[Discussion] Uniswap Liquidity Incentive Plan

Authors: @monet-supply @coopahtroopa

Reference: https://uniswap.org/blog/uni/

Summary:

This proposal offers the continuation of UNI Liquidity Mining, with reduced incentives to the same four liquidity pools as the genesis program.

Abstract:

This proposal aims to maintain the status quo, as suggested by @rleshner during the first ‘unofficial’ community call. (See 1:00)

The thought process behind ongoing liquidity mining is as follow:

  • Liquidity mining is useful for distribution of UNI
  • Distribution of UNI is useful for the decentralization of the protocol
  • Decentralization of the protocol is useful for effective governance.

To maintain the status quo, we propose to incentivize the same liquidity pools.

However, the biggest change to this proposal is to reduce the total monthly UNI allocation by half from 10M UNI per month to 5M UNI per month.

Current Liquidity Program:

In its current form, 10M UNI was distributed each month for a total of two months.

This meant that 20M UNI was allocated from September 18th to November 17th. The four pools include in the genesis liquidity mining program included:

This breaks down to each pool receiving roughly 83,333 UNI per day or 13.5 UNI per block.

Proposed New Liquidity Program:

We propose to reduce the liquidity allocation to 5M UNI per month, for another two months.

These tokens should be allocated across the same four pools, meaning 10M UNI would be distributed in total as follows:

  • WBTC/ETH - 1.67M UNI/month
  • USDC/ETH - 1.25M UNI/month
  • USDT/ETH - 1.25M UNI/month
  • DAI/ETH - 0.83M UNI/month

This means each pool would receive 41,666 UNI per day or 6.75 UNI per block.

The new Liquidity Mining incentives should begin from the day this proposal is executed, marked by passing an onchain governance vote subject to the UNI governance standards.

Initially, this proposal will be reviewed by the community via the temperature check process. A 3 day Snapshot poll will be created for UNI holders, and if the poll passes with a minimum 25,000 UNI support it can move on to the next step.

After receiving soft consensus via the temperature check process, this proposal will be posted on Snapshot for off-chain voting in a consensus check poll. Should the proposal pass with more than 50,000 UNI worth of voting weight, it will be moved to an onchain proposal.

Motivation:

Ongoing liquidity mining incentives allows UNI to be allocated to the community while we search for optimizations to distribution, including vesting and redirection towards other pools and programs like grants, governance participation and third-party integrations.

As more UNI enters the circulating supply, the potential for governance votes to pass quorum thresholds becomes more realistic, allowing the community to have a greater impact on the future evolution of Uniswap and the UNI token.

There is no need to drastically change the structure of the liquidity program, especially given the timing around incentives ending and the intent to start the next cycle as close to Nov 17th as possible.

We recognize that parties feel strongly on increasing and decreasing incentives, and view this proposal as a happy medium to maintain the status quo in lieu of more detailed incentive programs in the near future.

Benefits:

  • Ongoing incentives allows UNI to be distributed to those providing value in the form of liquidity
  • The incentivized pools are likely to remain the most liquid DEX pair on Ethereum, providing a venue to trade against ETH at virtually any size with zero slippage.
  • Reduced incentives prevent UNI from being distributed ‘too fast’, marked by all tokens being distributed before the Foundation’s four year vesting has passed.

Drawbacks:

  • Ongoing incentives result in UNI largely being ‘farmed and dumped’ to earn yield. See ETH USD Yield Farm, Pickle, Harvest and Alpha.
  • Reduced incentives means UNI is distributed slower.
  • Incentivizing the same pools can be seen as choosing ‘winners’ by selecting WBTC as THE Bitcoin on Ethereum and favoring certain stablecoins over others.

Specifications:

The specifications for this proposal should be updated in line with development support. We are currently looking for a party to lead the development of this proposal, and are open to researching different iterations of its implementation. General Requirements of Liquidity Mining include:

  • New distributor
    • Distribution to 4 covered pools (WBTC, USDC, USDT, DAI)
    • UNI distributed evenly per block over 60 days (or estimated block equivalent)
      • 2.5 million UNI distributed to USDT/ETH and USDC/ETH pool, 1.25 million UNI per month per pool
      • 3.33 million UNI distributed to WBTC/ETH pool, ~1.67 million UNI per month
      • 1.67 million UNI distributed to DAI/ETH pool, ~0.83 million UNI per month
    • LPs receive UNI in proportion to liquidity provided
  • Uniswap proposal
    • Transfer 10 million UNI from governance treasury to distributor
    • (possible) Autonomous proposal that is able to accept vote delegations
  • Community review / testing / auditing as appropriate
    • Potentially less review necessary if simple Mintr fork is used

We invite those interested in leading development to comment on the proposal below or to reach out on Twitter.

