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

Temperature Check
21

Well, you just proved my point - Liquidity mining is awesome until it lasts. When it ends, it is bye bye liquidity. Liquidity is not loyal. The origin of the “new liquidity” you indicated is questionable to say the least. There is simply no supporting argument saying that the cost of a liquidity mining campaign supports liquidity in the long run. The majority of liquidity goes away and the costs are huge. This liquidity blip you indicated was attained at the cost of having the mcap of the UNI token halve - 350M USD in marketcap lost + additional inflation of the coin which is never going to reverse. Is it worth it? In my eyes, absolutely not. If we were to do this same liquidity mining campaign today on the same scale, the token would lose vast majority (90 % btw) of its value. How is it fair to the token holders? Like I´ve said before, there is absolutely no reason to do it in this fashion instead of OlympusDAO model. At least there its proven the liquidity will stay so why are we even talking about it? Why would we pursue a less efficient model? Why would we want to make the token holders lose value when they dont have to? Is there some kind of a fetish that the token holders´ value must go down?

Also, I´d kindly ask you to refrain from saying that it is justified to go to consensus check. Unfortunately, this is the way the governance works and it does not matter how many smaller wallets voted for it. More votes = more influence on the vote.

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can you contact me on Telegram @litocoen :slight_smile:

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Absolutely in favor of this! Agree!(1)

24

I will definitely re-submit this vote as it was literally ambushed by a single voter last minute.

There is overwhelming support for it both on social media and privately.

I will re-submit on Monday and accept the outcome of that vote no matter what.

2 Likes
25

we would like to join uniswap

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Points to consider (from this forum thread) to be addressed in a new proposal temperature check:

  • Is it possible to have a mining program that involves an OlympusDAO structure for L2?

  • Considering the large cost of the last mining program in retrospect; can a new mining program be cost effective? I.e. providing enough mining rewards
    to small bonders to cover L1>L2/gas subsidies, but not large whales? Bond limits (i.e. large whales would hassled to splinter funds accross many bonds)?

  • How does liquidity mining contribute as a bootstrapping tool for unfamilar enviroments to new users?

  • What pair’s would be worth while for liquidity mining at this time, and why?

1 Like
27

We all support this proposal

28

We strongly support this proposal. At present, arbitrum and optimization have two problems to continue to solve:

  1. The liquidity of mainstream defi token exchange is very poor, and we need to bear a very large sliding point. Moreover, many eth resident assets have not been introduced into arbitrum and optimization. At present, whether uni or arbitrum, optimization needs to encourage the transfer of assets to L2 through tokens.

  2. At present, many DEX (OK, binance) have opened Multi Chain recharge (sol, Tron, BSC, matic, algo). Now you need to contact DEX to support arbitrum and optimization recharge.

29

It is precisely because liquidity mining has detonated the market. After mining is cancelled, the reduced stock capital is also far greater than that before liquidity mining. We need to quickly enter L2!

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We will include this Temperature Check on our community call Wednesday November 17th 16:00 EST on the agenda. Come on join the discussion in the official Uniswap Discord!

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This is midnight in my timezone and too short term for me unfortunately.

Would have loved to discuss this.

32

Just wanted to say, in principle I’m in favor of offering liquidity incentives on Arbitrum and Optimism. I think incentivizing top pools (maybe just stablecoin/ETH pools or a select few others) for a short period will help cement Uniswap v3 as the preeminent DEX and liquidity schelling point for L2. And if Uniswap can support better L2 liquidity and trading experience, this will help onboard more small size users who are currently forced to use alternative DEX platforms on sidechains.

Incentivizing liquidity on v3 pools is somewhat complicated - giving yield only to LPs that are within the active tick can have negative side effects (see Ribbon finance for example: https://twitter.com/freddycoen/status/1460919501428559879?s=20). So maybe it would be better to incentivize wider ranges or get creative on exactly how rewards are calculated. Also think it could be productive to work with automation services like Gelato to offer better LP UX on L2 before we offer incentives.

33

Glad to see you chime in Monet and I agree on all points!

