[DRAFT] [GF: Phase 1 Proposal] Velodrome

Velodrome: OP Phase 1 Proposal

NOTE: We have withdrawn this proposal following notice of a Partnership Grant but left the thread open for feedback and archival purposes

Project Name: Velodrome Finance

Authors Names: Jack Anorak, Tao, Alex Cutler, Gabagool

Number of OP tokens requested: 3,000,000

L2 Recipient Address: 0xb074ec6c37659525EEf2Fb44478077901F878012

Relevant Usage Metrics:

As of July 1, 2022. For live metrics, please refer to our community dashboard at Dune.

Optimism alignment (up to 200 word explanation):

Velodrome’s top priority is to provide a deep liquidity layer for low-slippage trades on Optimism. Based on a ve(3,3) design, Velodrome rewards behaviors correlated with the long-term success of the entire ecosystem:

  • Liquidity providers (LPs) receive VELO emissions, following an emission schedule running in perpetuity
  • VELO holders can vote-escrow their tokens in exchange for veVELO proportional to the tokens locked and time locked, up to 4 years
  • veVELO holders control the flow of VELO emissions to liquidity pools through gauge voting
  • In return, veVELO voters receive 100% of the trading fees and bribes captured by the token pairs they select, as well as an anti-dilutive veVELO rebase

This design offers a capital-efficient, sustainable mechanism for protocols on Optimism to attract and retain liquidity. Protocols holding veVELO can incentivize liquidity for their token pairs in perpetuity with minimal dilution while capturing trading fees, a significant upgrade to classic LP rewards. Success cases include MakerDAO, Synthetix, Liquity, Qi DAO, and Optimism itself; all of which retain significant liquidity for their tokens on Velodrome.

This design also simplifies the onramp for new projects joining Optimism and can therefore accelerate development on the ecosystem.

Proposal for token distribution (under 1000 words):

Since its June 1 launch, Velodrome has attracted $15.5m+ TVL (>$40m at peak) and positioned itself as a key protocol on the Optimism ecosystem.

Directing OP incentives to core protocol contributors such as active veVELO voters and strategic partners will add foundational strength to Velodrome’s economy in these early days, giving us time to build out additional functionality critical to the protocol’s success.

How will the OP tokens be distributed? How will this distribution incentivize usage and liquidity on Optimism?

Velodrome will allocate OP distribution to support a healthy economic equilibrium of protocol incentives and reward further development on top of its liquidity layer:

  • 15% - Long-Term Locking + Governance Incentive
    • veVELO lockers are making a long-term bet on both Velodrome and the Optimism ecosystem during a moment of great uncertainty.
    • Token locking supports the health of the ecosystem by a) reducing floating supply of VELO, thereby reducing volatility, and b) aligning incentives between the token holder base and the overall ecosystem, as veVELO holders have a shared interest in the long-term success of Velodrome and Optimism as a whole.
    • Rewarding lockers with OP tokens could not only increase the health of the Velodrome economy but also give more governance power to the exact kind of deeply invested, long-term thinkers Optimism is looking to attract.
      • Quantity: 450,000 OP
      • Delivery: Distributed to new veVELO lockers proportionally to locking balance
      • KPI: Exceeding and maintaining 65% VELO total supply locked
  • 45% - Flywheel incentives: liquidity, partner onboarding and OP trade routing
    • In return for their active participation, veVELO voters receive the trading fees and bribes collected by the pairs they vote for. Bribes, therefore, are highly-capital efficient lever to attract liquidity to the pairs in the ecosystem that deserve it most, while effectively increasing the incentives for long-term participants (veVELO). Bribes act as a core balancing mechanism and can serve as a liquidity catalyst for new players looking to enter the ecosystem. Experience in Velodrome and similar protocols, such as Curve-Convex-Votium, shows that bribes yield a 1.3-5x return in emission value per bribe. Maintaining a consistent bribe program for core ecosystem token pairs would allow Velodrome to attract and retain liquidity in a capital-efficient way.
    • One of Velodrome’s core objectives is to become the liquidity platform for new and existing projects looking to deploy on Optimism. A key aspect of Velodrome’s initial distribution was the gifting of veNFTs to key “launch partners” both inside and outside the Optimism ecosystem. This resulted in the first ever L2 deployment for several protocols and tokens. The Velodrome Team retains control of additional veNFTs to be used as “grants” for future protocol partners looking to migrate to or build on OP. To continue incentivizing partners to join the Optimism ecosystem, Velodrome will offer bribing matching, veVELO voting boosts, and OP token pairing (providing liquidity) for new partner tokens, using a portion of the OP grant, which would further strengthen OP’s position as a central token for trade routing. As part of this program, Velodrome will seek to coordinate with other partners receiving OP grants to merge liquidity incentive efforts leveraging Velodrome’s mechanics, increasing the sustainability of ecosystem incentives and reducing the potential price impact on OP
    • Velodrome will also strategically pair OP with core tokens to establish OP as a central token for trade routing on the protocol, ensure deep permanent liquidity for OP
      • Quantity: 1,950,000 OP
      • Delivery: Bribes strategically added to key pairs, OP paired with key partner tokens, offered as incentives to partner onboarding, match partner bribe incentives. Distributed at an average rate of 160,000 per month
      • KPI: High liquidity on targeted pairs (TVL), TVL / bribe value, Trading volume / bribe value, number of partners onboarded
  • 20% - Builder Incentives
    • Distributed to protocols that integrate Velodrome’s liquidity layer into their dApps
      • Quantity: 600,000 OP
      • Delivery: Co-incentives positioned on partner protocols
      • KPI: TVL, transaction volume, transaction count attracted through partner dApps
  • 20% - Building and Auditing Relay
    • Relay is a proposed addition to Velodrome that will be a first-of-its kind vote delegation and autocompounding feature that is directly built into Velodrome - i.e., not administered by a separate protocol with fee cuts, separate governance, and so on.
    • Relay is a crucial part of the Velodrome ecosystem, one that on the one hand allows votelockers to enjoy passively optimized, compounded yield, and on the other hand provides the Optimism Collective more power to direct liquidity for the benefit of the greater community.
    • How? By combining delegation to a strict profit-maximizing strategy, which would vote for pools offering the greatest potential for fee and bribe revenue, with pool incentivization from OP grants and bribes (e.g., the flywheel incentives mentioned above*),* we can help direct delegated votes to the most socially beneficial pools, while offering the best yield available to veVELO lockers.
    • While our work since our launch one month ago has for the most part been (and will continue to be) the continual improvement of our existing functionality as well as UI, QoL measures, and integrations, we see an urgent need to get Relay online; this offering would dramatically increase our value proposition to existing and new partner protocols. Unlike many of our peers on Optimism, we have never raised outside capital, instead bootstrapping ourselves off fees and grants after being invited by OP Labs to build on Optimism. This means we’ve been building on a shoestring.
    • This grant would enable us to reach out to the community to attract more builder and auditing resources. We’ve already identified some people and orgs who can help - it’s just a matter of making sure they can link up well with us. Because this is new, we want it done right and quickly.
      • Quantity: 600,000 OP
      • Delivery: Relay spec’d, built, and deployed as broadly defined in the post linked above, or built to specs revealed to be better for proper ecosystem functioning
      • KPI: Relay successfully deployed and audited to the highest standard
Initiative Allocation
Locking Incentives 450,000
Flywheel Incentives 1,350,000
Builder Incentives 600,000
Relay Building and Auditing 600,000
Total 3,000,000

Why will the incentivized users and liquidity remain after incentives dry up?

Velodrome’s LP emissions are designed to run in perpetuity, following a sustainable and predictable schedule (see our docs for details). As a result, liquidity incentives will always be a key protocol feature.

