could see opportunities to create LP with each of these partners with our current and upcoming line of products.

@overanalyser I think we should link reduction of rewards to the $INDEX price so we target a fixed APY for each LP pool. I think LP’s will like it because they know they are providing liquidity for a stable asset and the rewards will be consistent. It is almost like a investment. I think we can agree that it is impossible that most LP pools with really high APY are unsustainable long term. If we can show the market that our LP pools can maintain liquidity, trading volume and provide stable APY in the long run we will win the liquidity race. We should always be thinking of long-term value provision.

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Thank you @overanalyser for the detailed analysis, here. I am conscious about the last posts following up on the initial post, but would like to address a few points here just to rethink our guiding principles, and then apply those in any consequential decisions we explore.

I do not seem to share the same profitability concerns. We are dealing with a very high growth environment here, and I would strongly prioritize growth over short term profitability, and very much prefer to achieve this profitability later through growing the size of the DPI, rather than by drastically cutting LM rewards and possible growth avenues.

This does not even take into consideration the second order benefits & premium that INDEX commands just through DPI’s position in the space. I can easily argue that the bigger DPI gets, the more premium INDEX commands, the more we can (in terms of INDEX - The Coop’s primary treasury asset) reduce its incentivisation cost to us! (I guess we could neglect here the pressure that new INDEX distributed generates on INDEX price, but happy to hear others thoughts on this).

This monthly approach seems to create too much overhead on having to re discuss LM every 30 days. While it might have been possible with 1 product, it is certainly impossible with 4 let alone more products potentially coming to market.
I do think that it makes sense to approach liquidity mining with a more generalisable model that the Coop would apply to all its products based on set of parameters. Size of AUM (achieved/expected), potential growth opportunities, target market share, … while factoring in bootstrapping phases for new products.

I kind of disagree with the logic of looking at liquidity mining just from the perspective of a “cost” the Coop is paying.

On top of incentivising liquidity, LM is rather an opportunity to distribute tokens to a wider audience, thus attracting new holders, contributors & talent, just like growth initiatives. Maybe analyzing the number of individual liquidity mining addresses and new VS old miners can help shed light on this.

I am not at all comfortable with having less liquidity for DPI (let alone something in the high double digit percentages), more so in a yet immature market with large growth opportunities and with at least 2 new Coop products in the pipeline (BED & SDI) that might be leveraging DPI in their components. Less liquidity, will eventually cap growth, which will eventually render all ressource we are expanding on growth and other areas futile.

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