[Discussion] Uniswap Liquidity Incentive Plan

Requests for Comment
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Let’s keep in mind that founder, devs and VCs have way more information in their hands than us:
They know what will go in V3, and when it can be expected.
This information is so important at this point that there’s no doubt that it makes them able to take significantly better decisions for the protocol than us.
While I’m sure Uniswap’s future is decentralized, I’m ok with its present being partially centralized.

Let’s not forget that the only reason why we have UNI available to us today is Sushiswap.
UNIs wouldn’t have been dropped so early without this competition, this clearly wasn’t the initial plan.
But as far as I can tell, everything is working pretty well so far.
VCs interests are aligned with ours here, they can be trusted for the moment.

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At the same time, I understand the Uniswap dev team for keeping everything about v3 under wraps.

Giving advance info to copycats/competition would hurt Uniswap at the moment.
Let them be stunned when v3 gets out :slight_smile:

I think it’s now safe to assume big delegates have been told to put incentivization on hold. Otherwise, they would reply. I’ve pinged them many times on Discord and here, and they keep quiet.

In the meantime, we are losing liquidity, but volume doesn’t follow that much.
Sushiswap has to use subsidies all the time, pretty much on every pair since they have the fee switch turned on (LPs get less by default).

Uniswap is still the default DEX for most new coins.
Recent example : The Graph / GRT. I think there’s literally 0$ liquidity on Sushi at the moment.

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Yes I fully agree.
Even though the Sushiswap situation worried me at the beginning, it looks less of a major threat today.
Sushiswap will certainly survive, it will probably grow, but it doesn’t look like it will become the #1 dex anytime soon.
Without incentives, Sushiswap cannot really compete with V2 yet.
And even with incentives, I doubt it will be able to compete with V3.

What I’m curious about is the way the team will make V3 hard to copy.
I’m sure they will somehow manage to do it even if it means additional delays. Still a good choice.
Setting up optimistic rollups (if any) will certainly be harder than copying V2, but my guess is that there’ll be more than that.

I can’t wait!

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218

I whole-heartedly agree, and hope the current management displayed by the core team is temporary until v3 is released.

All of these arguments are valid, but it also means current governance is meaningless for small players.
As a community we deserve more than the current level of fog.
You cannot justify the value of UNI as a governance token at the moment and it is a situation that worries me greatly

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Here’s what I suspect happened:
The core team knows V3 is coming soon, and realized that rewarding LPs isn’t necessary at all at this point.
They feared that the community (and LPs) would vote for reactivating LP rewards, and they feared that the LPs gain too much power so early.
These rewards would only lead to more LP rewards, more power for LPs, more LP rewards, more power for LPs.

They realized that this a threat to the protocol, and and an extremely serious one.

So they decided to slow down the setting of this vote, which is weird, but works.

My guess is that in order for V3 to make as much noise as possible and to maximize decentralization, it will include user incentivization at launch.
This would be a fantastic marketing tactic, and would allow to gain crazy market shares not only from all dexes but also from cexes as well. Extremely rapidly

Amazing launch + excellent decentralization = fantastic plan.
Then only can the governance be fully put in the hands of the community, which was the initial plan.

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220

I think it could also be that V2 liquidity incentives will represent a problem with regards to V2->V3 liquidity migration. Once the code is voted, it lasts 2 months and doesn’t distribute anything to future V3 LPers… So the Uniswap team probably thinks V3 might be operational within ~2 months.

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True true.
In any case, I don’t see any scenario in which the current situation doesn’t indicate that V3 is coming soon :slight_smile:

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Interesting read.

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Is this proposal dead? Almost a month now since @monet-supply signalled the technical implementation of the proposal was ongoing. I know a lot of things may have changed in the space since then, but it would be helpful to know if the work on that implementation has been abandoned.

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You describe a worst case for decentral goverment. Hidden Information, small teams with control advantage. Then there is no use in creating a community with gov tokens at all.

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This is the best solution for now, and I trust that it will change in the future.
Please don’t forget that another successful vote happened in the past month.