This section will be updated with details of implementation when available.

Proposed Timeline and Governance Process:

We’ll try to hew as closely as possible to the proposed governance process posted here. However, with the imminent ending of the first liquidity incentive program we feel that it will benefit the community to take action sooner rather than later.

Given the timeframe around the incentives ending on November 17th, we’ve decided to pull the following pieces:

This timeline is tentative and subject to change

16 Nov 2020 -

  • Post plan overview document to Uniswap forum
  • Begin temperature check process

17 Nov 2020 -

  • Genesis liquidity incentive program ends

19 Nov 2020 -

23 Nov 2020 -

  • Begin consensus check process

28 Nov 2020 -

  • Snapshot poll concludes for consensus check
    • Poll passed with sufficient quorum

TBD -

  • Submit Uniswap proposal 3 for on chain UNI voting
    • 10 million UNI required to submit proposal and begin vote
    • Voting period lasts ~6 days and 4 hours (40,320 blocks)
    • 40 million UNI required to meet quorum

7 days later -

  • Voting period ends
  • If proposal passes, 2 day timelock before execution

2 days later -

  • Timelock period ends
  • Proposal is executed
  • New liquidity incentive program begins

60 days later -

  • New liquidity incentive program ends

Development goals timeline

17 Nov 2020 -

  • Solicit contribution from interested parties
  • Request for comment on specification

20 Nov 2020 -

  • Finalize specifications
  • Begin development work

27 Nov 2020 -

  • Target to complete development work and testing
  • Deploy distributor contract
  • Solicit community / professional feedback as appropriate

TBD -

  • Submit governance proposal

Future Developments:

Governance would benefit from a more flexible distribution method for liquidity mining. Ideally, governance should be able to increase or reduce distribution speed, and change covered liquidity pools, without needing to deploy a new distributor contract each time. However, this would likely require substantially more development and review work. For this reason, we’re proposing to use a simpler distribution mechanism for the new 2 month incentive program, which will give the community time to build consensus around a long term solution.

References:

Change Log:

19 Nov 2020 - Updated timeline

22 Nov 2020 - Change to proposed distribution:

  • Reduce monthly DAI/ETH incentives from 1.25M UNI to ~0.83M UNI
  • Increase monthly WBTC/ETH incentives from 1.25M UNI to ~1.67M UNI
  • Total UNI distributed remains unchanged at 5M per month, 10M total over 2 months

28 Nov 2020 - Updated timeline

29 Nov 2020 - Updated timeline

15 Likes

It feels like we may learn a lot from observing what happens when liquidity incentives stop. Would it better to start the poll a few days after that, rather than before?

23 Likes

We need to create more polls to boast the value of the UNI.

2 Likes

These UNI rewards actually created 2 net negative side effects 1) volume to Liquidity ratio have become very small compared to historical ratio for all these 4 pools making actually the overall fees collected (uni token + 0.3% fees) by LPS actually smaller than historical fees.
2) These rewards actually dilutes the token holders without providing benefits to LPs. The only advantage is that UNI can claim higher locked Total value but without any increase in volumes which is the real economic value of UNIswap.

10 Likes

Sounds good, seems fair. Gauntlet Network said they were doing the math behind current incentives to see if it was worth keeping them as is or reducing them. With a bit of luck, they’ll be done soon and will be able to support this proposal…

DeFi is still in a heavy growth phase from a macro standpoint, hence I see a point in incentivizing pairs that are like entry doors to DeFi (stables, and WBTC especially these days.)

Otherwise, we should start asking the UNI team to look into ways of making Uni LPers votes count. This should have been the priority.
There are currently 7,992,501.71 UNIs in the UniV2 Eth-Uni pool that can’t have a voice. This is absurd, as LPers show a high level of commitment to UNI by exposing themselves to potential impermanent/divergence loss.

