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

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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Hey there,

Personally I would like to see Velodrome survive without incentives.

My understanding is, the 1.5 Million allocation is for locked up velo. Which seems like the incentive is designed for buy pressure on your token ‘velo’. This is not what this fund is for and previous proposals were slammed for an incentive mechanism like this.

Do you agree that this incentive will directly increase the price of Velo?

Very well written proposal with substantial data to support the ask.

I think it goes without saying that Velodrome has been a critical contributor to Optimism’s growth. They seem to be continuously engaged with protocols not yet on Optimism, and are the only grant recipient I know of that have taken on the voluntary burden of being an unofficial ambassador for the ecosystem. I think this deserves recognition. Several of these protocols who moved to Optimism are posting in this thread in support of the proposal.

While this thread has clearly not avoided standard online forum shenanigans, I urge any voters to not miss the forest for the trees. At the current time Velodrome is the very definition of critical infrastructure to Optimism, and the way the $OP incentives flow, both from the prior grant and as proposed, support the whole ecosystem of participants.

I am in agreement with @ramblers99’s comments.

I believe the ask amount is appropriate and I like the two-phase compromise.

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Glad to see this proposal from Velodrome Finance. Clearly one of the main contributors of growth for the Optimism ecosystem, which is demonstrated throughout different data points.
From the voice of a regular Optimism user, I would like to see this proposal move forward to a vote.

Why? Velodrome would survive just fine without incentives. It is the rate of ecosystem growth that would suffer. The cost of liquidity incentives would increase, putting strain on ecosystem treasuries. Projects would need to increase the rate at which they are spending their granted OP to close the gap, depleting governance funds faster and increasing OP sell pressure. And it’d make it harder for new projects to bootstrap and onboard, slowing the growth in economic activity and losing builders to other networks.

It would also put Governance in an awkward position where it is directing millions in incentives to multi-chain DEXs worth billions of dollars that are offering somewhere between $0 to a few hundred thousand in co-incentives, while passing on their only homegrown public good DEX’s offer to pump another $6.5mm in stimulus into the ecosystem.

According to the data shared by the Foundation on the Governance Grants to date, Velodrome actually attracted more TVL growth ($66mm) than all the governance grants combined ($60mm). Velodrome did this with a grant of 3mm in OP compared to the 40mm OP distributed by governance. You are essentially suggesting ending the most successful ecosystem growth program funded to date.

You are referring to the “lock bonus” here. The purpose of it is made explicit in the proposal, namely to lower barriers of entry for protocols seeking to invest and build in the Optimism ecosystem.

From the proposal:

To onboard new protocols to the Optimism ecosystem during uncertain times and in the face of competing incentives, we must ensure that they are able to bootstrap their liquidity in the most cost-effective method possible. At the same time, these incentives should be paired with mechanisms that require protocols to meaningfully invest in the ecosystem for the long term and thus discourage mercenary and exploitative behaviors.

Incentivizing the acquisition and locking of veVELO is an ideal strategy in this regard, as it requires a multi-year lock of capital in the ecosystem to receive the lock bonus and access Velodrome’s voting and revenue generation capabilities. It is to our knowledge the only currently running incentive program that requires the locking of capital in the Optimism ecosystem. Incentivizing locking lowers the underlying costs of building an initial veVELO position (by an average of ~25% ) while simultaneously giving any protocol the power to direct emissions and attract liquidity for the long term.

Whereas other incentives programs, particularly proposed by DEXs, focus on direct rewards to liquidity providers who have demonstrated a willingness to quickly exit ecosystems when they taper, this locking incentive requires protocols to lock their investment into ecosystem for four years to access the bonus. Indeed, it has already helped lead to $11.2mm (70% of all supply) being locked in the ecosystem for an average of 3.6 years, a feat we have not seen repeated by any other ecosystem incentive program and that isn’t currently possible for protocols like Curve who require you stake on mainnet.

