Temperature check - Swapmining : Should we incentivize swapping?

I’ve spoken with a user on Reddit and they’ve suggested a better idea might be to try an pay for the gas fees directly in a similar way 1inch already does with the CHI gas token.

Advantages
Direct, less gas cost to user, can reduce gas costs by up to 50% or so. This would give Uniswap USP over other DEX’s as Uniswap would be a market leader due to these reduced gas costs. The gas fee often exceeds the swap fee so this would incentivise users to trade on Uniswap
Would be effective at any gas price.
Miners wouldn’t be incentivised to include Uniswap blocks in needlessly.

Disadvantages
Would need a rewrite of the transactions being sent to uniswap but not the code that holds the funds.
E.g. 1inch already uses this so it’s definitely possible
May result in slightly higher gas costs for users not using Uniswap
CHI would somehow need to be acquired, whether that be minted on bought on Uniswap.

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Thanks for this precious input ! A list of agregators could be compiled and whitelisted. The idea here is to exclude bots to make more place for “retail” or “normal” end users. But contracts could also be accepted in general to foster integrations, yes. The way I see it, though, is that 1Inch is pretty indifferent here. They don’t care that much about Uniswap.

So, now that ETH is going up in price, swaps are going to get more expensive and the network could go back to the congestion levels we’ve seen this summer (200+ gwei gas).

At these rates, I wouldn’t be surprised to see 100$ swaps soon.

Suddenly, incentivizing swaps makes more sense, if it didn’t already.

Imagine if we had an ETA for Uniswap on Layer 2 (where gas costs way less), we would be able to bridge the gap of really high gas prices by subsidizing swaps until L2 lands. I know I’m dreaming, but still…

High ETH cost + Network congestion (high gas cost) could prove to be a worse enemy than the japanese dish competitor.

@Danpi314 CHI is basically an ugly hack that’s frowned upon by many ETH devs. It will be deprecated soon, I hear… The real solution here is Layer 2 support.

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I agree wholeheartedly with your idea of subsidizing swaps until L2, this would be a much better use of Uni as opposed to just providing LP rewards, as it benefits a larger number of our users. Not only that it has a sunset clause rather than perceptually handing out rewards.

Fair enough, I’m just throwing up out ideas that aim to help the average person on Uniswap. Your right though exploiting a refund by creating and destroying dummy contracts would be bad for the ecosystem as a whole.

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@Jacob, so if I understand this correctly, we would set a unit value of UNI rewarded per block, and then the UNI reward would be distributed proportional to the number of trades in the block? So for example, we could start the program with 1 UNI rewarded per block, and then number of trades per ~13 seconds would get their proportionate share? For the last few months we have been averaging ~4,000,000 trades per month, or about 20 trades per block. So, at 1 UNI per block of reward, each trade would receive 1/20 UNI, or 0.05 UNI (18 cents). This would cost us ~$750,000 per month which I believe is a good value for all stakeholders.

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I like the general idea to incentivize swaps a lot. And your limit is a very thoughtful security aspect. In any case there should be upper limits per block or time interval.

Usage reward.
Transaction reward.

I see no real reason in using the word mining, as there is no mining involved.

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I’m not sure I see the point of rewarding users.

While LPs are essentiel to the well being of Uniswap, its users are the ones who benefit the most from it.
Subsidizing usage is dangerous for a number of reasons :

  • It doesn’t really contribute to the protocol’s long term usage (see Aave vs Compound TVL even thought Comp rewards its users)
  • Creating a precedent is dangerous for the stability of governance (we can’t just start handing money over, there has to be a clear strategy)
  • By distributing tokens this way you create a downwards pressure on prices
  • The small amounts disitrbuted would be so insignificant it would have no utility (when the amounts are too small decentralization becomes pointless.

All in all, while it allows new category of actors of Uniswap to be rewarded, I believe it’s an idea that would create too many complications.

Cheers,
Figue

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Thanks for your take Figue. I respectfully disagree on some of your points. Interested to get your and others feedback on my counterpoints.

I see the initial early success of Uniswap to a number of factors, but most obvious is that the trading experience is simple, convenient, and many times faster than interacting with a centralized exchange. What Uniswap is not is cheap due to three main factors: Network fee, Swap fee, and Slippage.

Network fee solve: V3 is rumored to utilize rollups greatly reducing network fees, but until then, we are currently not serving customers the best we can because of high network fees. Giving a temporary micro reward will help here.

Swap fee solve: There is no current solve for the high swap rate of 0.3%, and it is a reality that centralized exchanges beat us here. For example, Binance is 0.1% and offers reducing trading fees with BNB.

Slippage solve: With the liquidity mining program and a general organic increase in transaction volume, slippage has progressively improved, and hopefully will continue to improve in the coming months. It remains to be seen if/when liquidity mining will return, but it appears that a scaled down version will happen at some point to accelerate the rate of slippage reduction on certain high value pairs. There definitely appears to be a law of diminishing returns on incentivizing liquidity, and this is why there is a lively debate of the forum on further liquidity mining, including size of program and targeted pairs.

