Consensus Check - Begin Uniswap Liquidity Program v0.1

Authors: @itzler (Variant), @HelloShreyas and @verto0912 (Llama)

Updates:

We appreciate the positive engagement and feedback we received from our initial proposal. This proposal has been updated based on feedback from community members. The changes include:

  • Updated the stated long-term goals of the program to include ecosystem growth over the long-term.
  • Increased the rewards allocated for deposit receipt tokens from 2% to 4% to account for the fact that holders of deposit receipt tokens in v3 will forfeit any of the underlying protocol’s liquidity incentives.
  • Excluded aTokens from ULP as they require a wrapper contract that has not yet been audited. We will consider including aTokens in the future.
  • Updated the overall allocations for ULP based on the increase in rewards for Deposit Receipt Tokens and the exclusion of aTokens.

Note that this is just the beginning of the Uniswap Liquidity Program (v0.1!). We want to start simple and evaluate the program’s effectiveness before we expand it. We will provide periodic updates on ULP to Uniswap governance and seek community feedback.

Snapshot:

The Snapshot vote will be live for 5 days to get a consensus check.

Summary:

This proposal outlines a framework for establishing a liquidity incentives program (Uniswap Liquidity Program, ULP) with the goals of: accelerating the migration of liquidity to Uniswap v3; encouraging new market participants to experiment with liquidity provision, further distributing ownership of UNI tokens, and supporting ecosystem growth over the long-term.

We propose the program start with an initial maximum budget of 1.662m UNI, to be allocated as liquidity incentives across two quarters. Continuation of the program will require an additional governance vote. Upon renewal of the program, each of the three initiatives can be broken out into separate proposals.

The program will aim to bootstrap liquidity across three different initiatives:

  • Stablecoin pairs
  • Mid-tail pairs (e.g DeFi governance tokens)
  • Deposit receipt tokens (i.e. cTokens, aTokens)

Similarly to the Uniswap Grants Program (UGP), pair selection is a subjective process that cannot be easily automated: any action requires close monitoring and frequent reporting to the Uniswap community. To this end, we propose a discretionary committee of 8 members — 5 core members from LlamaDAO to actively lead & manage the committee, as well 3 members for oversight. Find Llama’s full proposal & management plan detailed here.

The committee structure allows for incentives to be allocated efficiently across many pairs without requiring a full governance vote on each pair selection. However, Uniswap governance retains ultimate oversight by granting a budget on a bi-quarterly basis.

Purpose & Background:

While Uniswap v3 has quickly emerged as the market leading DEX, we believe that it has yet to reach its full potential. In particular, large amounts of liquidity remain locked in Uniswap v2, and a majority of v2 LPs have yet to migrate over the v3.

Liquidity incentive programs have seen varying degrees of success. In Uniswap’s case, the initial liquidity incentive program between September—November 2020 was met with considerable interest:

  • Protocol liquidity quickly increased from ~$750M in the week preceding the program to ~$3B at peak.
  • The number of individual addresses holding more than 0 LP tokens increased by ~75% from ~33,500 to ~59,000.
  • The unique UNI token holder base grew by 14% over the course of 2 months.

A contributing factor here is that Uniswap v2 has an organic user-base, which drives organic swap yields to LPs.

We expect and hope that a liquidity incentives program on Uniswap v3 would succeed in increasing wider LP participation, liquidity across sought-after pairs, UNI distribution, and swap volume. Importantly, due to v3’s Concentrated Liquidity feature, Uniswap governance can afford to pay significantly lower reward rates than previous liquidity mining programs to achieve similar market depth.

Quarterly Budget:

  • Max quarterly budget of up to 826,091 UNI across all initiatives to start
  • In addition to the quarterly budget, LlamaDAO (core committee members) is to be collectively compensated at a rate of $150 per hour up to 30 hours a week. Each month, oversight members will be responsible for calculating exchange rate from UNI to USD and appropriate payouts (estimated at ~2917 UNI per quarter), with payments being made in UNI.
  • Oversight members will be compensated at a rate of 300 UNI per quarter.