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226

Hey everyone,

While this proposal had a lot of community support I believe current data has shown that another liquidity program was not necessary for the health of UNI’s TVL.

I strongly recommend doubters to have a look at the numbers : Uniswap | Stats, Charts and Guide | DeFi Pulse

Perhaps we should switch the conversation to another mode of incentivization : LP token yields. There are a lot of projects trailblazing this topic and creating community partnerships might be a smart and efficient way to secure long term TVL.

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Hi everyone!

Sincere apologies for being out of touch for so long. I’ve been very busy with my day jobs over the past couple months and haven’t been able to give UNI governance the attention it deserves.

I wanted to update everyone on the status of this proposal.

TL;DR: I no longer believe it is in Uniswap’s best interest to extend liquidity incentives, and will not be pushing this proposal forward to an on chain vote. Quick explanation of my reasoning:

Liquidity incentives are not necessary right now

When @coopahtroopa and I initially drafted this proposal, the liquidity incentives were ending imminently and it was not clear if Uniswap would be able to maintain its market share and dominance without continued token distribution.

In my opinion, the relative performance of Uniswap vs competitors in the following few months has soundly addressed this concern. Uniswap continues to lead other DEXes in both TVL and trading volume, and in particular dominates trading in newly launched and long tail assets (basically anything that is not being actively incentivized by competitors).

The scope and targeting of the proposed liquidity incentives no longer make sense

Back in November, UNI was languishing below $4. Since then it has increased in value more than 5x, so the amounts listed in this proposal are likely no longer appropriate, even if UNI governance decided they would still like to move forward with liquidity incentives.

Furthermore, the relative allocations proposed for WBTC, USDT, USDC, and DAI were based on a point-in-time analysis of the “stickiness” of LPs and trading volume. Given how liquidity has changed since then, the allocations no longer make sense.

Liquidity incentives probably won’t drive long term value

In hindsight I view the September-November 2020 liquidity incentive program as a success - it helped Uniswap retain the top spot among DEX protocols and expanded ownership to the wider community. But in cases where we’re not facing an existential threat, liquidity mining seems less valuable.

Liquidity has no loyalty, and competitors such as Sushiswap are paying far more in incentives than they take in protocol fees. Over the long term, these incentives are clearly unsustainable and liquidity will likely migrate back to Uniswap once they are discontinued (assuming that Uniswap keeps the fee switch turned off).

So what now?

I believe we should refocus Uniswap governance and community efforts in areas that are likely to drive long term value and enduring network effects. Off the top of my head this could include community efforts on:

  • Improving Uniswap routing
    • Certain protocols such as Mirror, Frax, and Badger are heavily integrated with Uniswap, but benefit less than they should because key tokens are not included as “bridge” assets for routing purposes
    • If we add support for trades through UST, FRAX, and WBTC, we could potentially deepen these protocols’ relationship with Uniswap
  • SOCKS migration proposal
    • Uni governance owns the original SOCKS/ETH liquidity pool tokens from Uniswap v1
    • Migration to v2 would require upgrades to the unisocks.exchange front end as well as work on organizing the actual migration of assets from pool to pool
    • This type of initiative won’t have a huge impact on Uniswap financial performance, but could help onboard new devs into the UNI ecosystem (always a good thing)
  • Integrating LP tokens in other defi protocols
    • This is particularly close to my heart, I’ve been hard at work reviewing UNI LPs to onboard as collateral to MakerDAO.
    • Defi integrations could offer a more durable, long term advantage vs direct liquidity incentives (for example, UNI LPs can earn additional yield by borrowing against their assets from Maker and depositing to eg. Compound or Aave to capture the spread in interest rates.
  • Exploring opportunities for “payment for order flow” to drive integration with wallets and dashboards - distribution will be incredibly important for the next wave of DEX competition
    • Check out Banteg’s post hinting at PFOF incentives/revenue sharing for inspiration:

If you have an idea for a Uniswap related project, feel free to get in touch with me and I’m happy to discuss and see if/where I can support :slight_smile:

I’d also like to call out the Uniswap Grants program, which has a budget of $750k per quarter to fund important Uniswap related projects and initiatives. Applications for Q1 grants close soon, so if you’d like to apply for funding be sure to get your grant request in before Feb 28! Full details can be found here.

