Temperature Check: Larger Grant Program Construct // Community-Enabled Analytics + No Negative Net UNI

Temperature Check
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Problem

Uniswap’s Treasury Grant program [and the majority of protocols] are currently at a major crossroads, struggling with how to deploy larger tranches of capital with effective oversight.

Smaller grant programs have been successful at distributing funds broadly, and remain nimble with a small committee, but are designed to develop pilots or support localized offerings [See Uniswap Grant Program v1], while larger requests often become mired in controversy related to how the grant will be distributed or applied [See Harvard Law / Political Defense Grant Proposal].

With a significant treasury, it is in the DAO’s best interest to define and deliver on a model that activates more substantial grants appropriately while maintaining decentralized protocol management.

Products like Failsafe and the use of Multisig wallets are important to help manage funds, retain oversight and mitigate risk; For Uniswap to continue to develop major grant initiatives, it’s critical to begin designing a structure that enables the program to focus on ROI vs. how the funds will be managed.

Solution: No Negative Net UNI / Yield Fuels Program

Recipients of grant requests exceeding $20M should be required to maintain a minimum percentage of granted UNI within the protocol - and to utilize Uniswap’s own value creation mechanisms to generate yield to support their initiative.

In a perfect scenario, grants should enable programs with a clear plan to maintain the initial net capital - or ensure no Negative Net UNI.

To enable this to be effective, Grant recipients would define a program that deploys Uniswap grants within the Uniswap ecosystem, with defined outcomes for producing yield, monitoring solutions and a governance process.

Proposal: Flipside Community-Enabled Analytics

Flipside requests a $25M Grant to produce Community-Enabled Analytics [CEA] for Uniswap.

The $25M wouldn’t be spent.

Rather, we propose using Uniswap’s own profit-creation mechanisms to take UNI out of the hands of those selling it, and put it directly into the hands of those building and using the protocol. This not only leads to timely, perpetual analytics and tools, but directly rewards analysts and users who spend their time understanding and working on Uniswap.

flipside_CEA_July2021
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Currently, crypto analyst time is spread too thin across too many protocols - and the incentive to produce their best outcomes is not oriented toward pro-bono efforts for a DAO or protocol. CEA bounties solve this, attracting best-in-class analysts to deliver DAO and community-sourced analytics, on-time and on-demand.

As an example, In April 2021, Flipside was provided a Uniswap Pilot Program grant of $25k, which produced the Uniswap V3 Calculator - driving user growth and activity for Uniswap - among other analytics. [in 3 weeks there have been 1100 clicks to Uniswap, 8.9k unique users,13.8k sessions]

Flipside offers CEA for Ethereum projects such as Alchemix, Compound and AAVE, and additional chains such as Terra and Thorchain. Flipside began as a fund in early 2017 and thus has sophisticated treasury management and yield systems already defined.

The yield from $25M would generate a target of $300K in bounties per month to community members. Directed effectively, bounties will drive perpetual production of innovative solutions to support the Uniswap ecosystem (including analytics to support continued treasury management). The remaining 50% yield serves as flipside’s fee, covering data management, analytics sourcing, bounty aggregation, evaluation, delivery, program measurement and all other mechanics. Note that there will be a tax implication for this grant, which will be the responsibility of the grantee.

Finally, the bounties continue to fuel overall ecosystem growth through measurable returns. Program historicals include 50%+ of bounty payments remaining in the native protocol token (HODL; Stake) — and acquisition of new ecosystem participants averaging 22%. See Native Token Recycling for more on how this works.

Here is a proposed strategy that uses only Uniswap-V3 liquidity as the means of yield generation:

  • 100% of the grant will be deposited into the WETH-UNI .3% pool, which will be actively managed to an 80%-20% UNI:ETH ratio.

  • In simulations, if an 80:20 ratio is maintained each time we rebalance our position, the impact to UNI would be net 0 within 1 year. These simulations conservatively estimate a yield of 30% from this position.

  • Yield management and bounty distributions will be reported via a regularly updating dashboard - and Flipside will disclose to the wallet address used to manage the liquidity for WETH-UNI.

  • A Foundation will be established for effective oversight of the funds, which will be granted indefinitely. The Foundation will evaluate the best use of the funds for the ecosystem; in the event this program isn’t deemed effective, the Foundation may decide to apply the grant to other projects.

Note that many other possible strategies exist, but this is a straightforward one that uses V3’s unique properties to generate capital, while mitigating, and eventually eliminating the position’s negative impact to UNI. Much debate can and should be had over the specifics of this strategy, and additional considerations include using a Maker vault or Compound position to borrow against the grant to avoid selling any UNI, for instance. It is of course impossible to predict price, but especially because we are actively managing the position, and converting all rewards into UNI, this strategy should generate more buy than sell pressure over time.

More details on asset management, yield strategy, tax efficiency and CEA delivery to be provided as the proposal process continues.

Should this be enticing to the community, we will bring forward a snap poll related to the ask for the $25M grant, within 5 days.

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This proposal seems poorly designed.

Community-Enabled Analytics are a cool idea, and increased incentives for analysts and data-driven users are a good idea.

That said, the incentives here are poorly aligned - Flipside is essentially asking for a $25m, interest-free loan to operate a proprietary hedge fund from which they take 0/50 fees.

