DeFi Shadow Committee: Season 2 Recommendations

Hello, we’re DeFi Committee B, which is not an official committtee, as we were not elected to be a DeFi Committee. We do, however, plan to contribute to the discourse here because we want to help delegates and community members have an extra view of the likely merits of these proposals.

Our committee is led by @MoneyManDoug. Other members are @mastermojo, @MattL, @solarcurve, and me.

Our initial committee information can be found here: DRAFT][S02 Committee Proposal: Category: Defi: Group B].

We’ll be reviewing DeFi proposals and making recommendations. We again urge people not to take these to be official Optimism committee recommendations; they are just suggestions that we hope are coming from a helpful, informed perspective.

A caveat here is that we have interests in Synthetix as well as Velodrome and Beethoven X, and recommendations we make should be taken with this in mind. Nonetheless, we’re committed to placing the interests of Optimism first, understanding the primary need of ensuring the ecosystem’s health and vibrancy.

14 Likes

dHEDGE

https://gov.optimism.io/t/review-gf-phase-1-proposal-dhedge-v2-revised/3321

Recommendation

We support this proposal due to signs of specific PMF and the possibility of extending services in a targeted way but have some feedback that would have made it stronger.

Background

dHEDGE is a yield strategy aggregator. It pools independent providers’ yield generation strategies and allows users to seed them for rewards.

It’s been in secular decline for over a year, with the lone noticeable bump in TVL attributable to its arrival on Optimism.

Certainly part of this is due to macro headwinds and systemic declines in yields, but in general we’re unclear how much product-market fit dHEDGE have managed to hit in this time.

Where they have had success has been as a hedging solution for SNX stakers - it’s been the most visible growth driver for the protocol on OP. There is undeniably value being offered here. Our hypothesis is that dHEDGE’s primary objective ought to be to discover new strategies and target motivated users of those strategies.

In general, this kind of activity is good for Optimism; this protocol helps other protocols work better, as we’ve seen with Synthetix hedgers. We think there could have been more direct facilitation of new solutions like this rather than the untargeted supporting of pools with no clear indication of new development.

It would be interesting to see dHEDGE brainstorm OP-specific, socially useful yield strategies and consider how best to support them.

Asks

245k OP to distribute to dHEDGE pool tokens, ~10k OP / week
We’re of the opinion that this was defined too indiscriminately and by construction leads to nonsticky TVL. Why? Because their headline yield — how well the strategy works — is what matters. A poorly yielding investment plan with a subsidy returns to being just a poorly yielding solution once the subsidy expires.

This is unlike, for instance, yield protocols whose economic success depends on certain types of protocol/partner activity or user beliefs and can be bootstrapped.

105k OP for DHT/OP liq mining bribes, 17.5k OP / month, or ~4.4k / week, matched 1:1 with DHT

We’d want to know why it’s necessary to target $1.2mm TVL on their coin when to date they’ve only had half this (currently have $500k across chains) and been able to function well. DHT isn’t required for their yield strategies. In addition, dHEDGE has a treasury and thus the capacity to bribe themselves. Overall, we don’t see any obvious material benefit from subsidizing this piece but would be happy to discuss.

What this does for Optimism

To be clear, we believe this protocol can continue to serve unique functions for the ecosystem. This proposal lacks the specific definition required, but we think that some post hoc tuning of the OP distributions (considering we’re already in voting) would make this a fine grant.

4 Likes

Revert Compoundor

https://gov.optimism.io/t/review-gf-phase-1-revert-finance-compoundor/3242

Recommendation

We support this proposal as a measured bet on a specific type of active user migrating to Optimism from Mainnet as a result of granted OP. We would appreciate more presentation of data supporting the likelihood of this bet panning out.

Background

Revert Finance offers a suite of tools and analytics geared around LPing. One of its tools, Compoundor, is a dApp that, for a fee, lets users autocompound LP positions on Uniswap v3.

Although we can’t say for sure that the protocol has demonstrated clear PMF (it hasn’t had the explosive growth experienced by, e.g., Beefy), they’ve made a clear bet in migrating to L2: they believe there is a large class of Uniswap v3 LPs whose position sizes are too small to compound profitably on high-gas mainnet but who could be drawn to use Compoundor on a low-gas L2 platform. Under this belief, migrating to Optimism would dramatically increase the addressable market of not just Compoundor users but Uniswap v3 LPs.

When asking Revert how this would work, @mariorz had this to say:

The real point of what we are proposing is that we can convince our users (the people who use us for analytics not the existing compoundor tvl) into optimism, by targeting the LPs who would do well in compoundor and showing them the additional returns of the OP distribution

Ask

240k OP over 3 mo, or 15k OP per week, for the sole purpose of incentivizing v3 LP. Expect this to draw $20mm in capital to Uniswap v3

This is a generous run rate on Uni v3 rewards, and we’re not enthusiastic about devoting the entirety of such a large grant to LP rewards.

However, this is a unique case in that we think this grant is intended specifically for the migration of users looking to do something on Optimism they couldn’t do on Mainnet. Although there isn’t a massive amount of Compoundor capital on Mainnet, many do use Revert’s analytics, and it seems reasonable to imagine they are of this ‘on the fence’ type, though we’d like to see some confirmation of this.

