Suggestion for discussion - Liquidity Working Group

This is an idea for discussion.
I’ve formatted it like an IIP, but I’m not planning to propose it for at least a week or so. Then we can see the BED:ETH launch and consider if this suggestion should be modified.
Current liquidity mining on DPI and MVI will run until ~11 August, and I would like to have this in place before then.

OA


Simple Summary

To delegate the management of the INDEXcoop token liquidity, including liquidity mining, to a dedicated Liquidity Work Group (LWG). This will have two parts:

  • Research and Recommendation team (LRR)
  • Liquidity Oversight Committee (LOC)

The LWG will have a capped budget of 35,000 INDEX to cover the three months to 31st October 2021.

Abstract

Identify a small work team from INDEXcoop contributors with a mandate to research token liquidity and recommend which liquidity pools to use and liquidity mining incentives.

Identify a second committee of INDEXcoop stakeholders to oversee and approve the recommendations of the research team.

In order to maintain complete transparency and accountability to the community, all changes to liquidity mining must be posted to the forum 5 days in advance of changes.

New Product liquidity will be announced as part of the product launch process.

This IIP will have a total capped budget of 35,000 INDEX over 3 three months.

This delegation of responsibility will expire on the 31st of October 2021.

Motivation

The liquidity of the INDEXcoop products is a key factor in their appeal to our customers. Being able to trade large positions is essential for larger holders, particularly those who can not use the exchange issuance contracts. Large liquidity pools should allow for efficient Arbitrage and so keep the market price close to the Net Asset Value (NAV). In addition, having sector-leading liquidity means that we continue to dominate any comparisons with our competitors.

Ideally, liquidity provision income should be solely dependent on the trade fees for each product. In this case, the large trade volume ensures that there is sufficient liquidity to facilitate all trades. However new products, or those without large trading volumes, liquidity mining may be required to ensure that customers can trade without undue price impact.

However, liquidity mining is the INDEXcoops largest budget item and accounts for a significant part of each months budget:

The availability of uniswap v3 adds another dimension to liquidity management and means that previous frameworks based on xy=k AMM’s become less relevant:

  • Focused liquidity allows LP’s to make more income (and potentially makes pools self-sustaining without INDEX rewards).
  • INDEXcoop could be the baseline liquidity provider with focused liquidity to give 1% price impact depth and avoiding liquidity mining. However, this would expose the coop to divergence loss and management costs for the liquidity. (See IIP-54 on BED:ETH Direct Liquidity Provision)
  • Automated v3 management systems are in development, but not perfected for diverging pairs

Since the initial DPI liquidity mining campaign to launch the coop, INDEXcoop liquidity mining has been run on a series of 30 or 90-day campaigns agreed by IIP’s and snapshot votes.

With the growth of the Coop’s portfolio, diversification of our treasury, and the availability of uniswap v3 the working space for liquidity management is growing rapidly. However, there are multiple stakeholders (INDEX holders, Coop treasury, Liquidity providers, methodologists) who often have opposing desires (and many are not active in the forum) which need to be considered.

The current process is effectively:

  1. Monitoring and sharing research on the current liquidity/fee income/incentives.
  2. Review between the PWG and key stake stakeholders.
  3. Proposing IIP’s based on a single yes / No vote.
  4. Implementation of the IIP.

I believe that this process is not really fit for purpose and will struggle to scale as we launch more products. In addition, it can fail to reflect the communities desire to reduce the number of INDEX tokens spent on liquidity mining.

Delegation of the management of the coops liquidity with a focused mandate and fixed budget is expected to reduce the governance overhead of the coop while furthering our goals to grow the number of products and circulating units.

Specification

For example, the LRR team could be comprised of:

Likewise, LOC could include:

  • @Punia - Product Working Group and Set Labs
  • @MatthewGraham - Treasury Working Group Lead
  • @DarkForrestCapital - Full-time contributor

Mandate

The LWG will have the following mandate:

  1. Ensure current products have sufficient DEX liquidity that trades (including exchange issuance) can be made with no more than 1.5% price impact.
  2. Ensure products have sector dominating liquidity.
  3. Ensure that new product launches have seed liquidity for launch.

image

Notes

  • In July we will spend approximately ~ 18,000 INDEX: ~14,601 on DPI and 3,396 on MVI (possibly slightly lower as there was a gap in refilling the contract)
  • This budget assumes that we will continue to see/encourage migration of DPI liquidity to Uniswap v2.
  • We anticipate that we will see liquidity growth on polygon at no cost to INDEXcoop.

In addition, the LWG may call upon $500,000 of INDEXcoop reserves to provide liquidity (with risk of Divergence loss). i.e. $250,000 in addition to the $250,000 allocated to BED:ETH.

