[DISCUSSION] Should UNI Be Distributed in Proportion to Volume?

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1

This is just a very early idea, but I thought I’d get the conversation started.

So, first off, there’s been some backlash about the UNI rewards going to those four specific pools, which, albeit very important, don’t seem to fully represent the entire DeFi ecosystem.

Lots of liquidity is indeed being “drained” from smaller pools and new tokens, which could potentially hinder Uniswap’s position as a DEX for new or smaller DeFi innovations.
(See: Stop the Liquidity Drain )

My proposed solution? Well, I may not really know what the heck I’m talking about, but what if we rewarded UNI tokens based on trade volume? This would reward UNI to more or less every pool in proportion to that pool’s importance in the greater ecosystem. The bigger pools (like ETH/USDT, etc) will still get a whole bunch, but so will other pools like YFI/ETH for instance.

Of course, some kind of vetting procedure should occur in order to prevent abuse. I.e: people shouldn’t just be able to arbitrarily create their token pairs and mess with volume or something. Maybe we can set up a minimum liquidity threshhold or something. Anyway, what do I know? :rofl:

Alright, just wanted to get this potential discussion going. There are great minds here, let’s put them to work!

Thanks,
Zer0dot

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I agree.
I also think that in proportion we should incentivize more liquidity pools with low liquidity. It is an actual problem with UniSwap, because users pay 3 costs when making a trade:

  • 0,3% fee, this is fine
  • ethereum gas (6-20$)
  • price slippage

Making a trade too small (like 200$) is not convenient for users because they would pay an high percentage of the trade for eth gas. But in liquidity pools with low liquidity it’s not convenient even to do medium sized trade. For example in a liquidity pool with $1’000’000 making a $2000 trade would cost 0,4% only for the price slippage, which is quite high considering the fee for the liquidity provider is only 0,3%. And the situation is much worse in pools with lower liquidity. It would be better for everyone if liquidity provider were more incentivized thus lowering the cost for price slippage.

I think we should manually whitelist through voting the eligible pairs.

3

I think this proposition is excessive and would hurt interests of UNI token buyers and holders .

At this point liquidity providers of lower liquidity / bigger volume pools are incentivized enough by the commissions they get from pooling. There is no point of adding further incentivization of this group at the expense of other groups.

Let’s think about how this proposal would look in practice on an example, using today’s numbers.

Today the 8th biggest volume pair on Uniswap in ETH-MEME: the volume is 46 mil while the liquidity is 2.6 mil. Being a liquidity provider for this pair means that:

  • LP bears a lot of risk holding extremely volatile asset (MEME)
  • LP gains 541% APY from fees on uniswap for his trouble
  • LP probably gains a decent amount of MEME for his trouble too

Imo it is a balanced risk/reward proposition for LP. And what LP is doing here is called speculative mining .

So your proposition would effectively stimulate the group of speculative high-risk miners of assets that have questionable underlying value .

I do not think that it is healthy for long term protocol development to skew incentives towards this group.

Because that would stimulate people who want to earn more UNI tokens to buy speculative mining coins and potentially lose money on them.

At this point one could just lock his/her money in ETH/USD or ETH/BTC liquidity pools for 4 years and be tranquil about his/her money’s safety and value.

If we introduce volume based rewards this creates a totally different kind of game where the group of UNI buyers and holders (the people who want to accumulate more UNI over time) is incentivized to make high risk (high potential loss) decisions .

This way UNI incentives plan creates a situation where:

  • a person buys a meme coin for 1 ETH, then pools another 1 ETH to provide liquidity,
  • then the meme coin loses 90% of its value, because it is a free coin that was distributed with 10000% APYs during the first 2 weeks of it’s existence
  • our UNI miner loses 68% of the value of his investment because of IL.

This is not a good situation to encourage from the perspective of a healthy network growth.

2 Likes
4

You make an absolutely good point here! I hadn’t thought of that. What if we implement @JokerTheBond’s solution and vet every eligible pair through a governance vote?

In doing so, liquidity providers are still incentivized to add liquidity to high volume pairs, reducing slippage and (possibly) spreading the liquidity in a way that supports the broader ecosystem. However, only the pools that are vetted and approved by governance are eligible.

It is worth noting that though it’s great to lock your money for 4 years with good conscience, the main goal here is to promote the growth of Uniswap as an integral part of the greater DeFi ecosystem. I’m not sure incentivizing only the major currency pairs is the right way to go about this, could be wrong!