To be entirely comfortable with this grant, we’d want to know:

  1. Number of wallets and amt of capital Revert believes to fit the correct profile of likely, interested migrators

  2. Share of these wallets Revert already has access to through its analytics — that is, where/who is the latent capital that benefits from this migration?

  3. How Revert gets to the likely $20mm migrated capital of this profile (i.e., not whale capital) given 1 and 2

In this way, we could work backward to arrive at an appropriate way to determine the success of such an initiative — and to determine a more appropriate grant amount.

We do appreciate the short timeframe of this grant, which we believe will help us quickly determine the success of such a migration. We think that KPIs tracking the migration of the ‘sticky’ marginal capital would cover this better than the simple TVL measure proposed.

What this does for Optimism

Although we think it’s too early crypto-wide to expect a massive influx of retail or power-retail LPs, it does seem in Optimism’s interest to facilitate this type of service sooner rather than later. We especially appreciate how Revert identified a specific audience to target with this initiative, something we’d like to see in more proposals.

We think that Revert would be well situated to continue offering public goods with us, and helping them early may encourage them to work with Uniswap and large LPs for the purpose of specifically benefiting this ecosystem. We’ve found the team to be thoughtful and responsive.

4 Likes

Tarot

https://gov.optimism.io/t/review-gf-phase-1-proposal-tarot/3002

Recommendation

We support this proposal and believe the emphasis on providing LP support for TAROT is a clever way to incentivize non-LP activity. Would like to see a breakdown of intended dev activities.

Background

Tarot is a leveraged yield compounder. It’s a tightly scoped protocol that focuses on a few valuable features and has earned a genuine following.

On Tarot, borrowers depositing LP tokens can leverage their positions to amplify yield on their invested capital, though doing so amplifies impermanent loss and introduces liquidation risk. Liquidity providers can also deposit LP tokens without borrowing to enjoy autocompounding, similar to what Beefy offers.

On the other side, lenders can stake single tokens for variable yield, in some cases generating rates well above market with the risk of having their funds temporarily unavailable or incurring bad debt loss.

Protocols benefit from this key defi piece; Tarot encourages liquidity provision on dexes by offering LP autocompounding and juiced rewards, and we see some additional composability possible from the various borrow, lend, and collateral tokens it issues.

Optimism’s seen noteworthy organic adoption of Tarot, despite the lack of incentives to date and the limited LP coverage (only Velodrome and Zipswap). Tarot plans to expand to Beethoven X, and our expectation (and hope) is that Tarot will soon be able to cover other dexes as well.

Asks

540,000 OP over 12 months, or 45,000 OP/month, for liquidity bribes and incentivization mechanisms on various dexes on TAROT pairs

As an incentivized leveraged yield protocol, Tarot is unlike many projects in that it can (and would) directly incentivize general use selectively with token emissions. Borrow and lend on the protocol, get TAROT in addition to your compounded yield.

Because of this, using OP to incentivize liquidity on TAROT is more or less tantamount to directly incentivizing borrowing and lending activity. More liquidity → more capacity to issue TAROT → more users of the protocol.

In this way, Tarot would have the flexibility to juice certain types of activity it wants to promote without having to redirect OP to farmers looking to dump it. Pairing TAROT with OP isn’t necessary but does offer a marginal liquidity backstop for OP.

Although it’s important to critically examine each time a grant proposal asks for native token liquidity provision, we emphasize that Tarot incentivizing its native token is a genuinely beneficial thing for Optimism in this rare case because it encourages protocol use in a cost-efficient way.

Our most material concerns include that the intended term is way, way too long, but we understand that this came about as a result of delegate suggestions. We’d also like to have seen more of a breakdown of anticipated results of this grant, how much incentive would go to individual borrows, etc.

60,000 for dev costs, TAROT-OP POL in interim

We’d like to see some more detail on what Tarot intends to do with these funds; so long as there is a direct link between these costs and value-add for Optimism, we’re on board.

What this means for Optimism

We see a few core benefits:

  • Capacity to add more pools and protocols and draw new users to those pools and partners
  • Liquidity and activity bootstrapping aid for other protocols; effectively subsidizes some key liquidity enhancers other protocols would otherwise have to build themselves
  • Depending on direction of dev costs, new partnerships and defi primitives

We’re especially keen on proposals that immediately promise to subsidize other existing and new protocols’ activities. We’ve seen Tarot be able to do this: one thing they’ve been especially responsive at, for instance, has been adding pools for new lowcap projects (e.g., Layer 2 Dao and Optimism Prime) to further encourage liquidity provision in those tokens. This is a value multiplier for new projects that would otherwise have to resource the same LPing.

6 Likes

Kromatika

https://gov.optimism.io/t/review-gf-phase-1-proposal-cycle-6-kromatika/3306

Recommendation

We’d need to see substantial changes or clarification before supporting this proposal. There is overreliance on supporting a native token without any clear benefit to users, the product hasn’t achieved obvious product-market fit on Optimism or other chains, and the asks are disproportionate to anticipated user growth or welfare on Optimism.