Pair Selection Committee:

  • 5 core committee members, composed of LlamaDAO team members for the first term, as well as 3 oversight committee members.
  • Each committee has a term of 2 quarters (6 months) after which the program and members need to be renewed by UNI governance.
  • Committee functions as a 5 of 6 multi-sig, with 3 members of LlamaDAO and 3 members from the oversight committee.
  • Committee to share a weekly report detailing the decision making process (using a standard template) and periodic updates detailing the successes and failures of the program.

Committee Members:

Committee member criteria include:

  • Credibly neutral — need to avoid any sense of conflict of interest
  • Ability to evaluate fundamental strengths of projects and their place in the ecosystem
  • Data driven — capable of assessing quantitative merits/growth signals

Committee members must recuse themselves from any ULP decision related to a project they hold an investment in or are otherwise related to.

Core Committee Members (Llama):

  1. AG: project management and evaluation
  2. Shreyas Hariharan: project management, coordinate with Uniswap governance and stakeholders
  3. Mason: project management, create progress reports on ULP, coordinate with projects
  4. Austin Green: technical and security expertise
  5. Michael Silberling: create Dune Analytics dashboards that help us monitor the effectiveness of the liquidity program and enable us make changes when needed

Oversight Committee Members:

  1. Eva Beylin, Graph Protocol
  2. Jon Itzler, Variant Fund
  3. Arr00, Core Compound community contributor

Implementation:

UNI is distributed to LPs that provide in-range liquidity, with those that concentrate their liquidity closer to the market price (i.e. higher virtual liquidity) receiving larger allocations.

Initial Proposed Reward Distribution Across Initiatives:

Stablecoin pairs:

We suggest an initial stablecoin/stablecoin liquidity mining program over the course of the next three months conservatively targeting $250m in each of the following pools:

  • USDC/DAI [0.05% fee tier]
  • USDC/USDT [0.05% fee tier]
  • DAI/USDT [0.05% fee tier]

A reward rate of 2% APY feels like an appropriate target for stablecoin/stablecoin pools as v3 stablecoin/stablecoin pools are already generating organic yields in-line with money market protocols.

Based on a 30D moving average UNI price of $20.06, the committee would distribute 741.82 UNI per day to each of the three pools listed above for a total of 186,939 UNI across all three pools over the next quarter.

Mid-tail pairs

We suggest an initial mid-tail pair liquidity mining program over the course of the next quarter. We are conservatively targeting $100m in each of the following pools:

  • LINK/ETH [0.30% fee tier]
  • YFI/ETH [0.30% fee tier]
  • MKR/ETH [0.30% fee tier]
  • AAVE/ETH [0.30% fee tier]
  • COMP/ETH [0.30% fee tier]

A reward rate of 10% APY feels appropriate for mid-tail pair pools. Compared to stablecoin/stablecoin pools, LPs in mid-tail pairs must bear more price risk.

Based on the 30D moving average UNI price of $20.06, 1,483.64 UNI per day to each of the five pools listed above for a total of 623,130.61 UNI across all five pools over the next quarter.

Deposit Receipt Tokens (DRT):

We suggest an initial DRT liquidity mining program over the course of the next quarter. Due to Uniswap’s brand recognition and gas optimized contracts, deeply liquid DRT pools may serve as an effective alternative distribution channel for yield-generating platforms. We are conservatively targeting $10m in each of the following pools:

  • DAI/cDAI [0.05% fee tier] [Compound]
  • ETH/wstETH [0.05% fee tier] [Lido]
  • USDC/PcUSDC [0.05% fee tier] [PoolTogether]

As with stablecoin/stablecoin pools, LPs in DRT pairs take on minimal price risk. Additionally, they earn passive yield by maintaining inventories of yield-bearing assets. A reward rate of 4% feels appropriate.

Based on the 30D moving average UNI price of $20.06, the committee would distribute 59.34 UNI per day to each of the threepools listed above for a total of 16,021.8UNI across all three pools over the next quarter.

Conclusion:

We recommend the establishment of a Uniswap Liquidity Program (ULP), which will actively incentivize liquidity across three strategic categories:

  1. Stablecoin/stablecoin pairs
  2. Mid-tail pairs
  3. Depositary receipt pairs

ULP will exist as a 8-person committee with 5 core members, where core committee members are tasked with closely monitoring the success of ongoing programs and frequently updating the Uniswap community via regular written reports. The 3 oversight members are responsible for monitoring the core committee and multisig signing.