These locked positions further increase the capital efficiency of their incentive programs, reduce the need for protocols to rely on external incentives (such as OP) long term, and actually drive revenue back to them (at a pace of over $10M a year returned to lockers atm).

If there are indeed second order positive effects on token price, it only would only serve to accelerate a flywheel designed to support the ecosystem: further lowering costs, deepening liquidity, increasing volume, attracting users, delivering more revenue to protocols.

In short, the more protocols locking value into the ecosystem the better off the ecosystem will be.

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I think it would be helpful to evaluate what Velodrome’s “competitors” have received vs. what Velodrome has received. That could help people put in perspective the ask.

I don’t have a complete list, but this is what I came up with off the top of my head. Can (edit) if needed.

Approved:
Uniswap - 1m OP - Partner Fund
xToken/Gamma/Uni v3 Staker - 1m OP - Governance Fund
Revert - 240k OP - Governance Fund

Pending:
Curve - 1m OP
Arrakis - 500k OP

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Thanks for the response @alexcutlerdoteth
this wall of text as a response is not necessary

I take it this was the response for my Question

I feel I should ask it again… but I digress It is Obviously going to have a direct impact on the price of your token.

I fear Velo would end up relying too heavily on this Fund creating an even bigger problem in the future. whereby without additional funding would lead to a collapse that would hurt the whole Optimism ecosystem, effectively holding us ransom. In my view this is not sustainable growth

Definition of sustainable growth
refers to “the maximum growth rate that a company can sustain without having to increase financial leverage.”

This is my point we can’t be expected to " pump another $Xmm in stimulus into the ecosystem" every time the incentives dry up It’s just not sustainable…

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Hi @Butterbum

It is not very nice to dismiss @alexcutlerdoteth 's thoughtful and well written reply as a wall of text, especially when your response contains only conjecture.

If you are implying that the OP locking incentives are used to pump the token price, then you can look at the price history of the token thus far. The price of the VELO token has been in the same range since August despite ongoing locking incentives. There was an initial run up after the June market wide collapse once protocols had begun onboarding onto Optimism, which coincided with the initial OP bribe incentives. At this time VELO/USDC liquidity was a mere $500,000. This July run up also coincided with a 70% ETH run off the June lows.

This is besides the point however, a second read of the wall of text in the initial proposal may be in order to refresh your understanding of the reasoning behind locking incentives.

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I did my best to provide through answers to your questions, ser.

I actually do not believe it is obvious that it will have any kind of significant impact, but would welcome any analysis indicating otherwise. Incentives have actually remained consistent since July 15th or so and we’ve seen massive price movements both up and down. Indeed, we actually announced that we were decreasing the lock incentive on 10/19 and have seen the token go up by 15% since.

Again, the primary purpose and impact of the incentive is reduce the costs to protocols looking to build long term revenue positive liquidity programs on Optimism and the 20+ net new protocols we’ve onboarded (even as price has gone up and down), the increasing number of protocol accumulators, and $11mm+ we’ve locked in the ecosystem should be evidence that it is working as intended.

I don’t think you’ve understood our proposal. We are the ones pumping 6.5mm in stimulus into the ecosystem. This not only represents over 1.6x the grant request size but also equals over half of all $OP incentives projected to be distributed via governance over the same period. The ecosystem needs to grow before it can become self-sustaining. Limiting stimulus in its prime growth phase or over-investing in inefficient incentives is recipe for ecosystem stagnation (especially when competitors come with their own programs). Once sufficient economic activity exists on the network (which we’re actively onboarding), organic revenue and retroactive public good funding will be more than enough to sustain it.

This is how scaling works.

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Sure, happy to pull some numbers for you. Added to them and corrected a few data points.

You’ll see that Velodrome on average between our two proposals is offering 1.7x its grant request in co-incentives and is supporting 3.2x the number of projects as the others combined. For the most part, the other projects have offered zero in co-incentives, with the few that have representing an estimated $400,000 or so (difficult to estimate precisely).

