Temperature Check - Should Uniswap incentivize Liquidity on Optimism and Arbitrum?

Uniswap governance should start incentivizing liquidity on its Arbitrum and Optimism deployments to kickstart adoption of Ethereum Layer-2 and prove that its decision to bet on Optimistic Rollups was the right one.

It’s unfortunately a fact that the Ethereum mainnet has become unusable for normal users. As a result, many of the crypto newcomers trying DeFi for the first time are not being on-boarded on Ethereum anymore but on EVM chains like Fantom, Avalanche or other L1’s altogether such as Solana.

The adoption of Layer-2 networks thus far has been promising but too slow considering the competitive landscape.

Three main blockers exist:

  1. Missing Incentives
    Networks like Avalanche, Celo and Near are spending hundreds of millions of dollars to attract developers and users. Without a token, rollups can’t revert to the same strategy. On the other hand, a lot of the Ethereum native DeFi protocols sit on billion dollar treasuries that are waiting to be deployed for productive purposes.

  2. Missing fiat on-ramps

Without direct on-ramps onto Layer-2 networks users face high barriers before they can enjoy the benefits of these networks. These users have no other choice but to withdraw from a CEX to Ethereum to then bridge up from Ethereum to the promised land of Layer-2. On a day where fees on Ethereum mainnet are high, a user starting with $200 easily loses half of their portfolio.

  1. Slow application migration to Layer-2’s
    Perhaps the most surprising is how slow some protocols are to deploy on Layer-2’s. This can partly be attributed to composability effects, where applications relying on other protocols to exist need to wait on their partner protocol to deploy first (e.g Ribbon → Opyn, DeFi Saver → Aave etc.). But to a large extent applications seem to take their time because the growth statistics (volumes, tvl, unique users etc.) are simply not compelling enough.

This is a typical chicken-egg problem where every party involved stands still until the other moves. Users are waiting for subsidies and more applications to use, centralized exchanges and application developers on the other hand are waiting to see user adoption first to justify the integration efforts.

Uniswap is in a unique position to kickstart growth by launching a liquidity mining campaign on Layer-2. For one, it sits on a $11 billion dollar treasury (!!) that is currently being underutilized. Secondly, as one of the most essential money legos in the DeFi ecosystem the move would have a strong signalling power and trigger more applications to follow suit and invest resources into deploying on Layer-2. Third, the resulting liquidity and yields would set into motion a large-scale migration of users which in return has spillover effects on other factors (CEX on-ramps, devs deploying etc.) .

Per Uniswap governance guidelines this forum post is merely a temperature check. Details such as the amount of rewards or the length of the liquidity mining program are better left for the Consensus check. In order to move to the next stage, this proposal needs a majority yes with a min. threshold of 25k $UNI on Snapshot.

Link to snapshot: Snapshot

18 Likes

agree. I love it, L2 is the future

2 Likes

Absolutely in favor of this! Agree!

5 Likes

This seems like the perfect application of liquidity mining. Uniswap holders should be in favor of this and it puts the protocol in a better position to dominate L2 like it has with L1

3 Likes

I dont think its good use of the funds. The 11B treasury you are pointing to is largely a myth. A paper put out by Monet.supply and UCC.Hasu show just how much “11B is worth”. Its not even 1B…more like 150-200M USD which would get distressed even more if a liquidity campaign would ensue.

Liquidity mining is a great way to bootstrap liquidity onto a freshly launched project, but it proves to be quite parasitic in the long run. I´d say there is a better path to take than liquidity mining such as OlympusDAO has implemented. The problem with liquidity mining is that it leaves a negative footprint once it ends. Liquidity is loyal only to the person who pays. Why should UNI token holders bear this burden? What do they get in return besides the fact that they will get utterly dilluted?

The real problem for L2s is like you outlined in your point - fiat-on ramps. As long as the big CEXs do not adopt L2s, nothing is truly going to change. Liquidity mining will just burn through the UNI holders´ value.

Also, I think this is a duplicate thread. This was discussed in the past already…but I think it was for a migration from V2 to V3.

4 Likes

I strongly support this proposal. Uniswap has been very careful with choosing what chains to deploy on, opting to only deploy to chains that are “ideologically aligned” with the Ethereum ecosystem. So far, this has only been Arbitrum and Optimism.