We believe that the targeted nature of ULP’s proposals coupled with Uniswap’s organic user base will help achieve various objectives: wider LP participation, more liquidity across sought-after pairs, further UNI distribution, and increasing swap volume.

Next Steps:

Poll: Should we begin Uniswap Liquidity Program v0.1?

  • Yes
  • No

This is the original temperature check governance forum post.

This is the snapshot poll.

4 Likes

This is just such a poor solution to a problem which could be easily fixable without all the rent seeking commitee members wages, without consuming UNI treasury for a temporary fix. But hey! If you got the right people to agree to it, who cares what the community thinks, am I right? Let´s go! The cartel of 10 people who makes the governance here - time to voice your opinion :smiley:

BTW: If you could not tell already, I will vote NO on your proposal and urge everybody in the community to do so.

1 Like

Great job on putting together this proposal; it is a much need program to increase distribution and engagement with wider community. Having a group of expert’s doing analysis for the right pairs in a strategic manner is a good use of funds and I am looking forward to participating in the pools.

I do hope there is incentive for those coming just for the APY (i.e UNI sellers) to also take interest in governance in the long run. For now though I am willing to take a chance on the individuals in the proposal, and their reputations.

1 Like

Yeah right as they took “interest in governance” back in September when the second they got it they pressed the sell button harder than anything ever before.

just as in temperature check, I will be voting against this consensus check as to me it makes no sense, for the following reasons:

  1. For stable and mid-tail pairs there is no need to extra incentivise LPs with UNI, because for all of them and i mean for all 8 pairs your team or council have suggested v2 APYs are worse than of those v3 currently provides, and that is sufficient enough incentive for the migration, furthermore 4 of those have higher TVL in v3, 1 the same and 3 are lower, but for those 3 APY is 4x-10x higher in v3, so really none of these pairs need any UNI stimulus

  2. DAI/cDAi is feeling great on v3, and suggesting to incentivise such pairs, makes no sense for the UNI holders, but actually helps compound protocol, so please in proposal declare clear goals are we to incentivise the v3 migration or substitute compound users

3.for lido pair, see no point as its doing great at curve finance and don’t see why would we compete for that pair against them, they even got dapp integration directed with curve, so here no

  1. pooltogether is same as point 2, if we are aiming to incentivise/substitute other protocols, then i suggest it should be clearly stated in the goals

  2. you outline criteria for committee member to be credibly neutral, but at the same time propose to put Arr00 as oversight committee member which seems like a conflict of interest, since you suggest subsidising DAI/cDAI (compound)?

  3. imho having committee for general purpose LP subsidising should be avoided, as it should be directly governed, not thru proxy committee, committee is needed for its expertise, and if my calculations are correct, you propose a ~0.5% fee for UNI allocation (im using (2917 + 900) / (826091 / 100)) such fee could make sense to maybe go out and help uni related projects bootstrap liquidities and support them, by monitoring the ecosystem, but not to just stupidly burn UNI into some stable pair which is already extremely competitive thru sheer market forces

  4. no UNI pairs proposed

also provide quick napkin maths to backup my claims regarding the positions in point 1. here is a snapshot of 02.08.21 performances for ur proposed pairs on v2 and v3

edit:

generally speaking i think your liquidity mining proposal and method is useless and just burns moneys and will only have short term influx of highly capable first comers to reap all the benefits of subsided APYs, such allocation strategy did make sense back during the UNI launch, but not now, I am 100% there tonnes of ways uniswap can better allocate treasury funds, but todays is 2021 and i think we should be focusing in innovative ways to help the ecosystem grow sustainably and organically

voted NO!

4 Likes

Absolute NO. Looks and feels like an insider play, detrimental to all UNI holders.

2 Likes
  1. Committee Independence
    Seems odd that 5 of 8 members are llamaDAO. It would seem better to have 5 of 8 being oversight.

  2. Core committee hours
    30 hours per week seems like a lot. What were the comparable rates and hours paid for v1/2 incentives?

  3. Rationale for incentivizing
    Could you expand on the pros and cons of incentivizing the three types of pools you have laid out? I would suggest considering:
    A. Current TVL market share for each pool.
    B. Incentive rates and organic returns vs competing pools.
    I think some careful comparison here would make the case clearer for doing incentives.

