[RFC] - Gamma Strategies - Distribute at least 1/3 of $ARB airdrop as liquidity incentives

[BP333]

Proposal Summary

Distribute at least one-third of the $ARB as liquidity incentives to select liquidity pools on Uniswap (Arbitrum). Use Angle Merkl to distribute the rewards proportionate to the depth of liquidity provided by the LPs. All LPs who provide directly to Uniswap (LP NFT) or through an active manager like Gamma Strategies, Arrakis Finance, and DeFiEdge will be rewarded according to the same criteria. The pools selected will depend on (1) importance to the ecosystem and (2) amount of co-incentives from partners.

Why Liquidity Incentives?

Given the importance of liquidity, we believe that at least a one-third allocation of the total $ARB DAO airdrop towards liquidity incentives would be prudent. It directly benefits the Uniswap ecosystem to have more liquidity and volumes.

Facilitating more volumes towards Uniswap will encourage more builders to Arbitrum and Uniswap. More liquidity would allow other projects to build off Uniswap more easily and increase its reach within the ecosystem. Examples of projects benefitting from deeper Uniswap liquidity include lending projects using Uniswap liquidity pools for liquidations, projects leveraging the Uniswap v3 TWAP oracle which requires liquidity for safety, projects building derivatives on top of Uniswap pools.

Why Angle Merkl?

More info: https://docs.angle.money/side-products/merkl

The main benefits to using Merkl are the following:

1. Inclusivity - Anyone who provides directly to a Uniswap pool whether thru an LP NFT via the Uniswap frontend, or an active liquidity manager like Gamma Strategies, Arrakis Finance, and DeFiEdge will be included

2. Fairness - The same criteria will be used to reward all positions (LP NFTs, Gamma ERC-20 LPs, Arrakis ERC-20 LPs, etc)

3. Capital efficiency/Flexibility - Rewards will only be distributed to active liquidity providers in accordance to depth of active liquidity and trading fees accrued, and preservation of liquidity.

How does it work?

Merkl is based on an off-chain script that computes the rewards for all LPs of these pools according to specific preferences. For example, Uniswap can determine to weight rewards as 50% by fees accrued, 25% by preservation of Token A liquidity, and 25% by preservation of Token B liquidity.

The script aggregates onchain LP NFTs, Gamma LPs, Arrakis LPs, and other Uniswap LP positions and records eligible rewards based on a uniform criteria. It then compresses this information into a Merkle root and posts on-chain allowing LPs to claim their rewards.

Precisely speaking, for a given pool with two tokens (A and B), the script looks into the swaps that took place on the pool during the period for which it is ran and computes a reward score for each position according to:

• the fees earned by the position during the period, which represent the liquidity of the position used by the pool

• the amount of token A held by the position during swaps on the pool compared to the total amount of token A in the pool

• the amount of token B held by the position during swaps on the pool compared to the total amount of token B in the pool.

Which pairs to incentivize?

The pools selected should depend on (1) importance to the ecosystem and (2) amount of co-incentives from partners

For pairs important to the ecosystem:

1. WETH / USDC - 0.05%

2. WETH / USDT - 0.05%

3. WETH / ARB - 0.3%

Potential partners for co-incentives:

1. Lido Finance - wstETH pairs

2. Rocket Pool - rETH pairs

3. GMX - WETH / GMX - 0.3%

4. Radiant Capital - RDNT/WETH 0.3%

5. Treasure - MAGIC/ETH 0.3%

6. Gains Network - GNS/WETH 0.3%

About Us

Gamma is a protocol designed for non-custodial, automated, and active management of concentrated liquidity.

Gamma uses its automated infrastructure to manage over $100m in assets and 400 liquidity positions. Gamma’s vaults are deployed on six different networks and four different decentralized exchanges.

Gamma has previously worked with the Uniswap Foundation in a liquidity mining program on Optimism. The program is currently in its third phase and distributing 165,000 OP to Gamma as rewards for liquidity providers to select liquidity pools.

https://gov.uniswap.org/t/rfc-the-optimism-uniswap-protocol-liquidity-mining-program/17820

While we do aim to be active participants in this proposal, this proposal is designed to reward all LPs equally in accordance with the same criteria. The general rule is that the deeper liquidity provided, the more rewards earned.

Gamma will also reach out to its partners Lido Finance, Rocket Pool, and others for potential co-incentives.

[sogipec]

Pablo from Angle here, we’re the team behind the Merkl solution.

While this is a proposal from Gamma, I want to stress as @BP333 put it that the Merkl system enables to put in parallel different active managers, and any active LP manager can be supported within the system.

Contrarily to other usual one size-fits-all incentivization solutions on Uniswap V3, Merkl still leaves a full flexibility for LPs to provide liquidity however they want.