We understand that this has already gone through a round of revisions, but the guidance in our opinion has been ill-advised in the face of some unaddressed fundamental issues. We’d be happy to advise on an additional round of guidance if this proposal doesn’t pass.

Background

Kromatika offers two core swap products: a dApp that places limit orders using Uniswap v3 LP positioning, and what they call a swap ‘metaaggregator’, which aggregates aggregator routing. This proposal concerns the first, which has been live for several months on Optimism, Mainnet, and Arbitrum. Prior to the OP snapshot date, the sum of limit orders on Optimism amounted to $1mm.

In addition, there hasn’t been substantial growth in limit users since June, and a max of 400 user wallets isn’t inspiring—this is before considering individual users and team would likely have multiple wallets.

We’d want to get more user data before making any determinations that this is a high-PMF project we’d want to accelerate.

Employing these solutions can be gas-expensive (though less so on Optimism), and limit orders rely on Chainlink, which charges fees. Rather than visibly pass on these fees to users, Kromatica obscures these fees by employing their own token, $KROM. Users are expected to treat this token as a fee token. If people remember $CHI from 1inch, the idea is similar (and we don’t consider $CHI to have been a successful experiment).

Asks

300k OP total

90k OP for $KROM-$OP protocol-owned liquidity and another 30k OP for liquidity incentives over 3 months

This strikes us as an unnecessary use of OP to support a protocol’s native token without any clear need. The sole purpose for this pool is to provide depth for Chainlink Keepers to dump their $KROM into. Simply not using a native token and offering a fee surcharge would likely have been sufficient to pay these fees, unless there’s demonstrated volume efficiency (would need to know Chainlink’s fee structure), in which case we would reconsider this.

60k OP for ‘gas refund’

Although this is called a gas refund, what it actually does is subsidize the protocol’s intended feature of gassless trading; that is, there is no incremental benefit to users. The question is: is the current business model unable to support this feature otherwise? Is there some threshold of use Kromatika must meet in order for this model to sustain itself? If there’s no direct value to users, this strikes us as a mere handout to the protocol without any obvious objective.

60k OP for limit order airdrop

We believe that this airdrop, no matter how it’s going to be structured, is inviting wash trading by the few insiders and early users who exist. We don’t get the impression that there are enough users for there to be a broadly beneficial airdrop (Dune numbers aside, the distribution of $KROM uses in their proposal suggests a small user base), and it’s trivial to create more addresses to perform limit orders and pad the merkle list.
We also believe that delegate recommendations have in fact made this ask worse by requesting the protocol lower the required order sizes for rewards. Doing so makes it even less capital-intensive to wash trade as sibyls.

30k OP for referral program

This is a fair application with three caveats: 1) these can be sybiled and farmed as well, 2) it’s a program that would after only two months no longer be exclusive to Optimism, and 3) there’s not that much data on efficacy of these programs, nor are there any clear targets laid out. Although Kromatika claim that they would be the first DEX to implement this, it would probably be worth seeing how GMX’s own referral program has worked out. It’s possible that it’s been successful.

30k OP for marketing

In principle we think marketing budgets are in scope for Phase 1 grants, but there needs to be much more planning up front to determine the worth of this one. Otherwise we have no way of knowing how they will spend it, what their objectives are, or whether they’re likely to be effective.

What this means for Optimism

We think there is certainly space (and probably desire) for a Uniswap v3 limit order protocol of this type, but there isn’t enough evidence here that Kromatika is the one to achieve PMF, nor is there evidence laid out that this proposal makes this protocol more likely to be the one to do so.

2 Likes
1 Like

First thank you for reviewing Kromatika proposal. Based on what is written we see that you have spent a lot of time reviewing how the Kromatika protocol works internally and we are really glad about that, so we can explain ti in details how it works.

Please find our initial feedback below.
We still believe that our feedback will not change the bias intention of this review and at least it should have been provided a lot earlier (since Kromatika proposal was created 6 weeks ago).
We believed this review is on the edge of rough review and not an objective review.
However, we are here to discuss it with cool heads, all that for providing more insight and transparency to the OP delegates and community that we are all part of it

Start

This actually is on the edge of FUDing saying team likely have multiple wallets doing limit orders without any support.

Fees charged correspondent to the gas needed to pay for filling the limit orders;
the Optimism gas fees are lower, so the fees are 0.1$ per limit order.

This is also a dump assumption without any support. The keepers pay the gas fees for filling limit orders and get KROM as compensation in the same $ value. Since gas fees are low on Optimism, we dont see a sell pressure from keepers.
If a fee for filling limit order costs 0.1$ order limit order, it would take 10.000 filled limit order to even get to 1000$ fees. that confirm the no sell pressure coming from the Keepers.

This actually will drive adoption and more users to it, since more users will be inclined to use limit order more often. Please note that limit orders are UniswapV3 position, so by placing limit orders on Kromatika, users are placing liquidity on UniswapV3 and increase the liquidity depth on Uniswap pairs.
This benefits the UniswapV3 liquidity depth for any trading pair, which means it benefit the entire Optimism ecosystem and one of the DEX protocols with higher volume there, reducing the price slippage on Uniswap as well.

