The Commons: shoring up OP’s liquidity, governance, and funding capacity
Hi, I’m Jack from Velodrome, a leading Optimism dex that recently received a 3mm OP grant from OP Labs, a close collaborator in the build of our protocol. We’ve mostly been heads down building and showing up in partner discords, and we’re looking forward to participating more in OP governance. Consider this our first effort in earnest to engage, following some observations we’ve made.
OP grants to date are meeting some common needs…
Congratulations to protocol teams who have successfully received grants from the Optimism Collective. As part of Velodrome’s research on how best to apply, we read and catalogued every governance proposal to see which approaches seemed reasonable and what the community had to say about each. A few key themes jumped out:
- Through Phase 0 and round 1 of Phase 1, a total of ~40.3mm OP approved for distribution
- Of this, 40.0mm OP — ~99% of the total — earmarked for payment (to be likely sold)
- The only OP designated for some use is for protocol-owned liquidity
We observed successful grants primarily seeking, loosely speaking, three forms of aid: liquidity (35%), user acquisition (28%), and ecosystem engagement (21%). All of these (necessary and valuable!) forms of help essentially amount to a guarantee of a protocol paying someone OP, which would then in all likelihood be sold for ETH or some stablecoin.
…and are a lot for OP to digest
Across the three largest dexes featuring LP, there are roughly 10mm OP in liquidity pools. If we assume the ~40mm distributed OP to be sold evenly over the next six months, we’re looking at 6.7mm OP sell pressure – two thirds of all the OP in liquidity pools – every month.
Simply offering OP to be market dumped for these purposes in this way is an attempt to outrun the token’s degradation, hoping that eventually enough economic value will be generated by the community before the glamour surrounding the OP token’s potential fades to oblivion.
People have hypothesized that it could come from blockspace demand. It could be MEV, transaction ordering, or even community-level partnerships. But there is currently limited tangible value accruing to the Collective, and as far as we can tell there haven’t been significant moves on this issue – and the need to address it is likely imminent.
So we’re offering a broader proposal, one we believe could make a huge difference for the ecosystem. It would help the OP token meet its intended purpose — sustainably fund public goods that may otherwise go unsupported — while lending a crucial layer of relevance to the Optimism Collective as a governing community.
We call it The Commons.
The Commons: securing public infrastructure
OP does in fact have a valuable function in permissionless settings: you can pair it with other tokens on AMMs and use it as a central liquidity node, the same way WETH works on Mainnet or, say, OSMO on Osmosis. This has the effect of providing liquidity to less central tokens, all while increasing the base token’s price stability.
So rather than simply doling out OP to protocols, under this plan Optimism’s governance would reserve some portion of tokens currently earmarked for distribution each round to be used for liquidity pairing. To gain liquidity for their native or utility tokens, applicant protocols would now offer the Optimism Collective some of these tokens for pairing.
As an example, we’ll look backward at the roughly 15mm OP being distributed to help with some form of liquidity. Let’s say OP had instead set aside 10mm of that OP for pairing with native tokens. Roughly speaking, the following would occur:
- 25% of all previously distributed tokens would instead be earmarked for pairing
- Selling pressure is reduced by nearly 25%, or 1.7mm OP per month, to 5mm OP per month
- Adding 10mm of OP into liquidity would double the amount of OP currently in LPs to 20mm OP in LPs.
- So we’ll have gone from dumping 67% of aggregate OP in LPs to 25% every month.
In addition, assuming a 35% benchmark APR we at Velo are using, the current $10mm (assuming OP at 50c) gained from liquidity provision would return roughly $1.75mm over 6 months, not including compounding [note: may vary substantially due to the many potential ways of deploying LP across different platforms].