Merkl is also a non custodial solution, in the sense that it bears no liquidity risk for LPs. You don’t need to stake your liquidity anywhere to be eligible for rewards, and so there will be no smart contract risk for LPs. UX for providing liquidity and being eligible to the rewards will be the same.

With this, using the ARB airdrop to incentivize liquidity on UniswapV3 will be a nice way to try to increase liquidity on the pairs which are yielding the highest Volume/TVL ratio and increase Uniswap leading position as a DEX on Arbitrum. While I agree with @BP333 on the pairs important for the ecosystem that are mentioned, there might be other pairs on Arbitrum which are not incentivized so far, are yielding a super high volume even with a low liquidity.

[barbarossa_Arrakis]

Great initiative @BP333
Providing incentives to LPs on Uni is definitely essential and has seen successes previously.
Arrakis Finance certainly supports this proposal and will also make a separate proposal to state our proposition.

[TimeRows]

Gamma Strategies inclusion of independent Uniswap LP NFT’s makes sense. It is a more equitable approach to LP user’s who are outside the Liquidity management applications.

The amount of ARB to be distributed in this proposal is around 1.46 million ARB. To 3 different applications, and open to Uniswap LP NFT’s. As an initial distribution it may be better to be around 1 million as this mechanism is newly used by the DAO. More information about the effectiveness of incentive pairs will be gathered, and will allow the merkl distribution to be opened up to more liquidity managers in the future, and allow additional emergent incentive co-partners.

It is not clear to me on the time frame of this incentive. How long would it take to run out of the ~1.4 million ARB in the current proposal?

Overall in support of this proposal. Makes sense to have an overall distribution mechanism that includes several groups vs individual proposals, and allows for a more economical way of using the ARB.

[HCC]

Teahouse Finance would like to suggest a liquidity mining program that rewards all engaged liquidity providers. This approach would be a logical continuation of the last phase of the Optimism Liquidity Mining Program, in which funds were allocated to four major managers to combat liquidity fragmentation. It’s notable that other protocols that were left out, such as Revert Finance and Delta One, have been developing tools for liquidity management.

In the spirit of inclusivity and staying aligned with the objective of enhancing swap activity and reducing slippage, any future liquidity mining program should be open to all. Since the team at Angle already designed Merkl formula to distribute rewards to the managers who have contributed the most, Merkl should certainly be concider be delgated the distribution a portion of the ARB. Teahouse would be happy to be included in Angle’s native list.

Before the initiation of the program on May 4th, approximately 80% of the liquidity in the sUSD/USDC 0.01% pool was represented by Teahouse’s vault (0xA61DA408a5391b34Cb6C56A821e33c45C925Bd67). We employed our single-sided LP strategy that concentrated the liquidty with the price trend to optimize efficiency for our community’s liquidity.

Post program initiation, we noted that reduced slippage assisted our community’s liquidity providers in achieving superior results. Teahouse would be deeply appreciative of the chance to contribute to this liquidity mining program utilizing our Weighted MA strategy. (edited)

[sogipec]

On the inclusion of Teahouse and more generally of more applications to answer your point @TimeRows, any LP manager can be included in the Merkl system.

Ichi, Steer, DeFiEdge are on the verge on being supported, and it wouldn’t be hard to start supporting Revert Finance, Delta One or Teahouse.

[BP333]

@TimeRows

It is not clear to me on the time frame of this incentive. How long would it take to run out of the ~1.4 million ARB in the current proposal?

That’s a good question, and certainly up to discussion.

Collectively around 1M OP tokens were distributed over 6 months on Optimism. Given the lower price of ARB compared to OP, 1.4M ARB distributed over a 6 month period seems like it could be sensible.

Taking another look at which pairs to incentivize, I would also include ARB / USDC as it has a fairly high volume to TVL ratio and likely would benefit from more liquidity.

[research]

Any snapshot link ? Temperature check ?

[BP333]

Right now we’re currently in the proposal phase. See this thread here: https://gov.uniswap.org/t/request-for-proposals-arb-distribution/21287?u=bp333

Tl;Dr - Uniswap received a 4.4M ARB distribution, and the Uniswap Foundation is requesting proposals until the end of the day today.

The proposal period should run for two weeks (till Wednesday, 7 June). At that point, proposals that have garnered community feedback should incorporate it in new Temperature Check posts in accordance with the approved governance process . Delegates with enough voting power are also encouraged to reach out and help proposals they support to launch Snapshot polls. The UF will also be available to help in this capacity.

[Damboy]

Great proposal! The plan to distribute liquidity incentives to selected pools on Uniswap (Arbitrum) using Angle Merkl is a fair and inclusive approach.

@BP333

Which pairs to incentivize?