1 Like

I agree, we’ll gain useful data from the ending of the liquidity incentive program - how much money stays in the pools, what are the unsubsidized fee returns, how much will slippage increase, etc. But, it may take governance a while to process this information and agree on the ideal incentive program. This proposal is meant to be a stop-gap which will keep Uniswap humming and support the user experience while governance builds consensus on a long term solution.

That being said, we can be responsive to any data coming in over the next few days, and make changes to the distribution plan as appropriate :slight_smile:

Uniswap benefits from having deeper liquidity - allowing larger size swaps with lower slippage and a better trading experience. Anecdotally, some of the increased volume since August may be a result of having this deep liquidity available.

If you would like to submit a separate proposal on this, please feel free :slight_smile: You can continue discussion on that topic in this thread.

2 Likes

I agree, I think we should wait few days or even weeks and see what will happen… in the past Balancer and Sushiswap reached several times the liquidity of Uniswap and still failed to pass its volume… today Uniswap is in a much stronger situation so we don’t need to panic

5 Likes

Finding an appropriate answer to these questions is made quite hard by the fact that we don’t have any visibility on when V3 can be expected, not even a rough estimate.

2 Likes

There’s a couple things I would love to see changed before this is going to be passed.

  1. Switch away from including the wBTC/ETH pool and move towards tBTC/ETH pool - it’s the better, more trustless BTC on ETH

  2. The current system struggled for volume on ETH/Stablecoin pairs (ETH/WBTC had nearly x2 more deposited in $ than the best performing one), half the incentive given to the ETH/BTC pool & increase it equally for the ETH/stablecoin pairs - this should act as a big incentive for people to reduce their worry about impermanent loss and/or missing out on any extremely wild price increases for ETH / BTC

2 Likes

Actually this week where no reward will be given to the 4 pools could inform us whether volumes will actually decrease because of the projected decrease of liquidity. This will be interesting to observe. Also a very low ratio of volume to liquidity, although providing little slippage in theory, may just benefits arbitrage to make more $ as price equilibrium with centralized exchange will require more swap. Some slippage is important for price discovery and equilibrium in my opinion

3 Likes

Some thoughts on feedback I’ve seen so far both here and on Twitter:

  • Using the end of rewards to gauge the change in liquidity feels like a great point of research to mesh into the iteration and discussion here.
  • Gauntlet’s analysis is one a lot of people are looking for, and one that should be used to inform the evolution of this proposal.
  • Lots of concerns around ongoing rewards leading to negative token price. I agree with the likelihood and want to emphasize that we should look for improvements to these behaviors as well as other distribution mechanics (like developer grants) to help mitigate these types of actions.

There’s a clear difference of opinions between speculators focused on token price, and those who see liquidity rewards as a means of distributing UNI to allow for more effective governance processes.

I believe we will land somewhere in the middle, and am curious to see how the temperature check vote (now live) plays out.

4 Likes

Thanks for doing this. It was much needed.

What is behind the decision to cut rewards in half? Is there any rhyme or reason to this… or is it just a way to indicate a “phasing out” of some sort?

It seems to me that all we know right now is that Uniswap won back a ton of liquidity with the current reward setup. We don’t know what kind of effect removing rewards would cause, and we don’t know what kind of effect halving them would cause either.

Since the treasury gets 172m in Y1, is there really any harm in continuing the same 20m rewards we have for another 2 months, then use that time to make a more educated decision about how to proceed? Between phase 1 & phase 2 its still less than 25% of Y1 vesting.

If we maintain what we have now, then between now and February we could have more calls & get far deeper on the issue than we can right now.

5 Likes

I just think that using governance UNI to continue liquidity incentive plan doesn’t bring long term value to the protocol and is obviously not sustainable in perpetuity.

9 Likes

:orange_heart::yellow_heart::green_heart::blue_heart: I vote NO.

As a community we need to start getting over this idea of just handing out tokens in Liquidity Pools. The early loyalty scheme is over, we are not going to just endlessly hand these tokens out.

We need to come out with better incentives to add value to UNI over time.

For example:
We should give a discount on trading fees if you own and stake your tokens.