Aside from the incentive structure, from the website Flipside Crypto seems like a data company, so I’m not sure why they are the best entity to operate an actively managed strategy.

Speaking more broadly - Uniswap should of course look to earn yield from its treasury, but it’s not clear to me why active management at this point is required. There are ample opportunities to earn yield passively or through various toolings.

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Yea, I echo what Holistic said + this proposal would be rendered ineffective if the fee switch turns on and the treasury would generate income which would be substantially more than 300k so.

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Thanks for the feedback @holistic_shepard and @buckerino - great points raised.

  1. On the fee switch → valid concern, but this is purposefully not about the treasury earning yield – it’s about a mechanism where the treasury avoids selling UNI to fund a program, and instead deploys a chunk of tokens that will be managed to fund a program with yield (so whether the fee switch turns on or not is moot). Ultimately, our goal is to create a sustainable, continuous way to redistribute UNI to motivated, aligned members of the community - incentivizing them to produce analytics and solutions that drive protocol usage - not to create revenue for the treasury.

  2. On clarifying our broader model → the main idea here is that the scale of a perpetual yield stream would enable us to reward the best builders and analysts in the space to focus their time on building useful, meaningful tools, and analytics for Uniswap – don’t want to lose that thread as we dig into the finer points of how the grant would be managed.

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Could you elaborate on the passive yield strategies for UNI? Are you referring to switching on fees?

I’m also pro-analytics. Especially if they come from the community. I really like the yield tool linked by Flipside. It looks to be built internally, but enabling community built tools like this could be really exciting and lead to more informed decisions.

I see the benefit of an “endowment” here vs. a continually funded program, but entrusting this large amount to be well managed without any clear recourse is a risk.

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Appreciate it, @welldone – we’re excited about the potential here too.

Flipside actually began as a registered fund, and we currently manage a significant balance sheet of crypto assets with both passive and active strategies across 11 different protocols on 4 different chains. We use a variety of above industry-standard custody solutions including: multi-sigs, secure hardware wallets, and independent entities to ensure that our funds are secure.

Our assets themselves reside in a Cayman entity that is established independently of Flipside Crypto Inc. So we may be known as a data company (and that is and should be the main thrust of this proposal), but we also have an established track record of competent asset management.

For this CEA program, the foundation we proposed will have oversight over the investment strategies and solutions used.

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Thanks for the proposal! Some comments:

Positive

  • I like the idea of creating perpetual income streams backed by productive use of treasury funds
  • I think these income streams can do an excellent job of motivating and incentivizing analysts and researchers to produce quality content that brings value to the Uniswap community

Uncertain

  • This proposal conflates treasury management with allocation of funds. Although Flipside’s quantitive chops might make this a non-issue, I think it’s worth discussing how to handle this scenario more broadly, as not all grant recipients will be able to self-manage capital productively.
  • Earning yield through market making could have the following effects:
  1. deepens order books, making it harder for UNI price to rise,
  2. downward UNI price movement could be exacerbated by rebalances. increasing sell pressure
  3. cannibalizes fee income earned by other LPs
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By passive strategies, I mean simply lending them out on other platforms, or turning on fees and lending those tokens out. I’m not in favor of turning on fees at this point, but it’s not unreasonable to use a portion of treasury UNI to earn yield. One simple option is to be an LP on v3, or just lend them out on a yield platform like Compound or Aave.

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Thanks @willprice - great feedback.

A few thoughts:

  • It’s important to recognize that every grant has some form of risk. For example, funding a service that fails to deliver on its outlined objective is a relatively simple risk. In this case, the risk is more complex and relates to managing funds responsibly to deliver the service outcomes. We would make the argument that Flipside has a long history in treasury management and certainly in analytics. Our efforts here will also help shape how these strategies can be applied to additional use cases.

  • These are keen observations around the effects that market making strategies can have on UNI price and LPs - we’ve debated them internally as well. In fact, our sustainable yield-based approach to program funding was inspired by an attempt to avoid the downward selling pressure inherent in straight grants (where we’d have to directly sell UNI to fund the program). Effectively, the most important question to assess is whether the program will produce a significant net-positive impact on the Uniswap ecosystem.

  • As such, the net-benefits here are all extremely significant for Uniswap: 1) analytics solutions that drive significant network usage and liquidity, 2) UNI perpetually allocated to participants helping build the ecosystem, and 3) new paradigms for treasury management.

*An important footnote to the discussion on this: It’s essential that the ecosystem continue to evolve and experiment in finding new frameworks that deliver results. Proposals will inevitably face a plethora of competing perspectives, and the requirement to solve for each point of view makes it difficult to foster the ethos of finding evolutionary opportunities (i.e. perfect is the enemy of good). Ultimately, our goal here is to develop programs that yield significant net-benefits for the Uniswap ecosystem, while sufficiently balancing & aligning differing perspectives.

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We’ve appreciated all of the input, are listening - and will be making updates as we progress.

The Temperature Check snap poll is now live with voting from June 22nd at 18:45pm UTC through Friday June 25th at 18:45pm UTC

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Hi all, our proposal has passed Temperature Check. Very much appreciate all the responses and voter participation thus far.

We are currently reviewing feedback & formulating responses for our Consensus Check - and will be back post US holiday break for this next phase.

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