Are there any specific criteria or factors that will be considered when computing the reward score for each LP position, such as the fees earned, preservation of liquidity for Token A and Token B, or other parameters?

[BP333]

There are a few considerations here. Going too high on the fees earned can potentially attract single-tick farmers who don’t maintain an even distribution of liquidity. Going too low on the fees will attract liquidity providers who provide wider positions, which doesn’t help Uniswap compete for volumes on DEX aggregators.

After speaking with the Angle team, a weighting of 50% fees / 25% token A / 25% token B seems to make the most sense. Dedicating 50% weight to fees will compensate narrower range LPs who have greater IL risk, but who are also doing more to attract volumes to Uniswap. Dedicating 50% of the weighting to maintaining allocations of both Token A and Token B will attract more long-term LPs and prevent short-term mercenary LPs who provide single-tick ranges.

[sogipec]

Also wanted to address the concerns of people considering Merkl as a “new” solution. While the system has only been used as a standalone product for more than 3 months now, it’s been the primary incentive solution for Angle protocol to incentivize agEUR pools since August 2022. $ millions of incentives have been streamed using the system.

In fact, the launch of the Merkl system coincided with:

• an increase in the efficiency of the incentives sent to the UniswapV3 pools with agEUR
• an increase in the utilization of these pools and more globally an increased in agEUR volume

Increased incentive efficiency

This dashboard shows data about the agEUR-USDC pool, its TVL and incentives sent to the pool.

If we look into the period between the 1st of September 2022 to the 23rd of January 2023, the $ amount of incentives sent to the pool decreased, while the TVL remained practically constant accounting for more efficient incentives.

Precisely speaking, between August to February, incentives decreased on average by 74% while TVL decreased by only 14%.
The same dynamic went for the agEUR-ETH pool on UniswapV3 (check out this dashboard).

Increased agEUR volume

Since the launch of Merkl, the concentration of liquidity on both agEUR-USDC and agEUR-ETH pools grew, with more concentrated liquidity positions around the spot price. Users swapping from or to agEUR faced less slippage, and this allowed the agEUR volume to grow substantially during the same period with respect to other similar Euro stablecoins (source).

In the period from September 2022 to February 2023, the agEUR market cap remained constant but the share of DEX stablecoin trades with € stablecoins involving agEUR moved from 59% to 75%, due notably to the effect of Merkl.

Going further, apart for some outliers in the data due to weeks with large activity (after notably the Luna crash), the weekly utilization of the pools using Merkl also increased after the launch of the system.

For the agEUR-USDC pool, it moved from an average of 90% prior to an average of 130% in March.

So all in all, Merkl is not a new system, it’s also a system that made its proofs when it comes to increasing volume on pools.

[kfx]

Great proposal that does not prioritize a single liquidity manager.

I have a question about the pools to be incentivized. The idea about selecting pools with partner co-incentives is clear. But who would decide which are the pairs important to the ecosystem? And would you also be open to using incentives to bootstrap liquidity in pools that aren’t yet established as important?

[BP333]

Thank you! The original goal was to leave that a bit open-ended in terms of pairs important to the ecosystem, but I do see the value in initially putting down some suggestions first.

I would allocate 60% of the rewards allocation to these important pairs:

1. WETH-USDC 0.05% (25% allocation) / WETH-USDT 0.05% (10% allocation) - These are the two major pairs in the ecosystem that will continually generate volumes due to the high usage of ETH for gas and USDC & USDT as stablecoins. While it does seem that Uniswap has quite a significant lead now with these routes, other DEX’s are introducing different concentrated liquidity models that likely would be competing heavily for these trade routes.

2. ARB-WETH (10% allocation) / ARB-USDC 0.05% (15% allocation) - These are major routes used by farmers, investors, governance advocates and others in the ecosystem. The ARB-USDC route with only $4.7M of liquidity is also generating $13.5M of volume (Dexscreener), so it likely can use more liquidity to support the volumes its producing.

For the remaining 40% of the reward allocation, I would allocate 15% each to Rocket Pool and Lido Finance pairs, and 10% to other partner pairs, so long as we have co-incentives for these routes as they are mutually beneficial routes and those partners are currently incentivizing liquidity on other DEX’s.

The other partner pairs which could be opportunistic are the following:

1. RDNT-ETH - The vast majority of this liquidity is in the 80/20 Balancer pool, which is full range liquidity. If Uniswap had more concentrated liquidity here, the vast majority of the volumes would go to Uniswap, especially when users are trading RDNT → WETH because the Balancer route has only 20% of WETH liquidity, likely resulting in high price impact. Radiant Capital may be willing to help co-incentivize this route because they are vulnerable in terms of sell-side price impact. Sells of RDNT will have disproportionately higher price impact due to the 80/20 nature of the Balancer, full-range pool.

