[RFC] - Gauntlet - Dynamic Incentive Optimization for Uniswap V3 on Arbitrum

[Gauntlet]

Summary

A proposal for Gauntlet to instantiate and dynamically optimize a liquidity mining program on Arbitrum using a portion of Uniswap’s $ARB airdrop. Gauntlet is requesting that 2M ARB be allocated to running and operating this 8-month incentive campaign.

Background

Over the past couple of years, Gauntlet has worked with both decentralized exchanges as well as L2s to optimize incentive spend and allocations based on trading volume elasticity. We’ve built an optimization engine that ingests both on and off-chain data, models elasticity, generates budget/spend recommendations, and continuously monitors performance via a statistical PID controller.

Gauntlet has published research and analysis specifically related to optimizing incentive campaigns for Uniswap V3. In April, we published a Quantitative Evaluation Framework to enable universal evaluation of any incentive programs run on Uniswap. We also recently published a detailed analysis of the liquidity mining experiments on Optimism. We are finalizing and will soon post a comprehensive trader/LP elasticity analysis, among other related research and analysis we are currently conducting.

Additionally, some of our current/past work includes:

• Immutable - Re-designing and managing IMX’s trading rewards program
• Sushi - Increased liquidity mining efficiency 5x
• Balancer - Doubled LP revenue
• ApeSwap - Provided savings of $742k ($2.3M annualized)
• Ref Finance - Budget and incentive optimization

Proposal

In April 2023, Gauntlet developed a Quantitative Evaluation Framework to enable the aforementioned universal evaluation of any incentives program that Uniswap intends to run. Through this, the target metrics with regard to the net benefit of any incentives campaign can be defined as:

Goals

• Optimize Incentive Budget and Allocations. The benefits of an incentive program should outweigh its cost. In the case of Uniswap, the primary cost is the token budget set aside for distribution. Gauntlet aims to set optimal budgets and allocate incentives to LPs based on the value they contribute. By incentivizing LPs to bring and maintain meaningful liquidity and volume, we look to operate an incentive program that creates value for all stakeholders.
• Drive Network Effects. Implementing a well-designed incentive program will attract LPs and encourage deeper liquidity pools, attracting volume. This will help Uniswap bolster its market competitiveness among both users and exchange routers. Enhancing this can lead to a flywheel effect of liquidity, trading volume, and platform growth.
• Generate Sustainable Growth. A successful incentive program should incentivize LPs who continue to provide liquidity and contribute to Uniswap’s growth and utility. With this strategic goal in mind, Gauntlet approaches our work for Uniswap with the view of supporting growth beyond the immediate time frame of the incentive program.

Methodology

• Ingest Uniswap V3 DEX data on Arbitrum into Gauntlet’s platform
• Develop and customize incentive optimization elasticity models
• Continuously refit, update assumptions, and analyze model outputs
• Provide weekly incentive recommendations

As an example, to better understand trading dynamics and volume elasticities within Uniswap, we use a combination of simulation, address tagging, and price analysis to classify arbitrage trading to separate retail volume from volume originating from bots:

Here is another view showing potential misrouted volume based on simulating slippage incurred per swap for a few major Uniswap pools against competing exchanges for the USDT/WETH pool:

Expectations

• Incentive and Total Budget Optimization Updates
  • Coverage of Uniswap’s native pools (current and future)
  • Supported Parameters: incentive budget, allocation points per pool
  • Ad-hoc analyses to understand tradeoffs between growth and profitability
• Communications
  • Gauntlet will share methodology details with the Uniswap community along with weekly incentive recommendations
  • Gauntlet will perform a mid-point and final retrospective impact analysis on the program
    • Results to be shared in the forum
• Out of Scope
  • Protocol development work (e.g. solidity changes that improve risk/reward)
  • Formalized mechanism design outside of the supported parameters

Dashboard

As part of this engagement, Gauntlet will build a dashboard (example below) to provide key insights into incentive optimization, with the key metric being the lift in the long-term net present value of cash flows to Uniswap on Arbitrum net of the incentive spend required to enable this cash flow.

Cost

Gauntlet charges a service fee that seeks to be commensurate with the value we add to protocols.