Lastly, what is the next best use of UNI tokens other than providing incentives like this? Always worth considering when spending.
B

1 Like

hey man, they just want a job paying 150 USD per hour. Why would you have to come in and try to ruin it for them? :smiley:

Obvious sarcasm.

2 Likes

Hi, I’m Michael from the Llama team. I can provide some context on the rationale for incentivizing. We pulled trailing 30 day trading volume and TVL market share into this table. We’re planning on tracking this over time in a community dashboard as part of the program (WIP).


Link: Dune Analytics

Some Takeaways:

  • Stablecoins: Curve led 2/3 stablecoin pairs in Volume (Dodo led 1) and all pairs in TVL.
  • Mid-Tail Pairs: Balancer, Sushi, and Uniswap v2 led in TVL for all (5/5) Mid-Tail Pairs. Uniswap v3 led in Volume for 3/5 Mid-Tail Pairs, and those pairs returned 15-30% in LP Fees/ TVL in aggregate.
  • Deposit-Receipt Tokens: Curve had 99%+ TVL and Volume for ETH/wstETH. Other Deposit-Receipt Token Pairs (cDAI/DAI, pcUSDC/USDC) had minimal volume and TVL relative to other pairs.
  • In all pairs, Uniswap v3 lags behind another DEX in TVL, except for the Compound and PoolTogether Deposit-Receipt Tokens, where we can experiment with a new method to enter/exit these positions.

We also roughly estimated how the Uniswap Liquidity program incentives compare versus the DEX that led each pair in TVL (WIP as well, so please share if there’s anything you think is missing):


We’re still not offering as many incentives percentage-wise as other DEXs in most cases, but we wonder if LPs may respond more favorably to UNI rewards (note that Fees/TVL for v3 may be overstated versus retail LP performance for Mid-Tail pairs).

1 Like

Gauntlet has been considering the merits of this proposal and we wanted to share our initial analysis of the stated goals.

Accelerating the migration of liquidity to Uniswap v3

This goal risks distorting the market by causing people to enter significantly riskier and more complex positions through incentives. Impermanent loss is magnified through V3 and V3 incentives may induce people unable to tolerate that risk to enter an investment vehicle they don’t understand. Both V2 and V3 have a place in the DeFi space, if V3 was monotonically better than V2 more of the liquidity would have migrated over already.

With that said, V3 is much more efficient in drawing volume per unit of capital (~3x more efficient). It is in Uniswap’s best interest to compensate LPs for this risk through incentives to draw in more liquidity since this in turn will be better utilized at drawing in volume versus leaving it in V2.

The framing of this as a simple migration is inadequate, it’s compensating LPs for the new risk from migration. Strong consideration should be given to the possibility that when incentives are removed LPs will migrate back to V2.

Encouraging new market participants to experiment with liquidity provision

Providing subsidized returns to convince HODLers to start experimenting with DeFi is a good idea. This grows the overall pie of capital that can be utilized in the DeFi space.

Further distributing ownership of UNI tokens

Most of the rewards will be concentrated among certain whale LPs so it is dubious how much true distribution this will lead to.

Supporting ecosystem growth

It is unclear how this differentiates from the first two points.

Overall

The proposal broadly makes sense although the function for how rewards are distributed is under-explained and analyzed:

UNI is distributed to LPs that provide in-range liquidity, with those that concentrate their liquidity closer to the market price (i.e. higher virtual liquidity) receiving larger allocations.

Based on this Gauntlet’s preliminary analysis suggests the vast majority of the rewards will go to pre-existing LPs who can actively manage and concentrate their liquidity. The passive LPs who they hope will migrate from V2, other protocols, and HODLers are likely to earn very little as their liquidity will be concentrated meaning much of the incentive will be effectively wasted. On the flip side, incentivizing all liquidity equally is suboptimal since it can be easily gamed by moving your liquidity to non-useful positions. This is a non-trivial problem to solve.

Disclosures

Besides acting as a delegate for Uniswap, Gauntlet has active engagements with Sushiswap and Balancer where our platform is used by those core teams and communities to inform token emissions and trading fees.*

1 Like