2. MAGIC-WETH & DPX/WETH - The dominant routes here are the Sushi full-range liquidity pools. Some amount of concentrated liquidity here would soak up all the majority of volumes those pools are currently generating, and the Treasure/DOPEX teams may be willing to co-incentivize as incentivizing concentrated liquidity would lower their cost of incentives per dollar of incentive spent.

TL;DR -

WETH-USDC 0.05% - 25%
WETH-USDT 0.05% - 10%
WETH-ARB - 10%
ARB-USDC - 15%
Lido Pairs - 15%
Rocket Pool Pairs - 15%
Other Partner Pairs - 10%

[Valdorff]

Hi All,

I’m Val, the treasurer of Rocket Pool’s Incentives Management Committee.
Thank you @bp333 and Uniswap community for considering including RP as a significant part of this proposal.

So far, our spend for liquidity incentives on Arbitrum has been ~200 RPL/month.
We propose to add 600 RPL in co-incentives (100 RPL/month) in support of this proposal, which represents a 50% increase for our Arbitrum spend.
I also want to note that RP did not receive an ARB drop – this means this is a fresh injection of funds to the Arbitrum ecosystem, rather than funds initially issued by Arbitrum.

I’m very excited for this proposal to help provide deeper liquidity on Arbitrum, which can facilitate more Defi usage.
I’m also excited to see more projects using rETH as a base pair to increase the capital efficiency of their LM efforts – this is just barely beginning and has lots of room to grow.

Finally, I’d also like to hit upon a broader perspective.
I love that this proposal includes RP as a big portion. I do want to point folks at total staking market shares, statements of intent (RP, Lido), and Danny Ryan’s article on LSD risks. Every protocol on Ethereum relies on a healthy overall network; I hope to see protocols show their awareness of this and help move the needle as and when they can. Even a small “signal” from Uniswap would be valuable here imo (eg, 16% RP and 14% Lido).

[ivelin.eth]

I support this proposal as a Uni holder and RP node operator.

We need more creative ways to incentivize solo operators and stalkers to participate in ETH decentralization.

[Damboy]

Thanks For clarifying.

Will there be any ongoing monitoring or evaluation of the effectiveness and impact of the liquidity incentives, and are there any plans to make adjustments based on the results?

[BP333]

Great thanks for the input @Valdorff and great to have partners who are interested in co-incentivizing these pairs.

[BP333]

Yes, I think it would be astute to perform this in phases. We can do this at 4-weeks, 8-weeks, and 14-weeks. In the past LM campaigns on Optimism, the Uniswap Foundation similarly did a phased approach with insights from the community regarding effectiveness and impact of the liquidity incentives.

Uniswap Foundation

Each phase had voting for new pairs as well. We can replicate the same approach on Arbitrum.

[eek637]

Thanks for the thoughtful proposal. I love the collaborative nature; it seems like a natural evolution of the way the teams worked together on the OP liquidity mining program.

Having just read through the proposal, comments, and docs, I had a couple of questions that I think will be useful for the community to understand.

1. How do we choose pools to incentivize, and how do we know how much to incentivize each pool we choose? It seems like there are some heuristics that have guided the implementation of these types of programs so far, but it’s not clear to me that these following these heuristics has resulted in efficiently spending an incentive budget. A good case in point is the OP program, which to date has seen only a couple pools maintain sustained increases in tvl and volume. And for those pools, it’s possible that the amount spent on incentives was not appropriate (e.g. could we have spent less for the same results?). In general, I’d like to have a better idea that each ARB that we allocate to a program like this will result in lasting value to the DAO (though the definition of lasting value is admittedly a moving target in and of itself).

2. How should we think about which Liquidity Managers are included in the Merkel script? And what’s the process for adding / removing managers?

3. What does the governance vote look like to fund this program (e.g. what is the function call we’d be voting on)?

I also had a couple of questions about Angle specifically. First of all, I love that it grew out of trying to figure out how to incentivize agEUR, and that the team has been using it in production for that purpose. That said, I am hoping for more clarity on:

1. Audits for the Angle contracts - can you provide links?
2. Can you provide detail on any privileged roles in the contracts? I ask because there’s a line in the docs about reserving the right to re-claim incentives that have gone unclaimed, which implies that there’s an admin/owner.
3. Has there been any experimentation with regards to the algorithm (50% fees, 25% tokenA, 25% tokenB) and if yes, can you share the results? Additionally, can you elaborate on the thinking behind the tokenA and tokenB parameters? Instinctively, I think this probably measures “how good is the liquidity provider at rebalancing”, but I just want to confirm.
4. Really interesting dispute mechanism - wondering if you have any examples of this being used in the wild?

Thanks again to both the Gamma and Angle teams for putting this proposal together.