On your point that this type of reward does not contribute to long-term usage (Compound vs. AAVE TVL), I would say that TVL does not tell the whole story on how successful a protocol is. I believe key performance metrics we need to also look at is active users (daily, weekly, monthly) and transaction volume. On these metrics there is a stark difference:
Active users (monthly): Compound (105,000) AAVE (7,000)
Transaction volume(monthly usd): Compound (7.2 billion) AAVE (2.5 billion)

On the hazard of setting a precedent, to mitigate this risk, we need to be clear about our intentions of this program up front to our customers. The goal of this is to earn loyalty to our existing and incentivize potential customers to try/choose us over other decentralized and centralized exchanges during a time when the network and protocol do not have the infrastructure complete to scale.

As far as this program creating downward pressure on price, I would say that micro rewards to our hundreds of thousands of users will create less sell pressure than large concentrated rewards to liquidity miners. If our goal is broad ownership of this community asset (and I think it is), this is the way to go.

I also believe no matter how small a user position is in UNI, they are still an owner and stakeholder in the success of the protocol, and we should encourage participation in governance from people that have even just 1 UNI. This program will create more small UNI holders and hopefully more distributed governance. We should track Gini coefficient to ensure continued decentralization of UNI token.

Finally, I think this is a great promotional marketing tool. Imagine the headline something along the lines of “In appreciation of our users, for the next 3 months we will be rewarding 1,000,000 dollars per month in UNI to our community of traders.”

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Hey Shawman, love yout insights, especially those tables you put up comparing UNI/SUSHI TVL per LPs !

I like the way you highlighted all the issues and how they’ve been fixed, will or won’t.
Yes DEXes are more expensive, but they offer a different kind of service. I believe decentralization can’t be cheaper because it needs more incentives (to fix coordination issues created by lack of central authority).

I think your point about TVL not being the most important metrics is fair, even it helps solve some of the key problems you highlighted above.
Asa large and ancient Aave holder I still used comp as a lending platform until last week, which makes no sense. In the end it’s a lot about branding (and incentives).
That’s why I believe we don’t really need to incentivize swapping : Uniswap is the most popular DEX, hands down. Normies won’t go to sushi right now, we have all new user traction.

So UNI “swapmining” is great for advanced DeFi users but useless for normies. They have no idea how governance works, probably don’t care, and would use Uniswap anyways.

I’m a firm believer we should invest the treasurey wisely. Marketing (user distribution) can be smart, but it has to be targeted correctly. Massive distribution would be a waste of bullets we might need otherwise.

A Gini coefficient would however be really useful, would you be open to chat about it privately ? I’m working on something similar !

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It seems like there aren’t many against this, and I don’t have a low level understanding, but I wonder how much of the token realistically would be distributed to regular users vs the additional gas fee to claim it. If the distribution is feasible, as a small user, I want to say that I’d much rather see incentives go towards offsetting the gas fees in participating in governance vs executing swaps.

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I agree a lot on this matter. Incentivising by doing multiple tasks on the same page. Oversight and cleanliness.

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I think this is far superior than liquidity mining. LP already get trading fees, if we want to subsidize them further, we should direct more trading fees to UNI buybacks. Increasing volume directly impacts LP profits as well as encouraging integration. What I’d really like to see is a swap-reward that scales up as gas fees increase to help subsidize user fees. This may also have the effect of improving liquidity during market stress.

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Right now with regular gas price (say 55 is low, 120 is high), it’s becoming hard to afford a swap for the little guys. Coupled with eth’s price surge, gas fees are becoming a barrier for adoption for people who aren’t rich. I think this goes against what Uniswap wants to be.

It hurts the democratization narrative and people like CZ rejoice.

Swap incentivizing would certainly be a good thing while we wait for L2 solutions (lets be clear : it’s a bandaid) but I really doubt we can implement this w/o the help of the Uniswap team.

For starters, we would need to know what’s going on with L2 integration (an ETA).

Why is this so top-secret ?

If it’s in 1 month, then we wait. If it’s in 1 year, then it’s probably a good idea to create a swap incentivization program and subsidize part of the gas costs (maybe even for LPs add/remove operations) to foster volume growth.

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So Balancer is subsidizing gas costs right now on some pairs
Check out this governance post …

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Incentivizing gas could backfire. Yes, it will create transaction volume which should in turn attract LPs. However it’s an unprofitable, zero sum, short term way to grow. Remove the incentive and transaction volume falls back down and LPs migrate back to other platforms.

I think swapmining could make sense, in rewarding people who swap with a small amount of Uni. However the Uni earned should be on v3, and hopefully on layer 2 and locked until v3 launches. In this way, we incentivize and reward transactions and we also promote migration over to v3, since users would need to migrate to v3 to collect their rewards. Claiming the rewards would be much cheaper due to the expected much lower gas prices on l2.

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II like the idea of a reward structure. Great post.

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I think this is worth revisiting with the launch of V3. Specifically the cost of migrating from V2 to V3 is very high and it seems reasonable to reimburse gas costs to migrations that create V3 pools.

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Perhaps, based on a snapshot of they help uni V2 LP tokens before, that way it can’t be abused.

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I tried to think of an elaborate justification as to why more UNI should be dropped to me personally, but that’s a lot of work, so could you just drop a bunch of it to me personally, kthxbye

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I believe staking uni for interest different from liquidity mining is a noble idea.