[READY][GF: Phase 1 Proposal] Velodrome Finance

📜 Grant Proposals Governance Fund: Phase 1
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Thank you for this extensive proposal.

Below, we’ll dive into different aspects of the proposal but first we’d love to know

1. Grant Goals

These goals are reasonable for Velo. For the overall DEX ecosystem on Optimism they should be

  • Lowering barriers to entry
  • Boosting ecosystem efficiency
  • Building deep liquidity on key ecosystem pairs

( → $ in the right place to achieve xyz; openness & support for projects to join & contribute to Op)

Velodrome had an especially positive impact on the following 3 OP ecosystem goals:

  • Velodrome has been a key player in onboarding new protocols through personal contact.
  • Velodrome helped bootstrapping pools for projects with locking & strong co-bribing incentives.
  • Establish liquidity for Op & some stablecoins (1inch examples → trades routed through Velo & Uni)

100 Weth-Op trade
100 Weth-Op trade853×501 36.6 KB
10K USD Trade

→ Why is it that larger trades are routed more through Uni v3?

Despite that, Velodrome achieved other project-specific goals:

  • Large TVL growth
  • veVelo locking from partners (+individuals)
  • User attention & activity
    image image

Things that we criticially look at: Deep liquidity on key ecosystem pairs & ecosystem efficiency

  • Uniswap has been more important for key ecosystem pairs so far without incentives. (Check routing from 1inch for USDC/ETH/WBTC, Op pair somewhat split between Velo & Uni v3)
  • High amount of incentives & TVL compared to trade volume (market share)

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2. The Ask

As mentioned by @GFXlabs @katie, the Ask is very large - especially given in a lump sum.

Locking Incentives: 1.5M Op (40K Op per week)

  • This incentive can help with onboarding projects to Optimism (+)
  • Requiring projects to invest into Velo instead of Op is not optimal in our opinion. We would look at this more postive if projects were to lock Op or an 80/20 position that helps with effective liquidity (±)
  • You mention competiting incentives: Do you mean within or outside of Optimism?
  • What kind of impact do you expect from full deployments of Curve and the upcoming start of incentives on Uniswap, Curve, Sushi + Velodrome on Velo bribing, efficiency, market share?

Boosting ecosystem efficiency with Bribe Matching: 1.5M Op (40K Op per week)

  • This could further help with onboarding additional projects & bootstrapping liquidity on Optimism
  • You state that liquidity cost from bribing is cheaper than direct incentives. Do you compare the same incentives on uni v2 or uni v3 as uni v3 might make up for the “extra cost of direct incentives”?

Building deep liquidity on key ecosystem pairs: 1M Op (30K Op per week)

  • Higher liquidity in top pairs is important for Optimism (IF liquidity is utilized/effective)
    • Would it not be a better idea to incentivize top pairs on Uni v3 and for example new projects on Velo considering ecosystem efficiency?
    • Do you believe it makes sense to incentivize the same pairs on different DEXs?
    • Despite “slow” market share growth of DEX aggregators on l2s, we strongly believe in abstraction over time & that users move towards wallets with built-in meta-aggregators in low-cost environments. Hence, we’d recommend a focus on protocol efficiency metrics (Slippage, trades (volume) routed, effective liquidity) over adoption KPIs (TVL, direct users, transactions).

3. General Ask Justification

Probably this doesn’t need to be stated. 4 Mio Op (110K OP per week!) is definitely a huge Ask. We appreciate the depth of the proposal and data provided, some of the “comparable metrics” are flawed though (apples & oranges) and should at most be used as small indicator in a comprehensive review. Obviously, we should not justify new Asks with previous grant amounts or Op granted/TVL but with value-added from the new proposal. Maybe, this helps anyways to stimulate a discussion which KPIs we should look at to evaluate all the different grants until today.

Potentially good KPIs (for long-term sustainable growth initiatives)

  • Op granted per unique user onboarded
  • Op granted per top project/team onboarded
  • Op granted per new liquidity on Optimism
    (+ retention, + effectivity, + network effects, + user activity, - user clusters, etc.)