Fixed Fee:

• $300K USD, denominated in $ARB

Term:

• Gauntlet will instantiate and dynamically optimize this program for 8 months
• Start date for instantiation is based on when a governance proposal is passed

Payment Method:

• Denominated in $ARB at 30d VWAP.
• This fee will be paid via a Sablier stream with a 8-month linear vesting period, to begin streaming when a governance proposal is passed

Next Steps

Please share any comments or feedback below.

About Gauntlet

Gauntlet is a simulation platform for market risk management and incentive optimization. Some of our prior work includes optimization work for Aave, Compound, Immutable, Sushi, ApeSwap, Ref Finance, MakerDAO, and Synthetix.

By approving this proposal, you agree that any services provided by Gauntlet shall be governed by the terms of service available at gauntlet.network/tos.

[BristolBlockchain]

Thank you for the time and effort you put into this proposal. The idea of incentivizing Uniswap pools with the use of a “Quantitative Evaluation Framework”, data pipelines, and simulations looks promising!

We would like to ask a few more questions, this will help us make an informed assessment of your proposal.

1. Detailed Allocation Plan : The proposal request half of the allocation (~$2m), could you provide a more detailed breakdown of how the tokens will be allocated each month? For example, can you approximate how many pools you will cover, will you rotate it every month or choose it from some criteria? What are control measures to prevent potential abuse of the incentives?
2. Performance Evaluation Metrics : Based on your key goals, 1) Optimize Incentive Budget and Allocations, 2) Drive Network Effects, and 3) Generating Sustainable Growth, could you specify the key performance indicators/metrics you will use for these areas? How will this proposal continue to add value to Uniswap’s ecosystem after the program ends? Additionally, will there be any negative impacts if the incentives were to suddenly stop?
3. Timeline and Milestones : Could you clarify the milestones and timeline for this program?
4. The total cost is: 1) fixed operation cost of $300k in ARB and the incentive ARB (~ $1.7m) or 2) $300k and ~$2m?

These questions will help the community to better understand your proposal. We look forward to your response!

[TimeRows]

Dashboard Questions:

• Has a similar dashboard been created for other projects i.e. balancer, sushi etc.? Or is this custom built from bottom to top with this proposal in mind?

• Will the created dashboard be openly accessible to visitors/users or will it require login/gated access?

Key Metric Question:

“The key metric being the lift in the long-term net present value of cash flows to Uniswap on Arbitrum net of the incentive spend required to enable this cash flow”.

• By cash flows to Uniswap this means the fee’s generated to Liquidity Providers net of IL?

• Is there a calculation behind comparing an increase of long-term present value to the incentive spent to enable this cash flow?

Incentive-cost breakdown questions:

• Gauntlet is asking for 2million ARB to run and operate an 8-month incentive campaign. To clarify this 2 million arb is to be used for incentive pools, or is it just for the infographic dashboard to be developed as a tool to provide insight for future incentive campaigns?

• Is the 300k USD denominated in ARB for the dashboard?

• Not quite sure the full scope here on what the ARB is going towards. What ARB is for incentives of identified pools vs the cost purely for creation of the dashboard.

[Gauntlet]

Thanks for your questions, @BristolBlockchain

1. Detailed Allocation Plan

We take a quantitative approach to determining which pools should be incentivized. We use a simulation that predicts the changes in a pool’s liquidity and volume market share across competing DEXes for a given level of incentive spend. Our active management would optimize the choice of pools and incentives for each pool to maximize net protocol benefit as determined by the Uniswap Objective Function. We will integrate Uniswap V3’s Arbitrum deployment into our incentive recommendation engine, resulting in pool recommendations. Integration and analysis ensure the pools selected offer the most ROI for the incentive program.

Using a fixed distribution plan over the 8-month campaign would be suboptimal. As we’ve done for other partners, we will actively manage and dynamically update both the overall incentive budget as well as allocations. This will be done on a weekly basis. In addition to providing incentive recommendations, Gauntlet will proactively monitor the impact and usage of the incentives program via internal real-time alerting to identify and mitigate unintended use or abuse.

2. Performance Evaluation Metrics

The KPIs based on our outlined goals primarily focus on potential protocol revenue. Although the fee switch has yet to be activated, focusing on monetization should be the long-term north star of any campaign like this. However, in the interim, we will focus on what’s tangible/achievable, such as additional LP fee generation, additional volume, and growing overall TVL. We will benchmark the program from Day 0 to the conclusion of the campaign and share the results both through our mid-point analysis as well as our final retroactive impact analysis.