Re: which pairs to incentivize, I was actually thinking of only including key stabecoin/ETH pairs similar to the first Uni liquidity mining propgram in my next proposal for the Consensus check, just for the sake of making it as uncontentious as possible. But there’s definitely an argument to be made to include tokens of 1-2 key projects on each L2 (e.g SNX on Optimism).

Regarding widening the range for LP’s I agree 100% as well. This should be an opportunity to introduce normal users to Uni V3 lp’ing - not just gift $UNI to whales and market makers. I think most V3 LP schemes work in a way that you get more rewards the closer your range is to the spot price. I will get in touch with the Gelato and Visr teams as well as other experts to see if this can be tweaked so that everyone get’s the same rewards as long as they are within a certain range (e.g ± 20%).

1 Like
34

There arent many projects on UNI Arbitrum and Optimism. I think it would make sense to take a snapshot of the current pools and incentivize all of them to reward early users/project creators. I dont see how it makes sense to incentivize only the biggest pools/stablecoins.

At least those which have some TVL. The vast majority of projects that launched on Arbitrum went to Sushiswap so I think it would be appropriate we reward those who stuck with Uniswap. Its like 20-25 projects. Why stiff them?

1 Like
35

Thanks for writing this temperature check Lito!

I agree 100% that the Uni v3 Staker contract is not a good idea as it does incentivize a lot of opportunistic single-tick farmers, who are the least aligned with the project and create downward pricing pressure.

At Visor, we can work together with the Uniswap team to determine the right range to provide liquidity at. Our main Hypervisor contract interacts directly with the Uni v3 core contracts and we can dynamically set +/- x% range around the current price tick and automate rebalances when the price moves +/- y% from the center of the range. Alternatively, we can apply our own Auto Regressive Strategy which is designed to mitigate IL by widening ranges during high volatility periods and narrowing them during lower volatility time periods.

Because all our LPs would be within the same range, it wouldn’t be possible to game the LM mechanics through providing large single-tick ranges.

Happy to answer more questions about our LM program and would love to be part of the solution.

2 Likes
36

TL;DR: UNI liquidity mining rewards should be based on the amount of time the price is within the LP token’s range.

Hi all–

The goal of the liquidity mining program should be to increase active liquidity. What I mean by active liquidity? Let’s look at a few pools on mainnet:

First, ETH-USDC-0.3%: info[dot]uniswap[dot]org/#/pools/0x8ad599c3a0ff1de082011efddc58f1908eb6e6d8 (I can’t embed links or media it seems, otherwise I would have posted a screenshot).

We’ve had a rather large downward price move in recent days and the “liquidity peak” is away from the current price. However, there are still enough funds locked at the current tick (>2M USDC in active liquidity) to limit slippage and be resilient against large buys-sells.

On the other hand, let’s look at the ETH-MKR-0.3% pool: info[dot]uniswap[dot]org/#/pools/0xe8c6c9227491c0a8156a0106a0204d881bb7e531

There is only 1.87 ETH lock at the current tick, that’s only $7,500 out of the $355m in TVL (!!). As a result, a relatively small transaction can drastically shift the price of MKR. Clearly, most LPs do not care about rebalancing, or perhaps they’re OK holding MKR, but the amount of active liquidity is way too small compared to the TVL.

The problem with the current LP staking contract is that it rewards users according to the effective liquidity, which is basically proportional to the amount of fees collected. Whales and market makers can easily shift their LP position in response to large price moves because gas costs will not matter as much once you cross a certain level (>$10,000?).

Smaller players, on the other hand, will rapidly get wiped out because burn+rebalance+re-deploy may incur $100’s in gas fees.

How do we solve this? How can smaller players that do not have time to actively manage their LP position still be rewarded for contributing liquidity in a manner that is proportional to their actual stake?

I am proposing to reward all LPs who have any amount of liquidity at the current tick.

For example, if the current price is 4,280, then locking 1 ETH in the ETH-USDC pool between 1,000-32,000 will receive as much UNI reward as locking 1 ETH between 4275-4300. But LPs that deployed 1 ETH to either 1000-4000 or 4500-4535 or any range that do not contain the current price will receive nothing.

Why do it like that?