4. Overall:

It’s great to see a native DEX on Optimism with a team that contributes significantly to project onboarding.

As many delegates such as @polynya @jackanorak have previously mentioned, it is really important that we finally have some serious evaluation of the first rounds of grants before doubling down on top initiatives. Despite that, we can only restate, that it would be very important for Optimism to have an ecosystem-wide liquidity, DeFi, NFT plan to incentivize the right partners or at least run short-term experiments that help Optimism come up with a competitive ecosystem strategy.

As mentioned above, we should very deeply look at incentivizing what’s best for the ecosystem (lowering entry barriers, improving efficiency & liquidity), and not waste incentives on conflicting incentive programs or pick pre-maturely favorites & lock-ins.

In that regard, thank you for the data provided. That helps already significantly in reviewing your new grant request. We believe a 2nd grant to Velo could be well-reasoned to further grow the Optimism ecosystem - esp. in regards to project onboarding & kickstarting liquidity for new projects on Optimism.

Looking forward especially to your takes re: key ecosystem pairs & competiting incentive campaigns!

And, we’d love to hear the evaluation from the Foundation too as mentioned in the beginning.

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Specified it with @alexcutlerdoteth in Discord. Based on what I understood, the percentages provided under “Number of OP Tokens Requested: 4,000,000 OP” have been calculated by dividing the metrics by the total number of OP tokens other protocols have received. While this is more fair than comparing Velodrome metrics to pre-grant metrics of other projects (which I mistakenly understood before), then I would still be wary of using these metrics for justifying the size of the new grant since it’s based on total number of tokens received and does not actually account for how much of the grants have been used till now. This means Velodrome has inherently higher statistics compared to projects that have not used their OP grant yet or are using it up in a slower pace.

I understand Velodrome has put great effort into working with other protocols. In this proposal the grant would be also used for supporting other projects by “Lowering Barriers to Entry with Locking Incentives” and “Boosting Ecosystem Efficiency with Bribe Matching”. But doesn’t that somewhat force other projects to work with Velodrome to maximize their funds and thus create unfair conditions for Velodromes competitors? Wouldn’t it be more fair to instead direct those funds to other projects directly (based on their own grant proposals), so they would be free to choose with who and how to partner with?

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The partner fund is not currently accepting grant requests and more details will be coming soon. But, regardless the plan was always to pursue grants through governance.

First, we should note that most pairs actually don’t trade through Uniswap at all. As @OPGovWatch pointed out above, Velodrome supports liquidity for 29 separate projects to Uniswaps 9. For most of the ecosystem, no trades route through UniV3 at all because it has no significant liquidity for their pairs.

Second, concentrated liquidity will certainly be more optimal for key pairs and it will always be an important portion of the ecosystem DEX landscape. That is why we’re exploring adding it to Velodrome. But, concentrated liquidity is not without it’s own issues. It is inaccessible to the retail LPs and there is plenty of research to suggest huge % of LPs lose money on Univ3.

It is not as capable as Velodrome is at providing fast, accessible liquidity/onboarding and it cannot be relied on alone to power an ecosystem.

Looking at snapshots of routing will never give you an accurate picture of routing in the aggregate. I’d recommend pulling comparative volume numbers for specific pairs over 30 to 90 day periods for that kind of analysis. That said, you are correct that the vast majority of UniV3s volume on Optimism is through just a few key pairs (also Perps variable pairs inflate volume numbers as well and need to be controlled for).

It is not accurate however to say that they are not incentivized. Projects are incentivizing heavily on UniV3. Just less efficiently.

It only looks very large if you look at it without applying any comparative analysis to other grants that have gone out (as high as 9M OP) relative to size and performance of the grantee protocols. That is why we took care to lay this out above. Indeed, it is actual significantly less in $ value terms that the original grant given to us by OP Labs.

You have to also take into consideration that the matching investment of incentives ($6m+) from Velodrome here is unprecedented and we’re the only project that has partner add their own matches on top of that to access the incentives, increasing the multiplier effect

It is critical for the effectiveness of these programs that Governance evaluate large asks in their broader context. I would ask that if we continue to call the ask “large” we get specific in relative to what.