Gasless trading means users will DONT need to pay any ETH gas when performing swap via Kromatika. Since Kromatika is a DEX aggregator, it pulls liquidity from different liquidity sources.
At the end, this feature benefit the END users, since they are the ones that can do swaps without paying ETH gas at all == FREE ETHLESS swaps with low price slippage.

The gasless mode will work on Kromatika as well without subsidising with $OP (when the gas subsidising period is over), however, the gas fees are then charged from the output amount from the swap.

We are really glad that we have the chance to explain our proposal in depth. Please let us know if we can clarify other aspects of it.

In the marketing section of the proposal, it is clearly stated HOW the funds will be used.

It actually describes in depth HOW the $OP grant will be used, by creating competitions (public bounties), awareness campaigns, Youtube competitions.

We have started configuring the necessary tools for the incentive / awareness campaign, competition bounties. They are only small part of the awareness, educational strategy.
We are gonna be using them regardless of the OP grant.

Please check a sample DEMO configuration!!!. Many DAOs are using it as proven bounties method for example:

Interest Protocol

Recommendation

We support this proposal. Setting aside the broader merits of the lending protocol, which we’re still discussing, we view this proposed grant as a low-cost means of delivering a clear value-add to OP governance: allowing collateral to be delegated.

We believe deploying this capability will grant users more flexibility with their OP tokens while filling gaps in governance participation.

Background

Interest Protocol is a self-described lending and fractional reserve stablecoin protocol that employs capped collateral tokens as a risk management strategy. USDi borrowers pay a single borrowing interest rate, which changes depending on the reserve ratio. The interest paid by borrowers is distributed to all USDi holders as a rebase.

Interest Protocol claims to be able to issue more stablecoins than other lending or stablecoin protocols on the same amount of USDC collateral despite also being overcollateralized. Relevantly for Optimism, it also allows users to participate in governance with collateral funds. Interest protocol is currently deployed only on ETH mainnet.

Asks

31,764 OP for development and deployment costs on Optimism

We appreciate that the ask is tightly scoped and pegged to expected development needs, with calculations arriving at this number clearly shown. There is also a clear desired outcome attached to these costs.

One note is that we ask that the OP be distributed directly to developers rather than be market sold by Interest Protocol; aside from the fact that current guidelines prohibit the outright sale of OP by a grantee, contributing engineers should at least have the option to hold and/or delegate their earned OP.

What this means for Optimism

To us this grant is intended to provide a clear, needed benefit for Optimism in the form of facilitating more governance participation. We also envision this protocol helping grantees better manage their granted OP and offering them more flexibility in holding unused funds.

After reading the whitepaper, we have several open questions about the protocol itself, particularly with regard to its claims about fractional reserve issuance, but we look forward to engaging GFX Labs in learning more about how the protocol works. For now, we’re happy to support getting this feature deployed.

1 Like

Hi @jackanorak,
First appreciate the recommendation on our proposal.

Adding more background to give context to your feedback. As mentioned in our proposal, we believe there are clear aligned incentives between the Compoundor and Optimism in that the lower gas prices mean that some positions that are too small to compound profitably on mainnet can be profitably compounded on Optimism. So migrating this liquidity from mainnet to optimism effectively increases the addressable market for the compoundor protocol.

We think that KPIs tracking the migration of the ‘sticky’ marginal capital would cover this better than the simple TVL measure proposed.

I have to disagree though with the suggestion of changing the KPI to this specific type of liquidity. The rewards will be distributed in a way that does not exclude larger positions, so we should expect these positions to also contribute to the growth in TVL and Uniswap liquidity on Optimism (which we consider a good in itself).

We do look forward to keep building on Optimism, and sharing the results of the proposed liquidity mining program in the context of our proposed KPI, though I also think doing analysis by different forms of cohorts, as the one proposed by the shadow committee is certainly worth looking into, and we will.

1 Like

Tarot - Cycle 7

https://gov.optimism.io/t/review-gf-phase-1-voting-cycle-7-tarot/3567

Recommendation

We are in support of the proposal and respect the creative attention to feedback. We’re beginning to take the view that liquidity mining and usage rewards are generally a -EV activity unless they amplify activity that is already sticky or promise to improve the function or use of protocols through composability or network effects. This proposal offers both.

It’s not clear to us that the changes made here are more cost-efficient than the original proposal made (as they’re direct incentives), but the emphasis on central tokens — wholly constructed by Tigris with little direction — speaks to the creativity and capability of this team.

Background

Adapted from previous review
Tarot is a leveraged yield compounder. It’s a tightly scoped, essential defi lego that focuses on a few valuable features and has earned a genuine following.

On Tarot, borrowers depositing LP tokens can leverage their positions to amplify yield on their invested capital, though doing so amplifies impermanent loss and introduces liquidation risk. Liquidity providers can also deposit LP tokens without borrowing to enjoy autocompounding, similar to what Beefy offers.

On the other side, lenders can stake single tokens for variable yield, in some cases generating rates well above market with the risk of having their funds temporarily unavailable or incurring bad debt loss.

Protocols benefit from this key defi piece; Tarot encourages liquidity provision on dexes by offering LP autocompounding and juiced rewards, and we see some additional composability possible from the various borrow, lend, and collateral tokens it issues.