Both Arbitrum and Optimism don’t have native tokens, and must therefore rely on the application layer to incentivize adoption. Uniswap is definitely the best positioned project to provide this incentivization given that it a) has the largest market cap of any DeFi project and b) has a massive treasury.

This chart from Avalanche - CryptoFees.info shows the total fee revenue on Avalanche, with the purple dot representing the start of their liquidity mining campaign. Liquidity mining is an incredibly powerful tool to bootstrap a network.

Responding to some of @Buckerino’s points:

I´d say there is a better path to take than liquidity mining such as OlympusDAO has implemented

OlympusDAO has definitely pioneered a great alternative to standard liquidity mining. It would be very interesting for Uniswap to consider bonded purchases of UNI/ETH LP tokens into the Uniswap treasury.

As long as the big CEXs do not adopt L2s, nothing is truly going to change

This may be a bit of a chicken-and-egg problem, CEXs don’t support L2s since they don’t have users, and users aren’t on L2s because there’s insufficient CEXs. A liquidity mining campaign is at least a worthwhile experiment to stir up some noise around Ethereum L2s.


One final thought I’ll add: AMMs like Uniswap truly succeed with long-tail assets. It may be worth waiting for Arbitrum and Optimism to fully remove the whitelists from their token bridges before incentivizing adoption of L2s.

4 Likes

I still dont see a reason why the UNI holders should subsidize it for everyone else. What do the token holders get in return?

The performance of the protocol has not been in alingment for quite some time with the performance of the token. It has been proven that the liquidity will not stay once the incentives run out.

Discounted OlympusDAO bonds provide a better alternative where the UNI holders providing the liquidity incentive do not get stiffed. I do not see any reason why this would not be a better alternative.

I think there is a general misconception of what the UNI treasury is capable of doing. Whilst I do agree that not every subsidy has to have a ROI attached to it (UGP, DeFi Fund), this one certainly would need to have it. We are talking about 10Ms worth of USD in subsidies for the success of unaffiliated companies with effectively nothing in return for the people who are supposed to foot the bill.

Effectively, the Uniswap treasury is only worth as much as the liquidity on the market allows it to be. Currently, any argument saying the treasury is worth more than 180-200M USD is absolutely absurd and imaginary to say the least. Proposing to cut double digit value out of it for vague benefits is outright provocative/taunting at best.

2 Likes

I support this proposal.

I would also support an amended proposal that introduces LP token bonding pioneered by OHM. With this amendment, Uniswap the protocol profits directly from incentivizing liquidity, while at the same time pushing rollup adoption, which in the long run helps build further network effects for Uniswap.

2 Likes

I am in full support of this proposal. I see this as a win-win for both L2 adoption, and Uniswap being seen a portal to this ecosystem. I am keen to see how the liquidity mining would be structured.

In response to @Buckerino:

I still dont see a reason why the UNI holders should subsidize it for everyone else. What do the token holders get in return?

As we have seen governance has not had much participation. Having a liquidity mining program is a great way to also get new users engaged with Uniswap through another avenue of distributing out the token into new paricipants. Yes, some may sell, but other’s will see the value in uniswap and the onboared ecosystem to become more involved. The sushiswap, and olympusdao forums have active dialogues in governance forums, while also having distribution model of tokens into the market.

Discounted OlympusDAO bonds provide a better alternative where the UNI holders providing the liquidity incentive do not get stiffed. I do not see any reason why this would not be a better alternative.

I also think the OlympusDAO model of liquidity distribution through bonds is a good idea. It also makes sense with uniswap TWAP’s to allow more security of oracle pricing through stable liquidity. I am unsure if this the avenue for this particular proposal, or a seperate one.

4 Likes

Doing a liquidity mining campaign instead of OlympusDAO liquidity model represents inefficiencies which are going to be exploited. Inefficiencies worth millions of dollars. Why waste resources? It does not make sense to throw money out of the window if better options are on the table.

Regarding your point on governance not having much participation, UNI actually had liquidity mining campaign a year ago. It did not revive the governance part of the token, did it? All it did was provide temporary boost whilst sucking out value from the token holders and then left.

This would be the exact same result. UNI holders would lose value and get little in return.

1 Like

I dont see the liquidity mining that was provided during that time as equivelant to this one. The first mining program was more of a reaction to sushiswap’s mining program. Yes, many sold UNI. I do think we had more engagement at the time in the forums; as UNI had just been launched.

