Uniswap-Arbitrum Delegate Program (UADP) Communication Thread

Delegation Pitch
11

Arbitrum LTIPP Application

We have applied for a grant for Uniswap in the latest round of Arbitrum funding! Here is our proposal.

For the last few weeks, we have been working with @Gauntlet to create a Uniswap on Arbitrum incentivized liquidity program that will work hand in hand with the prior approved Dynamic Incentive Optimization program Gauntlet proposed with the Uniswap Arbitrum airdrop.

Here are the main relevant sections of our grant proposal:

GRANT INFORMATION

Requested Grant Size: 1.0M ARB

Justification for the size of the grant: Prior to this application, Uniswap passed a DAO vote to use 2M of its Arbitrum airdrop to instantiate liquidity mining on its Arbitrum deployment. Since then, Gauntlet has been actively managing this incentive program, resulting in an increase of ~$1.01B in volume and ~629% in TVL attributable to incentives. Based on the success of this program and the continued partnership with Gauntlet, we expect similar/greater results with the requested amount. For a full breakdown, see Gauntlet’s mid-point retrospective 2.

Grant Matching: The Uniswap DAO has been voting on incentive packages since February 2024. The goal of this program is to increase liquidity providers to Uni pools, thereby providing depth for users swapping between assets. We have so far passed incentive programs to 8 different chains, representing ~$4M worth of $UNI. The members of the UADP are also prominent Uniswap delegates and are therefore able to post a temperature check to the Uni DAO to include Arbitrum in the incentive program. So, during March, the UADP will request the Uni DAO to decide whether or not it wants to partially match this 1.0M ARB ask. The options the DAO has to vote on are four: $250k, $500k, $750k, and $1M. We cannot guarantee that the DAO will vote to match incentives, but we will make a best effort attempt and report the results of the temperature check in this forum post.

Grant Breakdown:

  • 900k ARB for incentives:
    • 882k ARB: The bulk of these funds will be used to incentivize liquidity providers on Uniswap using Gauntlet’s dynamic optimization engine. Gauntlet takes a quantitative approach to determining which pools should be incentivized. Their simulation models predict the changes in a pool’s liquidity and volume market share across DEXs for a given level of incentive spend. Gauntlet has already integrated Uniswap V3’s Arbitrum deployment into their incentive recommendation engine. Integration and analysis ensure the pools selected offer the most ROI for the incentive program.
    • 18k ARB: For Merkl to distribute the funds. Merkl charges based on a percentage of the incentives distributed. We were able to negotiate a discount to a 2% fee since Abdullah and I also helped with Uniswap’s Growth Incentive Packages for new chains, and Gauntlet uses Merkl for their prior mentioned Dynamic Incentive Optimization for Uniswap V3 1.
  • 85k ARB for Gauntlet
    • Gauntlet will dedicate part of its Applied Research team, the same team currently managing the Uniswap/Arbitrum liquidity mining program, to this initiative. This team will focus on active management of incentive allocations, bi-weekly updates, and an external facing dashboard.
  • 15k ARB for UADP
    • These funds will be sent to the UADP multisig with the goal of making this meta-governance initiative a self-sustaining program. This will allow Uniswap DAO to maintain its voting participation in the Arbitrum DAO.

GRANT OBJECTIVES, EXECUTION AND MILESTONES

Objectives:

  • Optimize Incentive Budget and Allocations: The benefits of an incentive program should outweigh its cost. In the case of Arbitrum, 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 Arbitrum bolster its market competitiveness among L2s. 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 Arbitrum with the view of supporting growth beyond the immediate time frame of the incentive program.

Execution Strategy:

Gauntlet has built a simulation engine for understanding the effects of changing yield conditions on pool liquidity and volume. It consists of a liquidity model that determines how LPs would react to increased yield (in the form of liquidity mining incentives) and a volume model that determines at the per-swap level how historical swaps would be redirected or changed in size based on counterfactual updates to liquidity. Gauntlet is currently applying the simulation engine to our analysis of Uniswap’s fee switch, as a protocol fee works as a negative incentive for LPs that decreases yield. More information about our simulation can be found in our fee report.

