OP Liquidity Mining Incentives on Uniswap V3

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:

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

7 Likes

Very good. This will help to enhance the confidence of OP holders and also expand the ecological development of OP

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Great proposal, I want Uni V3 moving to Optimism

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Velodrome and Zipswap are incentivising OP-stable and OP-ETH liquidity from their own pockets. This seems to work decently enough so far, with $5M+ of liquidity on Velodrome and $1M+ on Zipswap in just a couple of days.

Does it make sense to allocate OP mining incentives towards Uniswap, rather than build with AMMs putting active effort towards promoting Optimism use?

This would be governance picking a winner. Said winner:

  • is already dominating the AMM space
  • couldn’t even bother to make a proposal in time for their retroactive OP grant

It might make for a healthier ecosystem to encourage competition. Especially when homegrown initiatives exist, and have shown willingness to promote Optimism.

6M OP over 10 weeks is a sizeable amount, for a questionable outcome. Liquidity mining capital typically isn’t sticky.

I believe for this proposal to make sense, Uniswap governance should come forward and offer UNI rewards as well. A joint UNI-OP program could make sense.

My own preference (if governance decides liquidity mining incentives are required) would be to encourage all competing AMMs proportionally to their OP liquidity. It’s better for the Optimism Collective to be credibly neutral.

I support this proposal. Having a liquidity presence on Uniswap V3 is critical to the success of OP and the Optimism Collective. LM Incentives will give an excellent kickstart to liquidity over there and allow CLMs and users to build solid strategies for LPing.

Agree with these points. I’ll add that Balancer and Beethoven are also offering up their own tokens as rewards to incentivize OP liquidity. Let the dexes compete with each other. If we’re going to spend OP to build short-term liquidity, at least do it in a way that doesn’t stifle competition.

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agreed for this proposal :raised_back_of_hand:

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These are good points, @PhiMarHal . However, the criticism about Uniswap not submitting a retroactive OP grant proposal is somewhat beside the point; Uniswap is not the core proposer here, but rather xToken and Gamma strategies. Both teams have been building contracts around Uniswap V3, so it makes sense that they would propose to tie their LM proposal to Uniswap V3.

Long story short, this LM program would drive liquidity to tooling on top of Uniswap V3 which in principle could be extended to other AMMs with concentrated liquidity. I view @PhiMarHal’s argument against this proposal as a bit of a false flag since xToken and Gamma are the drivers of this idea.

3 Likes

Great proposal and I agreed for this.

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Great, I’m up for the proposal

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I disagree. This proposal isnt about incentivizing uniswap vs other lp/amm platforms. Its about concentrated liquidity managing protocols that are new primitives in the space to generate sustainable yield rather than the airdropped mining incentives given by most platforms.

Uni v3 is an infrastructure product that is utilized by these new platforms to run their strategies for their clients/daos/funds/users. These protocols have to rebalance their lps in order to better manage them and this costs gas which makes their sole function expensive and inefficient on eth mainnet. For them to truly shine and show their potential, it would be better to run their strategies on L2s that have lower fees, so they can rebalance their lp positions as frequently as possible. Again its not uniswap, these platforms need products like uni v3 that allow managed lp ranges and other sophisticated strategies which are not possible on generic amms.

Its a completely new use case and primitive for sustainable defi yields and i believe if they are to truly shine and exhibit their potential, it will be on L2s with lower fees. All the more reason for funds and daos to migrate and have their lps managed on L2s and also better for users that cant manage their lps over on mainnet. We should be welcoming them with open arms and providing them with all the opportunities to succeed as these applications are true L2 apps which will drive organic usage here.

2 Likes

I think Optimism should do what is in the best interest for all Optimism users. The reason that Uniswap is dominating the AMM space is due to the fact that its concentrated liquidity model is providing extremely low price impact trades, and DEX aggregators such as 1inch and Matcha are routing trades mostly through Uniswap’s pools due to the capital efficiencies and price impact savings.

Credibly neutral should mean incentivizing the pools based on merit. This means incentivizing pools where you will have the most impact. Velodrome and Zipswap still use the full range Uniswap v2 model, which requires a lot more liquidity to get to the same price impact as Uniswap v3. As such, a $1 of OP rewards would go a lot further on Uniswap v3 than a constant product AMM model like Velodrome’s or Zipswap’s when it comes to lowering price impact on trades.

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One other thing I’d point about Uniswap relative to other DEXes, putting aside technical discussions for a second…Uniswap is the Schelling point for DEXes on Ethereum. Just by nature of almost everyone else having liquidity there and many traders simply defaulting to Uniswap, it’s important that OP maintain a strong presence there

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Definitely wasn’t intended, but I see your point now. I appreciate all the answers, it got me to rethink my position!

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Great proposal and agree with all of these points!