I fully agree Allo, I think you provided perfect, logical, objective points to your argument. I would also support another approach to things which would be able to reach more consensus in the community.
In light of Uniswapâs liquidity mining program, hereâs some research on how centralized exchanges incentivize liquidity. Granted CEXs tend to have central order limit books (CLOBs) rather than an AMM design, so the mapping isnât perfect.
Here is the write-up, with the highlights below:
In a simplified exchange model, they compete for liquidity - each one wants deeper order books and tighter spreads to get more volume. No one wants to trade on an exchange with lots of slippage. It turns out you can modify the fee model to incentivize particular behavior. Most exchanges today use a âmaker-takerâ model, where the taker of liquidity (market orders) pays the maker of liquidity (the limit order creator). Ex: taking a share off the exchange costs 0.3 cents and the trader who added that share gets 0.25 cents as cashback. This incentivizes traders to put a lot of limit orders on exchanges instead of market orders.
In a sense, Uniswap is the epitome of a maker-taker exchange as currently, all the 30 bps fee goes to the liquidity provider. This contrasts significantly with CLOB DEXs, who give meager < 2 bps rebates to market makers. We know that increasing rebates (via liquidity mining) will increase total liquidity, but the lower slippage did not lead to a meaningful increase in volume. Therefore the total fees (ignoring UNI bonus) to LPs per dollar went down.
This dynamic makes rebates complicated for AMMs. If fees/rebate increases by 50% and pool size doubles, but volumes are flat - the rebate per dollar goes down. Knowing this, new LPs will always be wary of deploying capital b/c their yield will vary. Therefore whenever there is a rebate increase, there has to be a push to also increase volumes, potentially through payment for order flow (PFOF) - but more on this later.
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Can someone explain to me where weâre at in this process? Personally Iâm against adding liquidity incentives to the four main pairs but itâs kinda crazy how slow this process has been. Iâd rather see action that I disagree with than nothing at all. There are a few whales that control voting anyway right now so whatâs the hold up?
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Even a modest mining program would demonstrate that the governance here isnât broken.
Holding UNI should be a growth investment, and done in conjunction with providing liquidity. If you are just HODLing UNI market bought, never providing liquidity in other key pairs, and making your game plan that no new UNI is ever issued and you can just take that 0.05% that seems like the completely wrong approach. This early in the stage protocol inflation is necessary to capture and retain market share. You can provide liquidity in the incentivized pools to keep your UNI % of the network strong. But having zero UNI emissions will kill this protocol and make the 0.05% meaningless.
If you want buy backs and dividends and no growth just buy a cigarette stock like MO or PM.
If UNI hodlers want an inflation shield we should subsidize an UNI/ETH pool. This is how every other farm does it. I know some at UNI like to think we are âbetterâ than âdegenâ farms but ignoring the basic principle of subsidizing liquidity in the inflated coin is a massive mistake and is part of what is creating this rift in the community leading to zero emissions.
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Not only is the process slow, but the proposal we will soon vote on is, in my opinion, based on a now outdated understanding of the situation.
IMO if the proposal doesnât pass, there should be a series of other votes about proposals that have been made here (no need to go through the 2 week temperature check, etc. process, because weâve been discussing this for a long time now, there are now 170+ replies in this thread alone) until something passes. The next vote after this one should be about incentivizing key DeFi pairs/DeFi « bluechips ». Again, with 50% of the original (initial phase) budget.
- YFI-ETH
- COMP-ETH
- AAVE-ETH
- SNX-ETH
- CRV-ETH
**IMO the incentivization period/epoch should probably be less than 2 months because the market moves way too fast. Maybe 4-6 weeks and during those weeks we do our best in this forum to come up with a new proposal in time.
Ideally, we can also come up with a proposal for vesting part of the rewards soon.
And other proposals for UNI distribution thatâs not related to liquidity mining (it could be usage rewards, some form of staking, integrations, grants, etc.)