5

I kind of agree with the point you make about super high risk pairs, but I disagree with this:

This is a problem, because people are basically farming UNI by providing tokens that bring a low risk in the long term, but that also bring a low value to UniSwap as an exchange. For example WBTC-ETH has $377.141.352 liquidity and only $17.788.619 volume. Giving away so many UNI for just one pair and seeing the volume “so low” is not a great result. If we only had one fifth of the liquidity we have for that pair it would be enough for that kind of volume. This mean the reward we’re giving away right now for WBTC-ETH is exaggerated…
I’m fine to give 83k UNI per day to a pair like ETH-USDT because it has some real stable volume, but in other cases we could make a better use of those 83k UNI.
If we give mining reward proportionally to the volume at least we’re doing it in a fair way.

6

There are two distinguishable questions we’re discussing:

  1. Is it good or not to reward other pairs with UNI distribution?

  2. Is it good or not to additionally reward pools based on the volume that is generated through them?

1. My answer to the first question is that it is not good to add any other non-store-of-value token to UNI distribution other than UNI.

The perspective I’m looking on it from is the perspective of fostering mass adoption of the protocol .

I find that there is a good question to ask yourself when you think about investments:

“Would you recommend a poor friend of yours to invest his/her life savings into this thing?”

I think there is a lot of responsibility in where we direct newcomers to . We need to be empathic.

Because if we direct them to wrong places where they lose money, we lose their trust .

On current pairs available for UNI farming the potential downside is as limited as it can be in crypto. And I can’t stress enough how important this is.

2. My answer to the second question is negative as well. Pools are already fairly rewarded for the volume they get. If they weren’t, Uniswap wouldn’t be top-1 DEX. And it is a super flexible mechanism, the system balances itself out quite perfectly in this case.

If we were to distribute all the tokens based on the volume, there would actually be no need in emission of UNI token, as it would duplicate the previous model where all the fees go to LPs in proportion to volume/liquidity.

I think it is correct to think of LPs in a way we think of miners in Bitcoin ecosystem. It is good to have them, it is good that they are profitable, but we don’t want to skew incentives completely towards them, as it would hurt everyone. There are a lot of POW coins that are just in perpetual downtrends because the only people who make money off of them are miners, who sell their coins off at the first opportunity.

I think what we want for Uniswap protocol to get mass adoption is easy and risk-free inclusion of new participants .

So I’d like to view the UNI distribution processes not from the point of view of how profitable they are for liquidity providers, I’d like to first and foremost address who do we invite to govern Uniswap ?

@JokerTheBond says that WBTC-ETH rewards are exaggerated, I believe they are not.

People who lock their funds in WBTC-ETH pair for the most part are people who believe in these coins more than they believe in Dollar. I believe inclusion of Bitcoin community into governance decisions of Uniswap is an unequivocally good thing for the future of the protocol. I don’t Bitcoin community should be discriminated on the volume basis, especially given the fact that it’s taking only 1/4 of the distribution, and yearly APYs for being an LP are quite negligible for this pair.

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You’re suggesting to give away UNI token to BTC holders just because it is BTC? I don’t think BTC holders care too much about that, most liquidity farmer dump the token they farm. We should start with this assumption.
UNI distribution started in a very inclusive way by rewarding all users with 400 UNI. This was very nice for all of us, but I think that we shouldn’t mistake the liquidity mining program for a giveaway. We should think in a selfish way about the UNI distribution and use it for bringing even more value to the UniSwap ecosystem.
For as I see it, giving 25% of the UNI reward to a pool that is bringing 5% of the total volume is exaggerated. I think at first it was an experiment to see if the growth of volume for a pair on UniSwap was proportional to the growth in liquidity for that pair. But this didn’t happen, even though the volume grew a by 3x. For the volume that it has right now, giving 10% of the UNI reward to WBTC-ETH would be more than enough.
To put it in simple term, I think we should use the liquidity mining reward to bring more liquidity where it is really needed. There are a lot of low liquidity pairs the are not being used just because the liquidity is not enough. Incentivizing them will bring more volume to those pools which in exchange will bring more liquidity and so on.

You talk about inclusion but this is quite bullshit in this case to be honest… Right now we are excluding al those people (like me) who are not holding either BTC or USD on the Ethereum blockchain.
Including more pairs to the liquidity mining program would mean include more people. Why do you think we should be inclusive toward one specific community (BTC) over many others (LINK, COMP, YFI etc). Of course I’m not suggesting we give the same reward to WBTC-ETH and LINK-ETH, that’s why doing it in proportion to the volume is the best solution if we want to be neutral.
About the risk, that’s for the liquidity providers to evaluate. Personally I would never buy a shitcoin just because its yield is high. I would provide liquidity with the tokens that I’m already holding, so I would put them to work. We’re not encouraging anyone to buy anything if we distribute the reward equally among various pairs. And by the way right now we’re not being neutral, we’re encouraging people to buy WBTC (+15k BTC locked in just 3 days since 17/09 https://defipulse.com/wbtc). And usually I don’t care too much about these things, but if we want to be picky WBTC is a centralized currency.