  1. It’s relatively easy to monitor that time spent inside any given range by calling snapshotCumulativesInside.
  2. Whales and market makers that actively rebalance their position already benefit by collecting a disproportionate amount of the collected trading fees. They have their cake.
  3. A more conservative position will receive as much reward as a more aggressive one, but the conservative option does not suffer IL because it won’t need to be rebalanced as frequently. Easier to manage for most users.
  4. By rewarding according to the time spent “in-the-money”, aggressive LPs would actually receive a lower relative fraction of the rewards because the price will leave a narrowly defined range (ie. 1-tick) after small price movements whereas a wider one will remain “in-the-money”.
  5. Using a fixed % range may still leave pools under-liquid in case of large price moves. What’s the best percentage? 20% is way too wide for DAI-USDC, but may be too narrow for ETH-WBTC. What’s the best range? Even a 1-standard deviation expected price move will still be “wrong” 32% of the time.
  6. The fixed-range option still rewards power-users and market makers and will leave smaller LPs with a much lower reward.

But clearly, making everyone deploying to the Full-Range (which is worse than Uniswap v2 in terms of capital efficiency) would not contribute sufficient liquidity to decrease slippage, etc.

What’s a good limit for the maximum range?

I suggest that any position whose range is chosen so that the capital efficiency is greater than 2x that of Uniswap v2 should be rewarded. By the way, the calculation for capital efficiency improvement over Uniswap v2 is:

(Capital efficiency) = sqrt(r)/(sqrt(r)-1) = 1/(1-1/sqrt(r))

So a Full-range liquidity would receive zero rewards, and any liquidity whose range factor r = sqrt(upperTick/lowerTick) is smaller than r < 4 will receive liquidity mining rewards.

The r < 4 criteria could be changed (a 4x price move is indeed unlikely for most assets), but r=4 LPs would still be performing 2x better than Uniswap v2.

4 Likes
37

After discussing these ideas with Dan Robinson and a few other people, I now realize that implementing my earlier proposal may require too big of a change to the Staker contract.

Note sure what’s the status of that proposal is, but I agree that one way forward could be to mandate that liquidity is deployed to a minimum “floating” range – ie have the position’s (upperTick-lowerTick) be larger or equal than a fixed value be centered at any price.

Choosing that range could be tricky, but it could be based on the 1-std expected move. For instance, a 1-std expected move for a 100% annualize volatility after 21 days is ±24%. So limiting the LP range to ±24% would only require a rebalancing every 21 days, on average.

By comparison, a 1-tick position in the 0.3% pool would need to be rebalanced every 20 minutes (clearly impossible to do unless you run bots), but successfully running this strategy would results in 34x more rewards than ±24% LP positions.

BTW, I suggested 21 days, but the number of days could be changed to whatever according to

  • Expected move = (annual volatility) * sqrt(days/365)
2 Likes
38

I understand all the flaws of LM programs that are being addressed by OHM Pro, Fei LaaS and Tokemak. That said, the ideal use case for that approach is to taper off reliance on LM for sufficient liquidity of the protocols gov token, often when liquidity of the protocols gov token is important but not vital to the utility of the protocol (e.g. Alcx, Pendle) or when diversification of the protocols treasury and long-term holder alignment is vital to its value prop (e.g. OHM, FRAX).

I think targeted LM programs on L2 for Uni in this sense is far more justified since the intent is not to create more stable liquidity for just the Uni token and align incentives with long-term holders etc but obviously rather to bootstrap liquidity for the whole ecosystem (or at least the pairs listed in the proposal) which will drive add’l utility for traders to make Uni on Opt and Arb more competitive and attract users. The concerns around Uni price pressure are valid but I would also question how much demand there would be for Uni bonds in return for the pairs listed in the proposal.

One easy amendment would be to take a page out of Curve/Astroport/Yearn’s book and weight higher rewards towards those that lock up their liquidity for longer periods. If there was a way to do this w/ Gelato or Visor even better but I understand the concerns around add’l dependency risk. Different topic but Uni should consider a DAO acquisition of Gelato…

1 Like
39

I second that! L2’s definitely need that push to help scale up defi