That means Velodrome is offering 31x the co-incentives as the other 7 projects combined while only asking for 1.6x the grant size.

Most of the other proposals are a mix between haven’t started yet, still waiting on approval, or currently in a progress so as of the moment there is no way to measure if they are achieving a similar 2x-3x ROI on their underlying grant value, though we’d suspect that is unlikely due to most of them using direct incentives (a 1:1 return) and lack of meaningful co-incentives.

However if they do, we’d expect them to do exactly what we are doing upon the conclusion of their programs: come back with results and ask for support in continuing the programs if there is still an ecosystem growth case to be made.

We’d reiterate that we do not think of incentivizing DEXs as some sort of zero-sum game where investing in one harms the others. The goal of governance is to maximize growth and it absolutely should invest more heavily where co-investment is higher and results are proven.

We pulled the numbers quick so definitely let us know if we got any wrong.

TOPLINES

Velodrome

Total Grant: 7,000,000 OP

Total Co-Incentives: $12,500,000

Total Projects Supported: 29

Total Projected ROI: 2x-3x (minimum)

Other Protocols:

Total Grant: 4,240,000 OP

Total Co-Incentives: $360,000 (estimated)

Total Projects Supported: 9

Total Projected ROI: TBD

DETAILS

Velodrome (OG Grant)

  • Grant Received: 3,000,000 OP
  • Grant Source: OP Labs
  • Distribution Date: 7/15/2022
  • Distributed to Date: ~2.5mm OP
  • Co-Incentives: $6mm
  • Projects Supported: 29
  • Demonstrated ROI: 2x-3x

Velodrome (New Request)

  • Grant Received: 4,000,000 OP
  • Grant Source: Governance
  • Distribution Date: TBD
  • Distributed to Date: TBD
  • Co-Incentives: $6.5mm
  • Projects Supported: TBD
  • Estimated ROI: 2x-3x

Uniswap

  • Grant Received: 1,000,000 $OP
  • Grant Source: Governance (not partner fund)
  • Distribution Date: 9/7/2022 ( ~2 months ago)
  • Distributed to Date: 0 $OP (not active)
  • Co-Incentives: $0
  • Projects Supported: 9 (overlapping between protocols #s below)
  • Estimated ROI: TBD

Curve

  • Grant Requested: 504,828 $OP
  • Grant Source: Governance
  • Distribution Date: TBD
  • Distributed to Date: 0 $OP (not active)
  • Co-Incentives: TBD ($90,000 average previous 2 months)
  • Projects Supported: 7
  • Estimated ROI: TBD

Beethoven

  • Grant Received: 500,000
  • Grant Source: Governance
  • Distribution Date: 8/8/2022 (3 months ago)
  • Distributed to Date: Unknown
  • Co-Incentives: ~$20,000 to date
  • Projects Supported: 9
  • Estimated ROI: TBD

Sushiswap

  • Grant Received: 500,000 $OP
  • Grant Source: Governance
  • Distribution Date: 9/7/2022 ( ~2 months ago)
  • Distributed to Date: 0 $OP (not active)
  • Co-Incentives: $250,000
  • Projects Supported: 0
  • Estimated ROI: TBD

xToken/Gamma

  • Grant Received: 900,000
  • Grant Source: Governance
  • Distribution Date: 9/13/22
  • Distributed to Date: 60,000 OP (xToken)
  • Co-Incentives: $0
  • Projects Supported: 2 (?)
  • Estimated ROI: TBD

Revert

  • Grant Requested: 240,000 OP
  • Grant Source: Governance
  • Distribution Date: TBD
  • Distributed to Date: 0 $OP (not active)
  • Co-Incentives: $0
  • Projects Supported: TBD
  • Estimated ROI: TBD

Arrakis

  • Grant Requested: 500,000 $OP
  • Grant Source: Governance
  • Distribution Date: TBD
  • Distributed to Date: 0 $OP (not active)
  • Co-Incentives: $0
  • Projects Supported: 6 (currently)
  • Estimated ROI: TBD
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I apologize for my poor choice of words. :v:

I understand what you saying I like seeing more of organic growth. but I understand where you coming from

Thanks again for the response.