Process

The proposed process would be:

  1. LRR will monitor coop product liquidity, new product launches, competitor product liquidity, Liquidity mining, and new routes to provide liquidity.
  2. LRR will make and justify recommendations for :
  • Migration of liquidity (e.g. Uni v2 to v3)
  • Liquidity mining campaigns
  • Liquidity seeding for new products
  • Direct liquidity provision by INDEXcoop where it is judged to be preferable to liquidity mining.
  1. LOC will review the LRR recommendations and approve/reject as necessary.
  2. @Overanalyser will coordinate with the Treasury Committee and Engineering Working Group to deploy the required Contracts, User Interfaces and INDEX tokens.
  3. In the event of a failure to agree on a particular liquidity strategy, PWG / LRR / coop contributors can raise an IIP for a formal vote.
  4. LRR will communicate any changes to the current product liquidity strategy via forum post.
  5. PWG will communicate product launch liquidity mining/seeding as part of the goto market process.

Direct liquidity provision could be run by the Treasury Operations Multi-sig (as per IIP-54 for BED: ETH), or a new Multisig comprised of members of the LWG

In scope activities include:

  • Liquidity mining of existing products
  • New product launch liquidity mining and liquidity pool seeding from coop reserve capital.
  • Encouraging the migration of liquidity to different pools (e.g. uni v2 → uni v3 with or without liquidity mining)
  • Direct provision of liquidity for coop products using INDEXcoop reserves.
  • Communication of the strategies to INDEXcoop and liquidity providers

Out of scope activities include:

  • Payment of LWG members for their work - this will be covered by other funding mechanisms.
  • Management of the INDEX staking contracts - Tokens will be held by the Treasury Committee then transferred to EWG / Set Engineers for deposit into deployed contracts.

Direct liquidity control will fall under Treasury Operations Multisig / Liquidity Working Group Multisifg (TBD)

This delegation will expire on the 31st of October 2021.

IIP vote specification:

FOR

  • Create an LWG with a 35,000 INDEX budget and access to a total of $500 K of INDEXcoop reserves for direct liquidity provision and delegate liquidity management to the specified individuals until 31st October 2021.

AGAINST

  • No change; continue managing Liquidity Management via IIP process

Notes on timing:

  • My first draft of this was written a few weeks ago before the v3 pool for BED: ETH was selected as the preferred option.
  • While IIP-54 was under discussion and vote, I held this post back to allow attention to focus on BED: ETH that as it was a higher priority.
  • BED: ETH Direct LP is being planned and prepared for launch in the next couple of weeks.
  • I’m hoping that once we have demonstrated our competence on BED: ETH, we can finalise this IIP and vote (Snapshot Monday 2nd - Wednesday 5th August ???)
  • If confirmed by INDEX holders, the LWG would then need to agree on plans to cover the end of the current DPI and MVI liquidity campaigns (End date ~11th August).
  • If we don’t have an agreement on the formation of the LWG, then we will likely be proposing LM IIP’s on the 9th to take effect on the 12/13th.

Finally, @Dylan and I have been discussing the risks/rewards of Liquidity mining on v3, so there will be a forum post providing the community with more info [Before the LWG IIP goes live]

8 Likes

Great post and proposal, OA. Executing this strategy would be a game changer for the sustainability of the coop. More than that, it could turn what to date has been a burden on our finances into a lucrative revenue stream.

I would like to volunteer to be a part of this team (LRR). I can help with modelling and research.

4 Likes

All,

A quick update on Timings around liquidity

  1. We will not have Liquidity in place for BED launch (But Bankless have over $1.2 m so all is good)
  2. I’m going to post a forum post about risks on v3 (coop and LP) over - this weekend
  3. I’m going to post some research on the forum covering DPI:ETH liquidity - this weekend.
  4. I’m thinking of a community call on the 29th to discuss Liquidity mining.
  5. After the call, I’ll prepare and post an IIP/'s to vote 2nd Aug covering either:
  • Formation fo Liquidity WG with a mandate
  • Individual product IIP’s to continue v2 liquidity mining / v3 migration.
  1. current MVI and DPI LM expire on the 13th of August.
4 Likes

Sounds good! I’d also like to be considered for the Liquidity WG if/when the time comes. I was Chief Revenue Officer for a SaaS company, in charge of the customer acquisition budget. I think some of the SaaS metrics like Customer Acquisition Cost vs Lifetime Value (CAC/LTV) are reasonably applicable for IC’s biz model.

4 Likes

@overanalyser - so if we go the Liquidity team route (with a mandate), this team will have roughly 11 days to put forth new plans for DPI and MVI before the current LM programs expire. While this will be a little tight, my vote would be for pushing for this scenario.

Looking forward to your posts and a community call! Thanks for spearheading all of this OA!

2 Likes