I’m not sure I follow here. When projects lock VELO they gain the ability to direct emissions to build liquidity and their share of the 100% of protocol that is directed to lockers. The token has both functional and financial utility to the protocols, allowing them to create revenue positive liquidity programs. The procuring and locking of it also supports a virtuous cycle that benefits the ecosystem at large. It is what has helped to drop ecosystem liquidity costs by 30%-70%. Why isn’t this a behavior we’d want to incentivize?

OP tokens at this time only utility is governance. I’m not sure why Velodrome would be the best place to force the locking of $OP tokens. This seems like something better undertaken by governance. For example, perhaps in the future locking/staking it required for voting.

That said, we do care a lot about bringing more utility to the OP token. That is part of why the Optimism Foundation received the largest partner veNFT to support their ability to vote for incentives (in perpetuity) for OP pairs. It is why we’ve raised possible solutions like increasing the number of OP token pairs and making it possible to delegate your OP while in LPs.

Yes, competing incentives coming from other chains such as Arbitrum, Metis, etc. [quote=“ScaleWeb3, post:49, topic:3736”]
What kind of impact do you expect from full deployments of Curve and the upcoming start of incentives on Uniswap, Curve, Sushi + Velodrome on Velo bribing, efficiency, market share?
[/quote]

As I understand things, Curve has no plans for a full deployment on Optimism. Staking will remain on mainnet, governance will remain on mainnet, and fees will continue to be sent to mainnet indefinitely. It sounds as if native bribing may eventually come, but there are no immediate plans outside of the stopgap solution they’ve presented for the purposes of receiving a grant.

As for incentives on those other platforms, our hope would be that the combined power of them helps to attract more liquidity and volume from mainnet and alt L1s, growing the total amount of TVL, volume, and economic activity on Optimism as a whole.

The goal for all of us needs to be to reach that tipping point where Optimism can compete for the largest trades and liquidity providers, which creates a flywheel effect attracting even more activity to the network.

Bribe for emissions models such as Curve and Velodrome have been demonstrated to be more efficient than direct incentives on UniV2 or UniV3.

We have plenty of direct 1:1 examples comparing incentives on UniV3 vs Velodrome as @tao outlined above. It is why there are 20+ protocols incentivizing on Velodrome and like 3 on Uniswap. It is also why projects like Aelin shifted all of their incentives to Velodrome from Uniswap saving millions in the process.

Yes, it certainly could make sense to push every DEX to co-incentivize key ecosystem public good pairs as part their proposals. I actually advocated for this on Curve’s proposal, but it didn’t seem like there was any appetite for it there.

We stand up great on these metrics too, more data coming.

Good ser. Out of respect for us and the 20+ protocols who have co-signed the proposal, can you please demonstrate the flaw or suggest a better framework before implying ours is flawed in some way.

As stated above, the ask is not huge relative to objective measures or the matching investment. Additionally, no other proposal has ever been paired as simply with a proven 2x-3x return on the grant value or a promise to match 1.6x the underlying value in incentives.

It would behoove us not to think of it in terms of this will cost $3.8m. But rather, it will return at least $7.6m to $11.4m in value based on the demonstrated performance of the original grant.

I have a feeling that if governance doesn’t show a capacity to process large deeply evidenced grant requests at a similar level to OP Labs that the power to allocate them may be shifted away.

More to come.

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We’ve provided (insofar as I know) the only objective framework for evaluating a request of this size that takes into account ALL prior grants. Unless you are suggesting delegates should just go on their gut intuition, which is in part which has led to the vast disparity in grant performance to date, please suggest an alternative model that feels more reasonable than the one we’ve offered here. Or, just ignore it and note that we’re the first proposal to ever cover more than the full grant amount in co-incentives.

Every DEX on Optimism has submitted their grant requests of their own design, all of them contained incentives, all but one has approved to date with minimal edits. Each has largely been given what they have asked for to incentivize users and now have a chance to demonstrate the effectiveness of the programs they designed. Your suggestion that anyone is being “forced” to do anything makes me think you’re not engaging in good faith here.