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I believe we are at step
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
The hold-up is probably on @monet-supply completing the necessary technical work for the actual on-chain proposal.
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Iâm okay losing ground on the WBTC-ETH pair because to be honest those LPs have very limited IL risk compared with the fiat pools, so giving them too much is a mistake. But the fiat/ETH pools are extremely important and those LPs face serious IL risks.
Iâd like to add two things regarding the timing of the liquidity mining program continuation.
- Uniswap Governance is likely to turn on the fee switch during the next year, at least for USD/ETH and BTC/ETH pairs.
LP rewards will shrink to 83.3% of what they currently are, so the major pairsâ liquidity will take a hit.
We might want to compensate for that with a liquidity mining program.
- The main competition for dominance on the AMM market will likely happen between Uniswap V3 and Deriswap around the same time.
The âliquidity bulletsâ might be needed soon, so it might make sense to save them.
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So, weâve all been debating for or against liquidity mining, and what pairs should be the most important, but considering the size the amounts intended to be distribruted, wouldnât it be better to use the amounts as Smart Liquidity Providers in the meantime ?
Itâs a band-aid solution but it solves the problem of slippage and liquidity while we figure out an optimal strategy + itâs virtually free minus transaction costs and IL,
Cheers
Probably not a good idea. The APY wouldnât be worth it at all and would give LPs second thoughts about staying (suddenly, 1/6th of their APY disappears).
What is a Smart Liquidity Provider ?
If the liquidity mining program compensates exactly the amount that is being taken away by the fee switch, nothing changes for LPs in terms of APY.
In this case what changes is the composition of the Community treasury: it accumulates USD, ETH, and BTC without the need to sell UNI. In other words, it exchanges UNI from the treasury for these coins at better rates than the market. The rates are better because a lot of LPs will keep the UNI they get, especially if the APY they get from UNI is low.
Having these coins in the treasury would be beneficial to pay for services and grants. We could pay a grant in USD and give a UNI bonus on top of it that wouldnât have to be immediately sold to cover the costs of work.
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A simplified take on Balancerâs Smart Pools. Basically itâs a part of the treasury that is automatically used as liquidity on pairs that need it.
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It feels like we are stuck, when the rewards will be renewed?!
Until we see fee switch on we donât need any LP rewards. The only benefit from this is more money for whales 
, all UNI holders will be diluted and the value of UNI will go down. Burn tokens, shrink supply instead to increase value of each token. 
I think maybe we should pause this proposal and rethink about a new one
- Seems the implementation is delayed a little bit (still appreciate all the hard work there). We are probably at least 2-3 weeks behind schedule. The market situation has changed a lot since we last discussed (Competitor strategy and market volatility etc.)
- The plan is proposing for 2 months. 2 months is forever for the Crypto (especially DeFi) world and every parameter can change. If we continue with Liquidity Mining, we should definitely go more dynamic or at least smaller granularity (e.g. 1 month to provide flexibility to react to market)
- Interested to know how much additional eng work is needed for directly implementing a more dynamic Liquidity Mining program vs implementing for current one and moving towards dynamic one in the future.
Thoughts?
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I believe developing the infrastructure that would enable us to be more agile is essential.
And we need shorter feedback loops when it comes to proposal development.
It would be helpful if, before a proposal is published, it has already been discussed and improved by active community members.
Maybe we can start with creating a pre-proposal discord group where people can gather feedback on their initial ideas.
It takes a lot of time and effort to develop a proposal.
And a lot of it could be saved if you could just put your idea up to vote and get the signal on whether you should develop it or not.
A proposal that is developed collectively by the active part of the community and is somewhat consensually approved by it could be less contentious. A lot of details could be decided by simple votes.
And when it comes to implementing proposals as code, I think we need to hire a team for that.
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Whatâs governance all about afterallâŠwhen are we having on-chain voting on LP incentives?