As we’ve identified in our recent LM Analysis, when proper bootstrapping/incentivization occurs, it has positive effects on the pools long term (liquidity and volume), even after incentives are deprecated. Our goal is to identify, attract, and retain “sticky” liquidity during this program so that the positive effects of running this incentive campaign continue beyond it. There will always be certain LPs that withdraw liquidity once they stop earning incentives. Our program seeks to mitigate this, and we will note in our final retroactive impact analysis the projected impact on incentivized pools after this campaign has ended.

3. Timelines and Milestones

Our total ask is 2M ARB. 1.7M ARB will be spent on incentives during this 8-month campaign, and 300K ARB (from the overall 2M) will fund a dedicated team focused on instantiation (including pre-launch analysis), active management of incentive allocations (weekly updates), the external facing dashboard, and the aforementioned mid-point and final retroactive impact analyses.

Our timeline is somewhat dependent on the approved governance proposal. However, here’s an illustrative timeline, including milestones, to provide further insight:

[Gauntlet]

Thanks for your questions, @TimeRows

Dashboard Questions

We’ve created dashboards for our past and current engagements - they are for internal-use at our partners’ request. For Uniswap, we will build a bespoke, external-facing dashboard focused on the metrics we’ve outlined, such as changes to TVL and volume market share on relevant Arbitrum pools and the net benefit (described below) created through this program. This will be hosted and maintained by us and globally accessible via our Dashboards page on our website.

Key Metrics Question

In our objective function optimization post we used the following objective function for Uniswap that we intend to use to optimize on Arbitrum:

Where we measure the net benefit from an incentives program as the change in the net present value of future expected protocol revenue (PV) as well as the exogenous value of governance related to increased volume and liquidity market share (G) minus the cost to run the program (Cost). To be conservative, Gauntlet will only consider the value of future expected protocol revenue from this program and ignore the governance value (thus setting a lower bound on net benefits from this program) against incentive spend cost.

Copied from our above response for further clarification: Although the fee switch has yet to be activated, focusing on monetization should be the long-term north star of any campaign like this. However, in the interim, we will focus on what’s tangible/achievable, such as additional LP fee generation, additional volume, and growing overall TVL. We will benchmark the program from Day 0 to the conclusion of the campaign and share the results both through our mid-point analysis as well as our final retroactive impact analysis.

Incentive-cost Breakdown Question

This is a similar question to @BristolBlockchain’s question above. To reiterate, our total ask is for 2M ARB. 1.7M ARB will be spent on incentives during this 8-month campaign, and 300K ARB (from the overall 2M) will fund a dedicated team focused on instantiation (including pre-launch analysis), active management of incentive allocations (weekly updates), the external facing dashboard, and the aforementioned mid-point and final retroactive impact analyses.

[0xkeyrock.eth]

We fully support this proposal. Very detailed, with the scope organised and Gaunlet’s track record is publicly known. We support data-driven decision making such as Gaunlet’s and believe this can be the most optimised LM campaign that can be also adjusted due to Gaunlet’s weekly reviews if needed.

[kfx]

This seems to nicely complement the Gamma and Angle proposal. That one is strong on the liquidity incentive distribution and partner co-incentive ideas, but could benefit from a more data-driven and methodical approach on the incentive allocation side, which is your strong point.

Is the fixed fee of $300k a non-negotiable part of the proposal? The value created for the Uniswap community through the optimizations in liquidity mining should exceed this sum.

[Gauntlet]

Gauntlet appreciates the community’s active participation and support throughout this liquidity mining campaign. As we reach the midway point, it’s a great time to share an update on the program’s progress.

This week, we published our midpoint retrospective, where we delve into the program’s key performance indicators for incentivized pools and explore potential modeling enhancements for future iterations of liquidity mining - specifically incorporating our recent on-chain simulation tools. We encourage everyone to read through the full retrospective for a comprehensive analysis found here, or the TLDR tweet released here.

Additionally, we invite you to continue to check on the public Arbitrum Liquidity Mining Dashboard. Here, you can find detailed, daily updates on the performance of each pool, enabling you to stay informed on the latest trends and data.

Thank you once again for your commitment to our community. We look forward to the program’s next half and gathering more concrete insights to inform future planning and growth.

[zzeng94]

Is there information on how those incentives are distributed? For example, how many participants claimed the rewards etc. Do not seem to find that information in the public dashboard.