Good for protocols
The selling point for protocols is simply this: they’re already asking for more liquidity from Optimism than what’s provided by this example and, even outside of OP grants, are incentivizing protocols such as Curve (and, yes, Velodrome). This is all to say that there clearly exists demand for this sort of liquidity backstop. This proposal would provide them this exact service while also giving them a responsible steward of their tokens. And, because this action lends some material value to the Collective, our hope is that it kickstarts similar initiatives accruing additional value and signals to the broader market that there is a nascent economic engine beneath us.
Becoming the Collective
By obtaining a wide range of ecosystem governance tokens, the Optimism community will gain broader governance power, creating a new layer of metagovernance available to Collective members to help shape the ecosystem for public benefit. The Collective’s status as stakeholder of participating protocols would then be formalized and made actionable. Delegates can now vote not just on Optimism-specific proposals but also on individual protocols’ proposals. Collective members now have a direct channel to partner with Optimism protocols, and some could even act as specialized representatives on behalf of Optimism. There is a lot of design space here.
This exact scenario has already played out for Velodrome. Some of you might know that when we first designed our token distribution, Velodrome took the initiative to grant Optimism 5% of our initial token share. This has proven to be one of our best decisions yet; Optimism has already gotten back its initial $150,000 grant to us in token value alone, and in the meantime it has collected substantial fees and compounded its power to incentivize liquidity in ways that have been beneficial for the ecosystem. And most importantly, that ownership has facilitated a close partnership between us and OP Labs; we actively work with them to help them use our protocol to best serve their interests.
Community member dcao has illustrated this mode of value creation through recomposition succinctly:
This is unironically true.
The Working Constitution calls for the Optimism Collective to “undertake a series of governance experiments” to, among other things, “sustainably fund those public goods that improve upon the well-being of the Collective and beyond” and “minimize the discrepancy between collective impact and individual profit.”
We’re asking the Collective to take the experimental bet that acquiring a stake in partner protocols in exchange for crucial, clearly desired support does indeed serve this vision—that properly seating the Optimism Collective’s capacity in the combined value of participants’ efforts and successes will lead to new directions in shared responsibility and prosperity.
And we’re asking protocols on Optimism to do more than express support for the public good as a concept and take another bet, that they will in fact be better off by formalizing a commitment to the public good and inviting the greater Optimism community to the table. It wouldn’t be for nothing — they would gain a responsible holder of their tokens, in addition to all of the other benefits they stand to gain from partnering more closely with the Optimism Collective.
There’s a reason why, when we were invited by Optimism to migrate from the Fantom ecosystem and build a liquidity hub, we shifted our entire trajectory as veDAO toward this new space. We saw in Optimism a unique ecosystem where it seemed that people were putting money where their mouth was when it came to experimentation in governance modes.
And now that we’re here, we want to help Optimism take real steps in proving that its philosophy of mobilizing new governance structures to build and maintain public goods can and does work.
One step in this direction, we think, is the communal ownership of liquidity, which we believe can be a public good. It helps that owning liquidity also happens to be a value-accretive activity, which in turn will help us fund more public goods in a sustainable way.
This, of course, all comes back to the question of why we have OP the token in the first place. Its sole purpose ought to be to fund public goods for the betterment of the community—so let’s make sure that this token can continue to do so by supporting its value through meaningful economic action.
We invite discussion on this issue, as there are some details and specific cases we have a view on but could use more perspectives. For instance:
- How would this be incentivized or required? Would there be some ‘bonus’ OP pool set aside?
- How much OP currently requested for liquidity as a proportion of the total OP distributed should be targeted?
- How do we factor protocols’ market cap (or having any token on OP) into these considerations?
- Would OP compound LP positions or accrue vote power (in the case of, e.g., positions on Velodrome and Curve)?
- Can we call this layer-owned liquidity (LOL)?
- What would be the actual mechanics of managing the LPs? Who administers them?
We suggest that new grants be frozen until we consider this proposal. It is critically important that the Collective appreciate the likely inability of the current liquidity infrastructure to handle projected sell pressure.
We look forward to hearing thoughts on this.