There are LOTS of scum whales (I won’t say their names) who come in, use their exchange tokens to farm, and auto-dump on everyone. I don’t want those r*tards messing with our sweet pink unicorn :unicorn:

It is obvious that the community should wait and evaluate the effects of the pool ending, as well as wait for Uni V3.

We should be allowing users to access better Uni V3 features if they have UNI token, or maybe stake it too.

As others have mentioned, doing the whole Liquidity pool is trash. I already know of SCUM HEDGE FUNDS who set up “Retailer Pools” to farm the Uni LP and auto-dump every day to get yield.

I will gladly buy their cheap UNI but I don’t think you guys understand how much dumping this causes over time.

In summary:

LP incentives are trash and we have moved pass it. NO MORE LP SCHEMES
Reward stakers and long-term h0dlers
Wait a bit of time and for Uni V3 to come out
Consider giving access to more features if you own UNI and stake it. Cheaper fees, more features.

You want to use Uni, the biggest dex in the game? Okay, you buy the token, you commit to staking or owning it with-in your account, and you get access to the best features in the game. A fair trade-off.

Liquidity Pools are Liquidity Poop

:rainbow:

UNICORNS ARE COOL AND HERE TO STAY :unicorn:

5 Likes

@sommi please follow the community guidelines. Your candid feedback is appreciated. But your tone is unnecessary. :peace_symbol:

3 Likes

First of all, I think the general feeling (in the Discord server, but elsewhere too) was that incentives were given at a pace too high to be sustainable, creating a sell pressure that was detrimental to the community of UNI holders.

Gauntlet seemed to indicate that their analysis would be complete pretty soon.
They also seemed to hesitate between keeping incentives as-is or reducing them.

From what I understand (referring to OP’s timeline), we are about to witness at least 2.5 weeks of no-incentive.
And then, a proposal might emerge, on which we will get to vote. I think those 2 weeks (a long time in terms of DeFi, as we know) will probably help us decide on the next phase.

2 Likes

Thanks for the response.

Feelings are great, but we are about to make a major decision regarding a $2 billion DeFi product.

Major companies, organizations, entities, etc do not run on feelings. They run on data. Being a decentralized organization does not lift this burden from us. Business is business. Where is the data?

We are fully capable of gathering the necessary data. But we haven’t yet (unless there is some research being done that I’m not aware of).

If we don’t have the data, then there is no doubt that we should continue doing what is working right now until we have data that shows that a change will actually yield the intended outcome. Whether it’s halving the reward, eliminating the reward, or doubling the reward - we should have strong evidence that it’s going to work before we do it.

2 Likes

I just realized it - we already have all the data we need.

5 Likes

Glad to see someone taking the initiative! @monet-supply I know you may have had some doubts in bringing a proposal to the table yourself at the time of the community call, so I really welcome your decision to take the time to build such a comprehensive initial thread.

For anyone who hasn’t listened to the recording of the first unofficial community call, I strongly recommend you to do that before coming to a decision on whether or not this is a good thing for the protocol.

As mentioned in the call, some of the most important factors to the health and continued adoption of Uniswap is the reduction of slippage and the ease of use as far as Uniswap acting as an on-ramp/off-ramp between stablecoins and other tokens - these are good goals to have at this time.

Whilst I agree that the liquidity mining program cannot continue indefinitely, I feel that in the absence of another proposal for developer grants or other programs that add value to Uniswap, continuation of the program for the time being in order to achieve the above goals is a good idea.

I have a couple of questions:

  • First, I’d like to echo Chris’ sentiment - what was reasoning used when making the decision to cut the rewards in half?

  • Second, was any thought given to the idea of reducing the number of incentivized pools? A couple of people raised the idea of dropping down to a single stablecoin-ETH pool along with maintaining the wBTC-ETH pool for the time being during the call, and I’m wondering what your thoughts were on this. If its indeed seen to be that the rate of distribution through this program is too high to be sustainable, could this be a reasonable alternative to cutting the per-pool rate in half?

Thanks again for taking the time to build such a comprehensive offering to the community!

2 Likes

For those having issues voting on Snapshot, please note that only self-delegated UNI is eligible.

If you have not done so already please visit the Voting tab to Unlock Voting on behalf of your UNI!