I see this program as being proactive, and a way to educate and incentivize new users to the L2 ecosystem (while also reimburse cost of trying L2 ecosystem) VS the old reactive liquidity mining that incentivized established users who moved around to different farming to just sell.

I am in support of this temperature check, and it will be good to see how the liqudity program is actually structured (I would be on board with a bonding progam as well if that seems to make more sense). It is better to be in a position of setting the tone on onboarding new users, rather than to be on the heels of another protocol.

1 Like

All 3 instances of the Uniswap protocol sit in areas that are expensive/hard to reach for the masses.

We know that L1 has no chance of becoming affordable and will likely only get more expensive as time goes on. Which should make the Arbitrum/Optimism instances our primary focus.

Just because this move benefits other teams as well doesn’t mean we shouldn’t go ahead with it. Uniswap has already benefited from both of the rollup projects and will continue to benefit from their success.

3 Likes

Looks like this did not pass the temperature check stage as it was voted down by @BOR4 with over 200k delegated.

I dont understand why large delegates are not active in the forums; and why specific “yes” or “no” position’s are not publically published for community understanding and dialogue. I am quite dissappointed as many smaller individual holding community members voted “yes”, and I see this is an important proposal; or at the very least allowed this proposal to the next stage to see how a L2 liquidity program would have been structured.

Would have welcomed you commenting on the proposal before unilaterally blocking it @BOR4

1 Like

Since the snapshot, " Should Uniswap incentivize Liquidity on Optimism and Arbitrum?" ended up with the, “No” choice gathering the majority of the votes, the motion is considered closed.

I will leave the thread running for another couple of days for people to openly state their opinions and then proceed to lock it afterwards.

It looks like we missed this vote, but we are in favor of the proposal and we have 5 million votes.

3 Likes

for me incentivising L2 usage makes sense, but one concern would be, the stage of current l2 solutions, both OE and Arbitrum are in betas right now. so I would probably wait but don’t think it should stop us discussing strategies and outlining specs for incentivisation programs

Well, this represents a conundrum: on one side, nobody can really stop anybody from making a second temperature check.

However, the question stands whether this would set a good precedent. It would be preferrable to avoid making it look like, “We will vote as many times as we want to get the result we want.” type of thing. Hypothetically, another set of delegates could come after the second temperature check saying they missed that one and would have voted against it. I think having one binding temperature check on an issue should be enough to avoid this situation. Also, it should be said I am talking from a biased position since Im not in favor of the proposal.

So, of course, I will leave it up to your judgement to decide, but I do believe this is the basic principle for voting which should not be violated to preserve order.

It is justified to move to the consensus check stage. This will allow a more layed out plan on mining pairs, and how Hop Protocol see’s a program unfolding.

Reasons why this should move to a consensus check stage:

  1. The number of token holder’s voting with smaller amounts of UNI voted by large for this to pass to next stage.

  2. The voting period was very short at ~2 days.

  3. UCLA blockchain is signaling support (after voting had closed) with 5 million.

  4. @BOR4 who has <4 very large delegated UNI. Voted down the proposal right before vote closed, and did not engage in proposal dialogue or give reasoning on behalf of delgated votes.

Instead of repeating a temperature check, and to allow more information to be unveiled on how such a program would be released a consensus check makes more sense.

I also encourage the proposer to check out sybil.org and inform large delegate’s via twitter about a consensus check and to at the very least to get involved in the discussion (on behalf of those who have entrusted UNI votes to their engagement).

I looked at the data from the original liquidity mining, which has discouraged other mining proposals. I believe there is a misconception that the original liquidity mining had no benefit.

Supporting documentation:

In the above chart, we can see that volume had tapered down after the large volumes of 2020 Defi Summer.

The liquidity mining program was launched on September 18th 2020 and ended November 17th 2020 (indicated by the liquidity mining arrow, and the end date by the new settling point)

The key improvement lines are:

Purple Line: eth-wbtc
Orange Line: eth-dai

September 16th (2 days before liquidity mining):

eth-wbtc: 17,793,554.0260
eth-dai:31,953,224.9506

November 18th (new settling point):

eth-wbtc: 206,514,310.6676
eth-dai: 176,986,579.1124

Post liquidity mining (new long time floor):

eth-wbtc: 206,514,310.6676/17,793,554.0260= 11.6x increase in liquidity TVL

eth-dai: 176,986,579.1124/31,953,224.9506= 5.54x increase in liquidity TVL

Sources: