Howdy fellow stakers!
In this post, we present the team’s vision for the deployment of liquidity pools for sETH2/ETH and rETH2/ETH on Uniswap V3 and seek community feedback on some of the aspects of the deployment.
After the setbacks with Curve and then Balancer v2, the team wants to finally nail the topic of liquidity pools and focus on the integrations with other protocols marketing the dual token system. To maximize the success of these integrations and campaigns, the bar for choosing a DEX remains very high. As a reminder, the key criteria for deployment are:
- Ability to deploy a stable pool to achieve a strong peg between sETH2 and ETH
- Using a top-tier DEX (out of considerations about liquidity, security and brand positioning)
- Cheap swap costs (to not price out smaller stakers)
- Not letting rETH2 run below 1:1 with ETH (to maintain the ability to compound)
- Offering a good APR to LPs (to increase incentives to provide liquidity)
There are only a few DEXs that meet these criteria, and as it became clear that Balancer v2 stable pools are also being delayed indefinitely, the StakeWise team changed course to deploying on Uniswap V3. While it required developing additional functionality, we are very happy with the result and cannot wait to share it with you.
Let’s start with a quick summary of the advantages of Uniswap V3. The key innovation of V3 is the ability to concentrate liquidity in the desired price range. For example, if I choose to provide liquidity in the [$2,000; $3,000] range in ETH/USDC pool, my liquidity will be utilized (and I will earn trading fees) for as long as ETH’s price stays within this range. I can tighten or widen the range (called “ticks” in V3) around the price - the tighter it is, the more volume will pass through my liquidity, and the more fees I will earn. However, if I choose it too tight, the price may move out of my specified range – in this case my liquidity will no longer be used, and I will stop earning the trading fees. However, I can keep my liquidity in that range (or a set of ranges) and will start earning again as soon as the price returns into it.
This has several particularly important implications:
- Significantly less capital (up to 4,000x less) is required to facilitate trading, because liquidity is concentrated in specific price ranges, not across the Uniswap bonding curve (x*y=k) (example)
- LPs are incentivized to keep liquidity as tightly around the current price of an asset as possible, because that way they can earn exorbitant fees (example)
- This has an effect of concentrating liquidity around the current price of an asset, leading to a dramatic reduction in slippage and the ability to handle huge volume of trading with just a fraction of liquidity (example)
- Liquidity provision becomes significantly more profitable while slippage is dramatically reduced
Applying the innovation offered by Uniswap V3 in the context of sETH2/ETH and rETH2/ETH liquidity pools, it becomes immediately clear that StakeWise i) could achieve a stable peg between ETH and sETH2/rETH2 with ii) less liquidity than it previously needed, by incentivizing liquidity provision in as tight a range around 1 as possible. This would lead to iii) significant earnings for the LPs and iv) create a strong foundation for integrations of sETH2 and rETH2 tokens in the DeFi ecosystem.
By our calculations, we will need 5x less capital in the sETH2/ETH liquidity pools than was previously required, while boosting LPs APR by 500% and freeing up sETH2 for utilization in the wider DeFi world.
So long story short, Uniswap V3 would be a great way to go for the deployment of StakeWise liquidity pools, and that is exactly what we are proposing.
The work to deploy has been completed, and we are only working on the UI to support the farming programs that are to come. We are excited about the possibilities offered by Uniswap V3 and would love to receive your support for the idea.
- Deploy sETH2/ETH and rETH2/ETH pools on Uniswap V3
- Deploy novel distribution systems for incentives and rewards
- Allocate farming incentives towards both pools
- Launch farming campaigns and UI for claiming rewards
Until now, the absence of contracts to allocate farming incentives to Uniswap V3 LPs has been a key blocker to the deployment of pools, because everything would need to be built from scratch. However, we have now developed and audited two novel mechanisms that support deployment on V3.
To incentivize the concentration of liquidity as tightly around 1 as possible, we have built one of the first incentives systems to exist for Uniswap V3. It will adjust the amount of $SWISE earned by the LPs dynamically based on how tightly their liquidity is concentrated around the current price of sETH2: the tighter the range, the more $SWISE will be farmed. It should motivate the LPs to tighten their range around the prevailing price of sETH2, creating very deep liquidity and resulting in outsized APRs.
Claiming the farming rewards would be cheap – there is no need to stake and unstake any LP tokens in order to participate in or exit farming, and LPs can collect their farmed $SWISE (and other tokens) regularly. Therefore, if we go with V3, StakeWise will be among the very few projects to incentivize liquidity there, do it dynamically and at a fraction of gas cost of interacting with other farming programs.
We also updated the staking rewards distribution model to support Uniswap V3 so that LPs will not lose rETH2 while their sETH2 is in the liquidity pool or another contract in DeFi. Uniquely, it will not require locking the LP tokens – instead, they can be reapplied elsewhere to generate more yield. This system deserves a blog post of its own, but we believe it is one of the most advanced incentives allocation systems out there. All hail Dmitri.
Uniswap V3 is not the cheapest from the gas perspective when it comes to adding liquidity. It costs twice as much gas to add liquidity in V3 than in Balancer v2 (~560K units vs ~230K units) and swaps are some 50% more expensive (~200K units vs ~130K units). Still, this is better than Uniswap V2 and other DEXs out there. (Correction: Uniswap V3 seems to be ca 28% pricier than V2 in terms of gas; deployment on Optimism is supposed to fix that).
Uniswap V3 also doesn’t support adding single-sided liquidity, unless it is for the ranges that don’t capture the current price (in this case it acts like a limit order i.e. you can submit 1 ETH to the [0.9;0.95] range and swap into sETH2 only whenever it has a large discount). Hence, if you only have sETH2 and would like to provide liquidity with it, you would need to swap a half of it into ETH and add only then.
Considering recent shakiness in the market and the delay in deployment of sETH2/ETH liquidity pool until now, there exist a number of users that are planning to swap sETH2 into ETH (and then stables) as soon as the pool is deployed. The amount of ETH these users have staked is uncertain; hence, there is a risk that we as a DAO do not allocate enough SWISE incentives to the sETH2/ETH pool to attract the amount of liquidity required to handle a flurry of withdrawals without losing the peg.
To mitigate the risk of de-pegging on the first day, we kindly ask that everyone who considered exiting from staking within the first week of liquidity pool’s deployment to anonymously state the amount they would like to withdraw via this form. Your response will help the DAO to plan ahead for attracting the right amount of liquidity on day 1 and ensure that the peg is maintained.
Meanwhile, once we learn about the size of withdrawals, we as a DAO will need to discuss how much incentives to allocate to the sETH2/ETH pool. For now, the provisional amount is 0.6% of the supply per month as per this forum post.
With a plan for deployment in place, we are now waiting for your opinions and questions. We really want everyone to be on the same page about how Uniswap V3 works and how StakeWise specifically would interact with it, so no question is off limits. We will also set up conversations about how much to allocate as incentives towards both pools in
phase-2 posts of the previous forum threads, so it is a good time to start frequenting the forum.
Things that we need to discuss and decide on:
- Size of the swap fee: 0.05% (facilitates arbitrage trades, but fewer fees for LPs), 0.30% (best of both worlds), 1% (very handsome for the LPs but prohibits exit without a “redemption fee” which is not attractive). This needs to be decided for both tokens
- Size of liquidity mining incentives for both tokens
We hope that you support this proposal and look forward to the things to come from its successful implementation.