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I havent seen one talk so much sense in a post in a long time :slight_smile: Big thumbs up Monet! This post made me proud.

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I see you mentioned keeping the fee switch turned off. Can you expand on why you believe it will/should stay this way? Given uniswap dominates transactions a slight dip in lp transaction fees still means uniswap is the best place to LP if you arent farming and will reward uni holders. Without a fee switch there is almost no reason to hold uniswap tokens vs sushi (or even pancake) that have a fee switch turned on.

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I don’t see any belief expressed, only observation that competitors’ perpetual liquidity incentives are unsustainable and once they die down, the 0.3% LP fee clearly beats 0.25%.

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Personally, I think Uniswap might be better off leaving the fee switch off for a while. Governance will always have the option to turn it on if we get consensus around that option. But it seems like a one way decision, I’m not sure if there’s a clear way to reverse the fee mechanism if it starts to cut into our competitiveness.

This is a key point. Uniswap is basically giving LPs a uniform subsidy, with pairs delivering more trading volume gaining a larger benefit. Sushiswap and others’ system of extracting protocol fees while also paying out (generally much larger value) token incentives is somewhat arbitrary.

Taking an example related to my work with the MakerDAO risk core unit - Sushiswap is very unlikely to subsidize DAI/token LP pairs. This makes Uniswap the best partner for MakerDAO to integrate DAI/token LPs, because LPs get to keep the entire 0.3% fee with no protocol rent extraction. The availability of low cost borrowing power then gives Uni LPs additional earning potential - they can borrow from Maker and deposit to Aave/Compound to pocket the interest rate spread.

For the time being, I feel like the advantages of building long term network effects outweigh potential fee earnings.

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Do we have to have a fee switch with the margin for token holders at 0.05, could we not go to 0.02 for instance?

Could we not put a mechanism into the proposal where the fee switch is turned off if the market share dropped below a certain level, or a vote is triggered?

There have to be mechanisms, and compromises that can be explored. I don’t have the expertise to know the feasibility of these things, but what incentive to the large number of small UNI holders is there to continue to hold? I think we’ll see these people gradually lose interest, or they’ll be shaken out of holding due to some fluctuations in price, or something along those lines.

Are we going to let these people leave while the large hands accumulate more and more UNI? That circumstance will lead to the DAO not being very decentralised, no?

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I also have come to think that it’s better to keep the fee switch turned off by default at this stage.

It might make sense to turn it on one day later on if/when Uniswap has superdominance, but it’s definitely too early for that in my opinion.

Having fee switch off is one of the areas where Uniswap’s competitive advantage currently lies compared to Sushiswap.
The 0.3% fee model scales much better for LPs than 0.25%+ some emissions.

As for the reason to hold, UNI holders have the right to distribute UNI treasury, so that’s gotta be worth something. They also have the right to turn that fee switch on when the time is right.

I think it would make sense though to turn the switch on for the assets that we wish to accumulate with our treasury. And to compensate that by UNI emissions. Still, I would vote for emitting a little more towards these pairs than what we would earn from the fees.

And what we get could be put to productive use, for instance, the fees from WBTC/ETH pair could go to Uniswap-controlled LP.

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Unless you’re a whale your vote is practically at least, worthless. Fee switch on benefits small and big uni holders alike. And again everyone has a fee switch and uni has the massive transaction fee edge over all other dex combined. So if yield was the most important, everyone would have left for sushi already where you earn more than on uniswap, yet people stayed. If it didn’t happen then it won’t happen now and we could always extend rewards for the major pairs if it turns out to be a bit of an issue which I highly doubt.

Best way to be certain is figure out the whale addresses for lp’s and cross reference for uni tokens. If there is better than 60% overlap it’s a no brained.

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