Optimism’s seen noteworthy organic adoption of Tarot, despite the lack of incentives to date and the limited LP coverage (only Velodrome and Zipswap). Tarot plans to expand to Beethoven X, and our expectation (and hope) is that Tarot will soon be able to cover other dexes as well.

Asks

540,000 OP over 24 weeks, or ~90,000 OP/month, for borrow and supply incentives on various Dex pairs

30% to OP-borrow incentives
This dramatically increases demand for OP and will help act as a stopgap solution until we find a more Defi-native means of deploying OP in a way that allows it to be a sustainable funding source.

30% to other Optimism pairs

All of these pairs have OP, ETH, or USDC to match the supply-side incentives.

40% to single-sided supply incentives

4500 OP/week to OP
2250 OP/week to ETH
2250 OP/week to USDC

Single-sided supply incentives

We’ll start with the single-sided lending of OP, ETH, and USDC, on which we can calculate the likely return on lending.

On Tarot right now, we’re seeing:

  • OP: max of 15% APY on $400k, compared with 10% APY (incl. 6% incentivized) on Sonne
  • USDC: roughly 5% APY on $1mm TVL, compared with fairly large amounts of 20% USDC from Reaper but otherwise 2-5% APY
  • ETH: 6% APY on $200k TVL, compared with generally lower amounts systemwide

This tells us that additional incentives are relatively unlikely to cannibalize other protocols on OP (versus other chains), as we’re already seeing larger yields here. The difference with single-staking on Tarot vs, say, AAVE or Sonne, is that you can’t use this as collateral - this is purely providing leverage for borrowers.

This is good news for OP, as this should attract new OP acquisition for lending.

Regarding USDC, we see mostly comparable rates across high-overlap chains and an enormous amount of available liquidity already getting less yield. Same with ETH.

4500 OP/week on OP, at $0.75 OP, translates to about $176k ARR, which, on top of the roughly $56k value currently distributed annually to $400k OP, implies a rough quadrupling of lent OP to return to status quo, or $1.6mm OP, or 2.1mm OP tokens.

2250 OP/week to ETH and USDC are $88k each. ETH currently gets ~$11k returned annually, and USDC gets $45.8k returned. This implies final TVLs of $1.8mm and $2mm to ETH and USDC, respectively.
Adding this together gets you additions of $3.8mm in TVL, with a large chunk hopefully coming from outside Optimism.

Borrow incentives

The 60% to the borrow side, however, is where it gets interesting: the incentives going to this side make it much less expensive to lever up LP positions, which draws in even more LP interest and further strengthens liquidity and routing.

A look at OP/USDC illustrates this. Currently we see:

  • 35% APR on $120k OP/USDC (at 1x) levered up to roughly 3x, getting ~90% leveraged APR
  • $85k OP borrowed and 160k USDC borrowed
  • $4mm in overall pool, $350k deposited on Tarot, $350k deposited on Beefy

Given 4x OP and 2x USDC available, utilization drops and borrow costs decrease, which in turn increases the leveraged APR from lending.

If we assume 2000 OP/week on this major pair, borrowers now get to distribute $78k rewards annually, or 65% APR on their initial capital, which almost doubles the base APR and further scales leveraged APRs (and in turn more borrowing). We don’t have enough history on Tarot performance but would love to see where this gets expected LPs on this pair. There’s enough headway here to encourage multiples, and even a 2x in OP LP would be a major improvement in lending liquidity support to Governance’s primary funding mechanism.

We expect initially a decent amount to be cannibalized from Beefy, but ultimately the rewards ought to pull more OP into LPs, and it’s worth testing this thesis considering the need for OP to provide more liquidity backstopping onchain.

Currently there is roughly $4.35mm of OP in LPs onchain, or 5.8mm OP. That is only 15% of the amount of anticipated sell pressure from the 35mm OP already live in distribution, to say nothing of the additional 12.5mm OP yet to be distributed to successful grantees.

What this means for Optimism

We see a few core benefits:

  • Drawing in liquidity from other ecosystems by encouraging more productive use of USDC, ETH, and OP
  • Amplifying OP rewards that have been distributed to other protocols for liquidity mining
  • Providing a liquidity sink for OP
  • Drawing high-use ETH and USDC to further strengthen routing liquidity
  • Liquidity and activity bootstrapping aid for other protocols; subsidizes key liquidity enhancers other protocols would otherwise have to build themselves

As we said in our last review, we like proposals that immediately promise to subsidize other existing and new protocols’ activities. Tarot’s utility as a defi lego plays well into this promise.

One activity we’d like to see is the creation of new pairs for tokens that bring real utility to the OP ecosystem — Tarot can act as an accelerant for them without their going to OP Governance for support. We’ve seen some success in their supporting new lowcap projects (e.g., Layer2 Dao, Optimism Prime) to further encourage liquidity provision in those tokens. This is a value multiplier for new projects that would otherwise have to resource the same LPing.

1 Like

Alchemix

([REVIEW] [GF: PHASE 1 CYCLE 7 PROPOSAL] Alchemix)

Recommendation

We broadly support Alchemix’s proposal as written but advise halving their ask generally by time and size – there’s simply no good argument for running a grant past six months, and even that amount of time is a stretch.