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No problem, ser. Appreciate the conversation.

Our thought is if we build it (a strong ecosystem), they (users and growth) will come. :slight_smile:

Hi all,

I’d like to add a bit of structure to this comment section by addressing the key themes raised so far. Follow-up comments are welcome. However, sourcing data asks takes meaningful time away from our daily work, so we’d appreciate if commenters could explicitly outline their “thesis” and offer data that could support it.

This way, interactions can be additive and build the common understanding for all readers. For example: “Velodrome would be better off directing OP incentives to XXX, as it would drive higher transaction volume / user growth / user retention. Here’s my data to demonstrate why”

Here are 5 themes we’ve identified so far:

1) Part of the data provided is based on a snapshot (e.g., 24hr Volume) and may not be representative of recent performance

2) Velodrome attracts lower Volume per TVL than alternative DEXes

  • When comparing same asset pairs (e.g., OP/USDC, ETH/USDC), Velodrome’s Volume per TVL is similar to that of both Uniswap and Curve (see charts below).
  • We believe Uniswap and Curve are perhaps the top 2 DEXes in all crypto. Performing on par with them is a testament in itself.
  • We acknowledge UniV3 pools can offer very low slippage for large trades. Although Velodrome remains competitive for the majority of trades using pools with similar liquidity depth, we like the concentrated liquidity architecture and plan on implementing a similar model for our pools.
  • Some Velodrome pools attract lower volume, as they serve different types of protocols. We welcome these pools, as supporting a wide variety of assets is part of our value proposition.

Volume/TVL for pools with >$100K TVL on Uniswap and Velodrome

Volume/TVL and Volume/$1 incentives for sETH and sUSD pools on Curve and Velodrome

3) Grant ask is too large

  • As a share of the Optimism ecosystem, Velodrome represents 10% of TVL, 12% of transaction volume, 16% of transactions, and 13% of users, while requesting 1.72% of the Governance Fund.

  • Using these metrics, the Governance Fund could distribute a similar ratio of OP tokens to ALL existing protocols and still keep 82%- 89% of funds to be used for other grants:

  • Even including Velodrome’s grant from OP Labs, the ratio of impact per grant size is extremely favorable

4) What is Velodrome providing to the ecosystem / what about protocol revenue?

  • For Liquidity Providers on Optimism, Velodrome has distributed over $7M in VELO emissions, continuing at a pace of ~$300K per week
  • For veVELO holders, Velodrome has delivered ~$450K in fees from >$2B in volume and ~$1M in bribes from partner protocols (net of Velodrome’s OP incentive program)

5) Velodrome has hit escape velocity / Velodrome should prove itself without incentives

  • Velodrome’s success is strongly correlated to the success of Optimism. We cannot consider the protocol to have “hit escape velocity” until Optimism itself is fully cemented as the go-to chain for the next generation of DeFi users.
  • We believe eliminating incentives now will have predictable results (lower TVL, lower overall activity), and would hamper our ability as a protocol to compete with other L2s / alt-L1s planning to deploy incentives in their own ecosystems. Attracting liquidity and users back to an ecosystem is significantly more expensive than maintaining them, since incentives (e.g., APRs) must be attractive enough to drive actions such as bridging capital and LPing.
  • Despite the attractive returns on Velodrome, we still notice a lack of confidence from DeFi players to participate in Velodrome’s model. For example, veVELO voters have received >200% APRs in bribes and fees consistently for the past 4-5 weeks, 3-5x higher than other ve token protocols such as Curve, pointing to lower willingness to lock VELO.
  • This grant would allow Velodrome to continue building confidence from interested players, while we focus on further developing the platform and onboarding new partners. The grant will effectively run longer than the time period Velodrome has been live to date.
  • As outlined above, we’re happy to structure the grant in stages to measure ongoing results.

We greatly appreciate your support.

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