If they can drive similar growth, I expect them to do exactly what we’re doing. Come back with results and ask for additional to support it.

But mostly, this is the absolute wrong way to think about DEXs on Optimism. The goal of grants is to grow the entire ecosystem. DEXs on Optimism are less in competition with one another than we are collectively in a competition to attract liquidity from other layers and chains (although some are less incentivized to focus on attracting it away from their own platforms on other networks) . Deeper liquidity across all of us will drive more volume across of us and drive economic growth across the network. Turning it into a zero-sum marketshare on the network is absolutely missing the forrest for the trees and misunderstands the entire purpose of the grants.

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Long time reader, first time poster here on the forums.
I’ve been a long time user of Optimism and I use it frequently since I do a lot of arbitrage and other trading strategies on here. From my own experience Optimism was never that interesting because liquidity was very limited on the main DEX at that time (uniswap). When Velodrome was added and especially when the OP grant was liquidity boomed and there were a lot more projects with deep liquidity on Optimism.
When I look at all the grants that have been given by OP in my opinion Velodrome must have been one of the most succesful, onboarding new users and creating more possibilities for the user on the network.
In my mind this grant to Velodrome would be an easy yes and I will certainly vote for the proposal. Keep it up and keep making it easy for protocols to come to Optimism and provide liquidity.

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I am one of the Synthetix Ambassadors and a member of the Defi Shadow Committee.

I am an Optimism delegate [Delegate Commitments - #65 by mastermojo ] with sufficient voting power, and I believe this proposal is ready to move to a vote.

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Thank you kind ser! We may still make an adjustment or two so will circle back with you to re-approve if so. :slight_smile:

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@GFXlabs @katie

So on the note of creating some sort of staging for the grant, we’ve got an idea for you that if successful could potentially serve a good model for future large grants as well.

Option 1:

  • Keep grant amount the same, but only deliver half the funds up front
  • Add requirement for a full report on efficacy at the 2.5 month mark to be submitted directly to governance
  • Upon delivery of that report, open a 2w window where anyone in governance can raise a proposal that upon two delegate approvals can proceed direct to snapshot to suspend further grant payments
  • If none are submitted, funding continues

(or)

  • Keep grant amount the same, but only deliver half the funds up front
  • Add requirement for a full report on efficacy at the 2.5 month mark to be submitted directly to governance
  • The committee overseeing defi grants is given is given an opportunity to approve or deny the next payment
  • Approval does not require a snapshot confirmation, but denying it does

Overall, what we’re trying to get at here is a way to limit the rather intensive work required with a full new grant application (we’ve spent a lot of time on this that might be better focused elsewhere :wink: ) while still giving governance the power to exercise more oversight.

It also has the benefit to conveying to partners a more sustained incentive plan is likely so they can plan accordingly, but makes clear to them what would result in it’s being not being continued.

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Even if the approach is novel and there’s maybe not an alternative model that feels more reasonable, then I was only pointing out that the provided data (in this case the percentages that justify the size of the grant) should still be looked at critically. The information in that section is skewed due to not all projects being in comparable stages of using their grants.

I am an Optimism user that wishes the best for the network. But you are right in the sense that I do have my concerns about the feasibility of Velodrome’s low-fee model for all pairs generating enough revenue to be sustainable in the long-term when extra incentives (such as OP grants) stop. In my opinion different assets with different volatilities and liquidities should have different fees to be serve the market. But this is not the point of this discussion, I just want the possibility for other models to also thrive on the network.

I have not objected the fact that the priority is on growing the entire ecosystem and attracting liquidity into the network. We all probably also agree that healthy competition between different projects only strengthens and livens the network. I believe this could be potentially hindered by one of the competitors receiving substantially larger grants in comparison.

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Thank you for the thoughtful compromise. Speaking on behalf of myself, not Defi Committee A, I really like the first option you outlined. This is a great way to monitor grant performance and still include governance in the decision making process. This same model could also be used for projects requesting large grants in the future.

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The Velodrome team has masterfully and thoughtfully built out what has quickly become the lodestone of liquidity infrastructure on Optimism. In the face of monumental growth, they continue to demonstrate attention to the individual needs of dozens of disparate protocols on Optimism.