They’re in the minority of proposals to date that have offered a bottom-up approach in outlining the size of their ask and explaining the additionality of the grant, and we’re inclined to agree with their view.

Another key piece is that Alchemix’s proposal is rare in that they are explicitly committing to move resources over to Optimism themselves — that is, they’re not just trying to draw users and capital, they’re moving the deployment of their own capital to encourage more use on Optimism. This goes beyond the simple idea of “incentive matching” — it’s a reflection that a grant can beget follow-on activity, and it’s exactly the kind of behavior we should be encouraging.

We think there is still some work to be done to determine KPIs, demonstrate migration from Mainnet, and discuss potential integrations with other ecosystem protocols, but these are nits in an otherwise well-presented proposal that seems advantageous for Optimism.

Background

Alchemix is a unique yield protocol that facilitates highly-touted self-repaying loans. The system works like this: deposit some amount of collateral and then mint up to 50% of that collateral value as a defi-composable synthetic derivative, effectively trading your expected collateral yield for immediate liquidity.

The thinking is: your initial collateral earns yield and is pegged to your loan, and over time, that yield pays back the interest and principal on your loan, progressively unlocking your collateral while ostensibly removing liquidation risk. This allows you to get the most out of your money without having to stake or sell it. It’s been a popular proposal that earned the protocol almost a billion in TVL in 2021.

In addition to being a draw for users, what’s compelling about Alchemix is the stimulus it provides the rest of the ecosystem. Specifically, it magnifies velocity on the capital that’s deposited; collateral is deposited in yield protocols like Yearn, and derivatives are minted against them, which can be swapped into other stables (thus creating more demand for them) or deposited into other protocols for more general defi use. Users benefit, protocols benefit, activity increases.

In the past year and a half, Alchemix has legitimately established itself as a protocol with real PMF, utility, and mindshare — and, compellingly, no analog on Optimism.

Asks

250,000 OP to vault incentives.

Estimated to incentivize $25m of deposits (at an approximated market-determined boost of 1% APR on AAVE strategies)

Alchemix “expect at least 25% of AAVE Optimism TVL in aWETH and stablecoins to migrate to Optimistic Alchemix.” - we’re not entirely sure what this means here, whether this is referring to the existing base of WETH and stables on AAVE Optimism (which are in the hundreds of millions) or specifically vault pools on transmuter assets from Mainnet.

Although we recognize the long-term bias of these deposits, we believe that there ought to be something of an understood cap on grant durations due in part to the quickly shifting crypto ecosystem, the need to iterate on how we distribute OP to protocols, and our desired reorientation toward more grants for more tightly scoped objectives.

250,000 OP for Velodrome bribes for one year on alETH and alUSD pools.

Estimated $3m additional liquidity at 10% APR (Alchemix currently incentivizes $2.5m of liquidity on Velodrome)

Liquidity is indeed a key need for Alchemix, as alTOKEN liquidity is a legitimate rate limiter for the uptake of deposits and increased money velocity. In a vacuum we would generally discourage this type of liquidity focus, but we’re in favor of this particular because of Alchemix’s unique need. In addition, there’s an opportunity to drag a lot of stablecoin liquidity into these systems by giving Alchemix a headstart in autonomously generating more liquidity.

In an ideal world, we would reorient this grant to hasten alOP development to allow for a potentially highly appealing alOP-OP pool. We’d almost have prioritized this over bribe subsidies in the hope that this could get built before demand really scales.

What this does for Optimism

The question is: does this grant bring power users from Mainnet to Optimism? We know that this activity is likely stickier than the average defi activity; users are depositing to take out a loan generally to term. That is use that sticks without resorting to locking or similar mechanisms. What isn’t clear to us is whether existing users on Mainnet will be incentivized or even able to migrate their capital. We’d love to see some clear expectations in this regard (versus merely sliding some TVL from AAVE Optimism over).

Even if there is some layer cannibalization, we see real opportunity for alUSD and other synthetics to establish a foothold on Optimism and for Alchemix to begin to explore more yield solutions on Optimism, which are quickly growing in number. With AAVE taking on such a large proportion of Optimism’s TVL almost immediately, it seems clear that Alchemix could almost unilaterally lead a small ecosystem to spring up around it. We’d love to hear more about what they have in mind on the yield and composability side.

Another key piece is that Alchemix’s proposal is rare in that they are explicitly committing to move resources over to Optimism themselves — that is, they’re not just trying to draw users and capital, they’re moving the deployment of their own capital to encourage more use on Optimism. This goes beyond the simple idea of “incentive matching” — it’s a reflection that a grant can beget follow-on activity, and it’s exactly the kind of behavior we should be encouraging.

One way or another, we think this is a good time to be supporting Alchemix’s initiatives, as they target large players and protocols, entities that are still active in today’s market.

The problem is that these are questions that should have been broadly addressed during the public review session when instead it devolved into questions about self-delegation. We don’t fault Alchemix for not having gone more into this, but we do appreciate the thoughtful direction @marc offered.