The incentive program outlined above will significantly boost the value of accumulating VELO and vote-locking into veVELO, supporting the health of the Velodrome economy while the natural tailwinds of Optimism’s growth accelerate. Once OP incentives end, protocols and retail players alike will hold a long-term veVELO position that will allow them to further direct VELO liquidity incentives, while sharing the upside of Velodrome’s and Optimism’s success.

Over what period of time will the tokens be distributed?

12 months

How much will your project match in co-incentives?

The VelodromeFi incentive model is designed in such a way that each of these actions will be reinforced and complemented with additional VELO incentives. In the case of the locking incentives, veVELO holders will receive a higher rebase (veVELO balance growth) every epoch, proportional to the share of total VELO supply that is locked (veVELO.supply / total.VELO.supply). Likewise, flywheel incentives such as bribes will attract an outsized share of VELO emissions to targeted pools, allowing liquidity providers to capture the increased emissions and creating a virtuous cycle of rewards for each $OP committed as part of this strategy.

10 Likes

The amount requested is way to high for the traction your project has.

1 Like

Thanks for the proposal guys.

65% - Flywheel incentives: liquidity, partner onboarding and OP trade routing
Bribes strategically added to key pairs, OP paired with key partner tokens, offered as incentives to partner onboarding, match partner bribe incentives. Distributed at an average rate of 160,000 per month

In regards to that particular allocation, when you say “OP paired with key partner tokens” do you mean that a portion of OP from this proposal will be LP’d into popular/partner pools? Or that it will be used for bribing incentives for those pools?

Thanks.

4 Likes

we’re flexible on this. could be done on a case-by-case basis

really this is part of the strength of this particular program and our commitment to being an active partner as a team; can lay out bespoke incentives to get new protocols onboarded to OP

There’s no way you read this in sub 1 minute. It is the 5th biggest protocol currently active on Optimism by TVL.

1 Like

Exactly right, ser. Use the OP token more as a base pair to help drive more liquidity to partner pairs as well as drive additional utility / liquidity on $OP itself.

We’ve got a bigger idea here we want to pitch soon too.

1 Like

distributions from the last voting round in fact have us confident that this is an appropriate amount given our top status as an OP dex, and the centrality of our protocol to ecosystem liquidity carries multiplier benefits that wouldn’t be found in other proposals

I see, can you specify how much is planed for pairing OP with the partner tokens and given that there is no single sided liquidity provision, how will the OP be physically paired with those tokens?

Based on metrics and usage the amount asked is way to much, you can very quickly see that. I am not saying NO to the proposal, only saying the amount is way to much based on those 2 parameters.

TVL of $15.9 million, requesting $1.5 million of OP for mainly incentives.

As @jackanorak mentioned, it would probably be on a pretty case-by-case based on the partner protocol’s needs and assets. But, one could easily imagine some form of token swap allowing both sides to provide deep liquidity on an XXX-OP pair.

Fees and or bribes generated from these pairs could then also be compounded into additional liquidity to continue building the size of the pool. I think the overall % of the allocation that would go specifically to this function would probably depend on the amount of demand and it’s relative efficacy in onboarding/deeping liquidity for partners.

3 Likes

Are there any good benchmarks in your mind? Looking at the current state of proposals, it’s hard to get a gauge.

There is also a fair amount of value we’re creating that is difficulty to quantity.

We’re actively working to attract and onboard new protocols to the ecosystem: Ren, Hundred, Redacted, Lido, Volt, Layer2DAO, Angle, etc etc. Part of the reason Optimism helped us to bootstrapped was to help new protocols get liquid (a major pain point in the past). That will yield exponential value for the ecosystem.

We’re also helping to deepen liquidity on critical ecosystem pairs like sUSD and sETH that support folks like Synthetix, Lyra, Aelin, etc. In the past 7 days, we were able to bring 1M in TVL to the sETH-WETH pair. And we’re highly capital efficient in doing so, which should help unlock a ton of growth for those projects.