When it comes to determining incentive allocations to pools, Gauntlet will be using our simulation to determine projections of liquidity and volume given various levels of incentive spend. From those projections, Gauntlet will optimize the choices of incentive allocation across available pools in order to maximize the program ROI. Gauntlet will balance this optimization against considerations of the strategic benefits that certain token pairs provide to the Arbitrum ecosystem as a whole. In order to adjust to changing market conditions and improve our allocations through experimentation, Gauntlet will be providing updates to incentive allocations.

What mechanisms within the incentive design will you implement to incentivize “stickiness” whether it be users, liquidity or some other targeted metric?:

In our prior Uniswap Incentive Design Analysis, Gauntlet identified the Liquidity → Volume bootstrapping flywheel as the best way to generate lasting liquidity mining impact. This works as follows:

  1. Liquidity mining incentives begin
  2. LPs add liquidity to the pool, which improves execution quality for traders
  3. Traders route more of their swaps through the pool and thus pay more fees to LPs
  4. Fees from traders further attract liquidity to the pool until a stable equilibrium between liquidity and LP returns (fees + incentives) is reached.
  5. Liquidity mining incentives end
  6. Some liquidity is removed due to the reduced LP returns
  7. The final equilibrium level of liquidity is higher than initially because of the greater fee incentives enabled by sustained trading volume.

In order for this flywheel to work, the following must hold true:

  • Liquidity must increase as a result of liquidity mining incentives
  • Trading Volume must increase as a result of the increase in liquidity.

Therefore, it is necessary to allocate incentives to pools for which LPs are elastic to incentive yield, and traders are elastic to increases in liquidity. It is for this reason that Gauntlet is taking a simulation-based approach to incentive allocation and projecting the lasting impact of incentives as opposed to simply spending incentives on blue-chip trading pairs.

Specify the KPIs that will be used to measure success in achieving the grant objectives and designate a source of truth for governance to use to verify accuracy?:

While we will ultimately optimize incentive allocation via a data-driven process and results may vary with market conditions, we are targeting about $200M in additional volume due to incentives and a 2X increase in TVL for incentivized pools. We believe our prior incentive program’s performance allocating 2M ARB over 7 months and driving $1B+ of additional volume and 6X+ increasing TVL justifies these targets.

The two main KPIs we will be tracking are:

  1. TVL gained per incentive spend

Across all incentivized pools, we will track the dollar value of change in TVL from the start of the incentives divided by the dollar value of incentive spend. Both TVL and ARB spend will be normalized based on token prices at the start of the incentive distribution for the pool. This metric will ensure that LPs are elastic to incentives, and that the incentives are effective in deepening Arbitrum liquidity.

  1. Volume gained per incentive spend

Across all incentivized pools, we will track the dollar value of change in average daily trading volume from the start of the incentives divided by the dollar value of incentive spend. To normalize for changing market demand, this value will be benchmarked against the Arbitrum trading volume of the pool’s token pair. This metric will ensure that traders are elastic to incentives, and that the incentives are effective in bolstering trading demand.

Grant Timeline and Milestones:

How will receiving a grant enable you to foster growth or innovation within the Arbitrum ecosystem?:

As highlighted above with the data we provided, we believe this will provide long term sticky liquidity and ecosystem wide incentives for Arbitrum, particularly with the depth and use of native tokens and projects which we intend to emphasize.

Additionally, we have primarily been incentivizing a diverse set including a few majors and larger Arbitrum-native projects (including MAGIC, VELA, GMX, RDNT, and others). Improving liquidity for these Arbitrum-native projects will be beneficial for the larger Arbitrum ecosystem.

Data and Reporting

Is your team prepared to comply with OBL’s data requirements for the entire life of the program and three months following and then handoff to the Arbitrum DAO? Are there any special requests/considerations that should be considered?

Yes. Note that Gauntlet is in the process of building a new dashboard for its current engagement with the Uniswap DAO (also focused on Arbitrum liquidity mining). We’d like to request that this be used to avoid duplicitous work in the form of standing up a second dashboard. This dashboard will be live by the time this program starts.

Does your team agree to provide bi-weekly program updates on the Arbitrum Forum thread that reference your OBL dashboard?: Yes, UADP will work with Gauntlet, Merkle, and other data providers to ensure that the requested data is displayed on Gauntlet’s dashboard or queryable by OBL. Gauntlet is already reporting 1 on relevant liquidity mining metrics through their current initiative with the Uniswap DAO, and Merkle captures LP and rewards data. Their new dashboard will include additional features and metrics.

CC: @eek637

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