Overtime Markets

https://gov.optimism.io/t/review-gf-phase-1-voting-cycle-7-overtime-markets/3579

Recommendation

We support the proposal and respect their path to growth on Optimism. The dual-pronged approach of fee rebates and direct marketing campaigns are likely highly catalytic for user growth on Optimism — and this would be a different user segment than typical market-dependent defi users and crypto speculators.

Overtime Markets has a unique value proposition for Optimism and stands apart from crypto-native DeFi protocols. With these fee rebates, we believe they ought be able to better compete with centralized offerings and continue the growth they’ve seen over the last 2 months since launch.

We think there is an information gap that Overtime could meet by reporting more of their expected go-to-market strategy, but now is the time to give them an opportunity to jump ahead of the pack.

Background

Overtime Markets is a permissionless, onchain sports betting market and without doubt the most advanced one available at the moment. Naturally, there is is nothing of its sort available on Optimism.

We like supporting this type of project because it is an all-weather product, always appealing to large numbers of retail bettors, and it makes use of key advantages of blockchain over centralized services more generally.

There is every reason to expect a crypto-based sports betting market to become an enormous vertical, and getting an early lead in this space could be extraordinarily beneficial for Optimism. Thales have shown some willingness to migrate over to Arbitrum so if we think that Overtime could be a genre-defining product, we should try to accommodate their remaining with us.

Asks

70%, or 210,000 OP, as fee rebates.

We’d been unsure about how these fee rebates effectively act as a catalyst for new users and shared our concerns with the Overtime team. Red’s recent post has brought us over the line in supporting this proposal as written. Basically: the rebates get Overtime to beat large betting market prices, offering a natural pull for users from those other areas. Bettors are often fairly crypto-savvy, as many centralized sports books accept crypto payments, and price-conscious — so this fact offers some good support for drawing in these users.

Moreover, this user growth is what Overtime will need to bootstrap the AMM use once it rolls out, so the timing works out: use grants, get users, grants go away, users are now there to support liquidity through the AMM. It’s not like typical liquidity mining where often some uneconomical initiative goes back to being uneconomical once incentives end.

30%, or 90,000 OP designated for promotional events such as those held by FIFA.

This allocation works well in tandem with the fee rebates: the rebates make the protocol economically competitive in this early stage, and this piece promotes this competitiveness. The timing is good given sports, and this is one we can clearly set KPIs against.

Overall, this ask satisfies our major questions we have for all protocols: does this grant achieve a step change in activity that sets up your protocol for success after incentives cease, and why is now the best time to do it?

What this does for Optimism

Overtime is a first-of-its-kind offering built entirely on Optimism that has the ability to bring non-native crypto users directly to Optimism, onboarding an entirely novel user segment. In our opinion, these types of users have a lower chance of simply farming rewards - they’re there exclusively to use the product, and they’ll use all kinds of onboarding means to get there.

This seems like a good return on the OP grant, as it acts as a short/medium-term solution until the other solutions are released to bring the needed liquidity and spreads and cover the gap with centralized bookmakers.

We would like to see a more concrete expectation of user inflows and an explanation of a coordinated go-to-market strategy around this (and we can work with them to achieve this), but this is the time to move.

1 Like

Overnight

https://gov.optimism.io/t/review-gf-phase-1-proposal-overnight-fi/3536

Recommendation

We are in favor of Overnight.fi’s proposal as written. They’ve achieved strong organic TVL by any measure on Optimism ($4.5M in a single month, several thousands of wallets, trading volume way above their weight), which is likely to continue as they launch their next wave of products across multiple partner protocols.

Their proposal is among the only ones to identify a target user segment, one that does indeed happen to remain active: the risk-averse stablecoin yield maximizer. We think there is plenty of meat on the bone here and see an opportunity to siphon a lot of interest from Mainnet.

Background

The centerpiece of Overnight is USD+. USD+ is a rebasing token backed with a growing collateral base earned from stablecoin yield strategies. Because a USD+ position inherently increases in value, there is a lot of exciting activity it can generate through its defi composability: pair USD+ in an LP and realize another layer of compounding and opportunity for arbitrage volume. Stake it as collateral and watch your LTV decrease. There is nothing else like this in crypto, let alone Optimism, and this lack of precedent makes their strategy a little difficult for people to apprehend. This is why we’re taking it upon ourselves to overexplain a bit on behalf of the team.

By contract, Optimism has been shouting from almost every direction that they want Yearn, a better-known protocol, to show up: well, this is a whole new spin on Yearn, one that promises even more defi composability through its rebasing stable. It’s a protocol that wants to make Optimism its home, and along with a tight-knit developer community that is poised to make the most out of this offering, watch out.

Overnight also has a fully-subscribed offering called ETS, which is a new entry in the field of delta-neutral strategies.

By any measure there has been a lot of organic traction in the single month they’ve been on Optimism. On no OP incentives they’ve accumulated more TVL and users than literally half of OP defi projects granted funding. They haven’t just shown signs of PMF in crypto — they’ve shown signs of PMF on Optimism itself. If we’re not supporting their growth, we’re not sure who we should be supporting.

In addition, the team are well known to the OP developer community. Solarcurve and Jack have both worked with them to integrate their product, and the team have been outstanding in their speed and professionalism. They’ve also done a fair bit of bizdev in their own right, facilitating introductions to developers on other chains looking to migrate to Optimism. We expect great things from them and want to see them thrive on Optimism.