The big thing though is that we’re Optimism native and the protocol is designed as a public good. 100% of fees and bribes stay in the ecosystem and go back $veVELO lockers which are primarily projects on OP. Compare that something like Curve where 100% of the bribing happens on main-net and 50% of the fees go to veCRV stakers there.

If we can capture more of the TVL and volume there, the ecosystem and Optimism wins.

Got it, so I think the details around those “token swaps” would need to be hashed out at least to some degree in the body of this proposal given how many variables there may be involved. That way delegates can have a pretty clear picture as to how that allocation will be utilized.

i’m not sure we can do that adequately, because we have to be responsive to the needs of the market. i don’t think anyone wants to force distribution for its own sake when it’s not efficient.

but i want to make sure i’m addressing any concerns you might have. could you please lay out what you’re worried might occur?

TVL of $15.9 mill but total volume of $238 million since only the 2nd of June. The OP/USDC pool has the most volume for OP anywhere I’m pretty sure ($3 million average daily volume since inception of the pool).

I have no worries, but I’m certain other delegates would want to know what the plans around that process are. It doesn’t seem like there is a clear plan for how the OP will actually be paired with the partner tokens effectively and that’s what my question is concerned with.

1 Like

so if we were to earmark some portion of those incentives for 'OP pairing" you’d find your concerns addressed?

i guess what i’d say is that if others have a specific concern about a lack of clarity in our plans beyond what we’ve outlined in the proposals and comments, they should raise them. if you’re satisfied, then as far as i can tell there’s not much cause to impose an arbitrary earmark for its own sake. if everyone wants token pairing (and again, please stay tuned for a broader proposal we think will dramatically help OP), we should devote the entire allocation to it, i.e., commit all of the allocated OP to LPs versus using them as incentive payments

If high-priority, large protocols, say, have POL on another chain and just need convincing to migrate over, we shouldn’t limit ourselves to OP pairing (especially if they’re stablecoin protocols!) as a potential use of granted OP when the broader upside of bringing them over is substantial

this, by the way, owing in part to substantial voting and incentivizing we’ve done (as well as core protocol design), which has led us to leapfrog Uniswap and Curve in efficiency and aggregator routing despite our threadbare budget

now consider the high requirements of many high-throughput OP protocols for deep liquidity and low-slip trading and the incipient need to get that sorted before the next swell of user interest and you start to see just how much this grant could do for the OP eco. we’re well positioned to be the top store of liquidity here, acting primarily as a public good (with no private funding!) for the benefit of Optimism

1 Like

I’m sure other delegates will chime in soon don’t worry haha :slight_smile:

Yes I would like to see how much is earmarked for token swaps given that you will essentially be selling OP to who ever you plan on partnering with and there are many variables involved in that process.

Personally I think that part of the allocation should be minimal given how opaque and discretionary that process would be, but that’s just my opinion.

1 Like

taking it from the discord:-

|Locking Incentives|450,000|
|Flywheel Incentives|1,350,000|

This a huge amount of token just for LP incentives.

Relay Building and Auditing 600,000

is this for development of this feature, right ?

and again, your incentives are not clear.

In this current form, this will be an easy No for me.

These aren’t entirely LP incentives.

Locking incentives are incentives to lock VELO as veVELO and claim Velo voteshare.

Flywheel incentives are in part LP incentives, or they may be distributed in the form of paired OP within an LP, which as far as I can tell hasn’t been an option explored by any other proposal but which we believe carries massive benefits, which we’ll elaborate on in governance this week.

I’ll say this again: if all people are asking for is an up-front demarcation between LP incentives and LP pairing, we can do that if it gets to yes. We just don’t think it makes a whole lot of sense.

All of this will be co-incentivized by us following an ongoing program.

The relay section is to solicit outside help in the development and auditing of this additional feature, which would be a first-of-its-kind addition to a dex.