This proposal reflects their deep understanding of capital efficiency and cross-protocol dynamics as it relates to ecosystem growth.

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I’m a delegate with enough voting power Delegate Commitments - #136 by jackanorak and i think this is ready for a vote

EDIT: not sure, this could be against the rules – we’ll find someone else

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@Katie @mastermojo

We’ve added the section on staging the grant. Would you be willing to approve to move to the review phase?

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I am an Optimism delegate [Delegate Commitments - #18 by katie] with sufficient voting power and I believe this proposal is ready to move to a vote.

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I am one of the Synthetix Ambassadors and a member of the Defi Shadow Committee.

I am an Optimism delegate [Delegate Commitments - #65 by mastermojo ] with sufficient voting power, and I believe this proposal is ready to move to a vote.

Reposting encase I need to.

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It sounds like we agree we’ve presented the most “reasonable” model for evaluating the relative grant sizes.

This presumes the impact of grants is cumulative, which is not something we’ve seen born out consistently in the data. If you have data that suggests they are, please share it. The data is not skewed, it presents the most comprehensive view of grants relative to KPIs to date and helps us in beginning to use a more consistent and quantitative approach when evaluating asks.

If any other DEX approaches governance with $6.5 million in co-incentives and a demonstrated track record of delivering 2x-3x return the investment of previous grants they should get grants that reflect that. If not, they should be lower proportionally to what they are offering and have demonstrated.

Governance isn’t here dole out equal grants to every project in a category, they are here to drive exponential ecosystem growth. We’ve shown we can do that. Other protocols have the same opportunity.

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Thanks for the really informative proposal. It’s clear the team translated the Grant from the Partner Fund into an awesome amount of growth.

To date, 47.7 million OP was distributed through grants, and 4 million OP is 1.72% of the entire Governance Fund. With that context, the amount is large.

That’s where I agree with this from @GFXlabs, although not with the solution they propose.

The revision with some of the grant amount unlocked later is a good improvement, but it’s not clear to me that Velodrome now needs more OP incentives than it received when it was getting started.

I would have the same hesitation if Aave drafted a proposal requesting more than the 5 million OP they received from the Partner Fund, despite their program’s massive success for the entire Optimism ecosystem.

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Why is 1.72% of the entire Governance Fund too large in your mind? Of grantee protocols we represent protocols about 10% of TVL, 12% of volume, 16% of transactions, and 13% of users.

What feels like a appropriate ask to you?

The underlying value of the incentives is actually pretty much equal to the prior grant and is focused on extending the incentive programs that have driven a 2x-3x ROI, reduced ecosystem costs by 30%-70%, and onboarded 30 new protocols. It isn’t so much a question of “does Velodrome need the grant”, it is a matter of “does the ecosystem need to continue to grow at this pace and are incentives on Velodrome one of the best ways to do it?”

I think the answer to both of those questions is clearly yes.

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Pablo from Angle Protocol here! Just want to praise the quality of the Velodrome team and say that they’ve literally been the facilitators of the growth of Angle on Optimism.

Goes without saying that I fully support this proposal

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I am not one for long winded governance debates and even knowingly sat out on the Overtime discussion even though I sit on the Thales Council. To me, the less said the better and many people smarter than I am perfectly argued the details of that proposal for a successful outcome.

That being said, I feel compelled to point out this statement from Alex because I feel the Velodrome ROI is in a class of it’s own and I want voters to understand what’s at stake. I get the hesitance towards a relatively new bribing system that brands itself as a “public good”. However, the system is working and it’s currently providing multiple protocols the opportunity to have deep liquidity for a fraction of the cost elsewhere. An approved grant to velodrome is like granting the entire ecosystem imo
 which is what we are set out to do.

Is the flywheel sustainable? Idk. But the potential reward (with data to back projections) certainly seems worth the risk. That’s why I feel the proposed staging option that Alex proposed (w/ Katie’s support) is the best way to go about this proposal.

My stance on this topic is only my personal opinion and does not reflect anyone else.

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