Asks

200,000 OP liquidity mining on Velodrome and Balancer.

This would grow USD+ and ETS liquidity on Optimism, but also increase liquidity for the protocols and pairs USD+ and ETS collateral is invested into (100% is invested on the same chain)

Dex incentives in Overnight’s case will continue to have a lasting impact after they’re fully used because both dexes return fees earned as voting incentives, which can then be compounded into sustainable liquidity provision — a key engine of this yield protocol’s growth.

The Balancer boosted pool in particular should have a high intrinsic yield by depositing most of the pool’s USDC and DAI into Overnight’s USD+ and DAI+ products. Even after OP incentives are exhausted, this base yield will be highly competitive for stablecoin LPs (and Balancer will continue returning fees earned as voting incentives).

This is a classic case of a benefit with a multiplier: this grant incentivizes liquidity provision which increases capacity for yield-seeking capital, which goes on to be active with a range of defi protocols seeking more activity. We’re not big fans of liquidity mining (and most cases of liquidity mining are going to Velodrome, Balancer and the like, so this is arguing against our interests) but this is an exceptional case due to its inherent support for the protocol and the capability to sustain itself after rewards end.

100,000 OP for expansion of “+” and ETS product lines

ETS based on OP/USDC in particular, as well as DAI+, potentially, BTC+ and/or Eur+ etc.

Delta-neutral products are relatively unproven but there is potential for innovation here. Ultimately we view this spend as a reasonable test to see if ETS can find PMF because in principle it presents a compelling use for OP and continues to attract. Our question is what in the grant is catalytic — that is, what makes this economical where it otherwise wouldn’t be?

100,000 OP for building insurance product

This would derisk entire Overnight ecosystem: both USD+ and ETS

This is the least interesting portion of the proposal. While an insurance product is probably a good thing, there is a less direct connection between funding this and growing Optimism. Other avenues of funding might be more appropriate here. We’d want to learn more about the potential value-add of this product. If this proposal fails, it might make sense to drop this part altogether.

What this does for Optimism

This is a killer team that’s shown real organic growth on Optimism, and they’re going after a user segment that remains active in crypto while promising to make more use of a range of DeFi protocols. Their core ask is one that we know lends enduring value-add to Optimism’s DeFi eco, and supporting ETS (i.e., increasing the headroom available) seems like a likely winner as well considering the consistent uptake.

They say they want to make Optimism an “innovation hub” — we take them at their word. We’ve seen an extraordinary amount of energy and engagement from them in the past month, seemingly everyone’s been hit up for a partnership, and they have a lot of ideas.

Sometimes it’s up to Optimism to show these standout teams that we’re open for business.

1 Like

I’m speechless. Thank you

2 Likes

Yearn

https://gov.optimism.io/t/ready-gf-phase-1-proposal-yearn/3509/

Recommendation

We view Yearn as a key DeFi building block that Optimism would greatly benefit from. However, 1M OP over 40 weeks seems excessive, and we believe reducing the duration and size of this proposal to 500k OP over 20 weeks is more appropriate. This should be sufficient time for Yearn to show some positive traction and integrations, and the opportunity would be there to present a second proposal for another wave of incentives.

Background

Yearn Finance is a suite of products in Decentralized Finance (DeFi) that provides yield generation, lending aggregation, and more on the blockchain. The protocol is maintained by various independent developers and is governed by YFI holders.

Yearn has demonstrated strong product-market fit on Ethereum without the use of incentives. They are used by many other protocols, and the presence of Yearn on Optimism is likely to attract more builders and innovation.

One of the biggest questions we get from partners and users is “When is Yearn coming?” — the demand really is there; they’re a valuable presence on Optimism. And the team are second to none.

Asks

1M OP for vault incentives over 40 weeks

Given that many protocols on Optimism are offering OP incentives, there should be no shortage of promising yield strategies for Yearn to tap into. Even without OP, it’s likely Yearn would see strong traction on Optimism - however, it is valuable to accelerate this growth due to the second-order effects of Yearn’s presence (see: all the partners asking for Yearn to show up). Other projects will build on top of Yearn, and this will stimulate additional usage of the network beyond the TVL that Yearn gains from printing extra OP yield.

That said, we must balance this against the likelihood of attracting primarily mercenary capital that comes for the extra OP yield and leaves when it ends. This is why our recommendation of reducing the ask is important - it gives Yearn the ability to jump-start their vaults on Optimism and get those second-order effects going while limiting unnecessary OP distributions. Even if some integrations cannot be online in 20 weeks, we should at least see some evidence that integrations are occurring and dedicated development being done on Optimism - in which case a second proposal for another 20 weeks of incentives can be proposed with clear evidence that the extra spend is justified.

What this does for Optimism

Yearn has a stellar reputation in the Ethereum community as one of the original DeFi projects. Optimism stands to gain tremendously by helping Yearn grow a foothold here—not just from the TVL their vaults will bring but from the integrations that Yearn enables with other protocols. Other projects are likely to follow Yearn here to build on top of them. This is a great multiplier effect on this proposal that we don’t see very often.