Intro
The following is a joint proposal by xToken Terminal & Gamma Strategies to outline a path forward for OP liquidity incentives on Uniswap V3. This is both a governance proposal and a partnership proposal. We are putting forward our capital markets platforms, as two service providers for OP liquidity incentivization. (After a period of discussion, we will publish a formal Phase 1 proposal.)
Terminal’s out-of-the-box solution allows projects to deploy a highly configurable Uni V3 liquidity mining (LM) program in a matter of minutes, no dev work or technical expertise required. Terminal is live on Ethereum mainnet, Optimism, Arbitrum and Polygon. Gamma Strategies has been actively managing liquidity on Uniswap V3 since March 2021 and prides itself on optimal LP strategies using its machine learning algorithms and automated strategies. Gamma is currently live on Ethereum mainnet, Optimism, and Polygon.
The OP token is finally live, ushering in a new era for L2 Ethereum. For at least some period of time, Optimism will be the only leading ETH scaling solution with a liquid token. The OP token – which serves a focal role in the governance of the network – has already generated significant investor interest. As such, bootstrapping a strong, stable foundation of liquidity for the token is essential.
While the token is trading on multiple CEXes, most DEX liquidity looks to be bootstrapped by independent actors and perhaps professional market makers. This is an undesirable state of affairs for a token, project and community with a commitment to transparency, decentralization and permissionlessness. We believe an OP liquidity mining program should be considered.
Optimism is a community-led protocol, meaning the team is deferring tokenomics and liquidity decisions to token holders and delegates. This post will walk through the design considerations behind an LM program and hopefully result in greater clarity in the community on the path forward.
Designing an LM Program for OP
In designing an LM program, we first need to understand what we’re optimizing for. After spending some time gauging community sentiment, we believe these are the community’s top priorities:
- Facilitating deep liquidity to minimize slippage
- Bootstrapping DEX liquidity on both L2 and mainnet
- Offering yield opportunities to token holders as the community determines the OP token model
With these priorities in mind, we can establish the key decision points for the program.
But, first, given the significance of the OP token launch and the importance of Optimism in the effort to scale Ethereum, we believe any initial Uniswap V3 liquidity mining campaign should be spread across multiple service providers. We are proposing that any allocation for liquidity mining incentives be split evenly between three providers:
- xToken Terminal
- Gamma Strategies
- UniswapV3Staker
Each provider offers a different angle in service of OP token liquidity. More in the Liquidity Range section below.
Network: Optimism + Ethereum mainnet
Ethereum mainnet is still the focal point of liquid markets, making a liquidity presence on L1 essential. We believe 25% of incentives should be paid out on mainnet, motivating LPs to migrate liquidity from Optimism and establishing liquid markets on both the native chain and L1. However, we are open to discussion on whether to include L1 or to incentivize LPs on Optimism only.
Asset pairs: OP<>WETH and OP<>USDC
To reach the widest audience, xToken recommends pairing OP with both WETH and USDC liquidity. While the difference to traders is small - likely only 5bps in swap fees - the difference to liquidity providers could be significant. By having an option between a WETH<>OP pair and USDC<>OP pair, LPs are able to express an opinion on asset composition and price outlook, increasing the pool of available capital and enhancing liquidity for traders. We think incentives should be split roughly 50-50 between these two pairs. On the fee tier question, we believe the 0.3% and the 1% tiers are acceptable and leave these decisions up to each service provider. xToken will recommend the 1% tier for initial programs on our platform, to be reassessed once a period of price discovery has elapsed.
Gamma will provide in the 0.3% fee tier for the WETH<>OP pair on Optimism as it believes that in the long-term, the majority of the trading volume for OP will take place in the 0.3% WETH<>OP Optimism pool.
Liquidity range: Varied
With three different service providers, each will be able to approach liquidity incentives and provision in a way that complements the other two options. xToken will provide a user-friendly interface for full range OP liquidity incentives, offering a passive option with lower IL and execution risk for community members who want a simpler LM experience. Gamma will actively manage OP liquidity, concentrating assets right around the spot price and structuring rewards through their platform. UniswapV3Staker will offer a more expressive, dynamic option for more sophisticated LPs looking to rebalance frequently and independently of other LPs.
Incentives Program Proposal
In light of this analysis, we’d like to propose an initial program of 6m OP paid out over 10 weeks, with 1/3rd allocated to each service provider’s program. In terms of distribution, we believe 75% of rewards should be paid out on Optimism (25% on Ethereum mainnet) and roughly half of rewards should be used to incentivize each of the WETH<>OP and USDC<>OP pairs.
We believe OP rewards should be re-evaluated each 10-week period, allowing for community oversight on the effectiveness of the program.
With that, we invite comments from the community.
On Security - xToken
Those who are familiar with the previous version of our project know that at our peak we managed over $100m in assets, specializing in native staking strategies and later getting into liquidity strategies. In fact, for several months after Uniswap V3 launch, we were the largest provider of Uni V3 managed liquidity (peaking at $25m). Those who are familiar with our project also know that we had security incidents in spring/summer 2021, related to our deprecated asset management product line. Since then, we’ve bolstered our security practices and have developed a rigorous and intentional process. Additionally, the Terminal liquidity mining contracts have been audited by ABDK, have been the subject of an Immunefi bounty program for several months and have undergone several months of internal review.
On Security - Gamma
Gamma has been audited by bluechip auditing firm, ConsenSys Diligence in addition to Arbitrary Execution and an Immunefi bounty program and is currently using the latest audited version of its smart contracts. An abundance of caution was taken in implementing dual-sided deposits and slippage parameters to prevent flashloan risk and MEV.
Links
xToken: xtokenterminal.io
Gamma: gamma.xyz
