Hello all, after the recent move out of the liquidity range in the sETH2/ETH Uniswap pool, some community members have been calling for a change in the method of allocating SWISE rewards (or stopping them altogether).
The team has its own opinion which we’ll share in this thread, but we encourage anyone who would like to propose a new method to share their suggestion in this thread.
Let’s get the discussion going 
One proposal that has been previously posted by @psyduck is to remove the incentives from the sETH2/ETH pool altogether.
I encourage those with an opinion to comment on the proposal’s thread:
I don’t have a new suggestion. I think we should keep things as they are 
All is fair in love, war and defi 
The whale outmaneuvered us other lp’ers in the seth2/eth pool, my approach is to learn from them and adapt my defi tactics.
Stakewise is a liquid staking service. One of the features necessary to be a liquid staking service is an ETH/sETH2 pool which has a near 1:1 rate to support a low friction way to exit the Stakewise liquid staking service. Given that goal of having a pool for trading ETH/sETH2, and given how the previously suggested participation rate of 0.994-1 ETH per sETH2 was beneficial to meeting that goal, would there be a way to encourage usage of that liquidity range by limiting rewards to those who participate in the specified liquidity range?
The current configuration of the ETH/sETH2 uniswap pool with the 5% spread (subject to change) has decreased the utility of the pool for allowing unstaking. Some people have expressed the benefits of this configuration to allow people to start staking with sETH2 at a discount - which is totally acceptable. But how do we also support the liquid staking goal as well? Should the Farm page be advertising a differently configured pool that is expressly for unstaking which contains a near 1:1 rate that is somehow enforced by the DAO?
Thanks for this post @kiriyha , I think this is a very important topic to discuss and I appreciate you creating this post. In hindsight, when i did my little rant on the discord, I should have just posted in here.
I just want to state/summarize my opinion before I go into solutioning and more details. I believe the whale is not doing anything wrong here other than exploiting a fundamental issue with LPs and not a feature. Some people are worried about interfering with DeFi, but innovating solutions (non-authoritative solutions) is a very normal thing to correct fundamental issues: the Ethereum London fork puts a max value on the amount a miner or staker can charge on a gas/trx fee.
My solutons?
I don’t really have one as this is an interesting problem. I think we need to go back to first principles thinking. First off, the goal of StakeWise is to increase TVL and appreciate the SWISE token value. Right now we are failing the 2nd value because this whale has the ability to dump 25M coins onto the market (although thy can’t because there is not enough liquidity, but this is furthering the issue that arose from this fundamental problem I am talking about).
So what is the fundamental problem? The problem is that a whale can easily (this is like a level 1 whale, wait until bigger ones come along) manipulate the protocol to grab the SWISE rewards for themselves.
First, if this goes on for more than a week, we have a serious fundamental issue going on here. If not, I don’t mind letting the storm pass and trying to use the treasury to future block whale attacks.
I don’t know how complex of a solution we can implement, but something like guard rails could help (no more than 1% drop in sETH2 price per day - American stock exchanges do the same thing and it protects the retail investor from massive flash crashes). We could also try maxing the number rewards a user can get in a month (I am not sure how popular this would be).
Removing SWISE rewards all together is another interesting move if we can get the votes. I also don’t want to scare the whale off because they do hold 10% of the sETH2 supply. Who knows, maybe the whale is willing to work with us.
In the meantime, I propose we move forward with my solution to re-invest rETH2 into sETH2 that we can use as firepower to try to block future whale attacks or at least try to slow them down.
^^ this is the most fruitful solution (that has an immediate action) that I can provide right now.
All is good though StakeWise DAO! I really think we can create a really innovative idea here. For now, i will do some more thinking around this issue.
Thanks homies!
I agree with StrangetoshiNakamanl. Let’s keep as it is.
LPing is putting your coins on the table, for others to take out in exchange for coins they sold. That is, for long term, LPing means you will take reverse position to market sentiment and incurs high downside risk.
On the other hand, we need it for securing exit liquidity to stabilize liquid staking, so I think we need to welcome any LP provided especially the size is large.
If we will consider another action, it should be something to increase size of ETH provided to pool, and I think revoking pros from the whale is not.
There are a few problems here as I see it.
Most of the liquidity is out of range and not earning any additional SWISE rewards. Most of the rewards are going to a few accounts now who are LPing in the new price tick. Additionally, the calculation of SWISE rewards means that they are getting a huge APR for LPing on this single tick range.
Meanwhile, SETH2 still trades at a decent premium to the other staked ETH derivatives. For example, stETH is trading around .945 ETH. However, since stETH is a rebasing token, absent the current market dynamics (and post merge/unlock), stETH would be trading well above 1 ETH. SETH2 is now at .962, but since it is not rebasing and rewards are distributed to RETH2, SETH2 should still be trading lower if it was in line with the rest of the staked ETH tokens (somewhere in the .9-.93 range based on my calculations). So there is still quite a bit of chance for more downside in my opinion. Not to mention if the market continues to deteriorate and more liquidity is removed, stETH and the rest could easily trade lower. Some analysts have suggested the discount should be somewhere more around 20% and some staked ETH derivatives have traded this low recently.
So while there is some hope that SETH2 and the others trade back to par with ETH, it is more likely that this discount persists and even increases.
Further, anyone who has set a larger, conservative range, seems to be getting next to no SWISE rewards. For example, adding new positions with a range between .8-1 SETH2/ETH has an APR lower than 10% while LPing in the current tick is getting over 100% apr.
This means that all new liquidity will go to the main tick where price is currently at, and add to the problem where there is little liquidity below the current price, making it easy to repeat the same play with a large sell of SETH2 in to the pool. A 500 SETH2 sell in to the current liquidity would push the price out of the current tick and in to one even lower for example. This is only 10% of the liquidity sitting at the previously suggested range, and is therefore a distinct possibility (along with any pressure on the markets that lead to an increase in the staked ETH discount).
Instead of giving all SWISE rewards to a single tick area, it likely makes more sense to incentivize a larger range and more evenly distribute these rewards to all liquidity providers on the pair. This will reduce the rewards to the few actors that are taking advantage of the current system and also incentivize liquidity under the current price, which will help to further support the price of SETH2 and reduce further widening of the discount.
Therefore, I suggest that the LP rewards be distributed evenly between liquidity providers vs the current system of incentivizing liquidity in a narrow range. This reduces risk for LPs, reduces the payouts to a few accounts, and will help support the price of SETH2 in the long run.
While this is true, the current set up incentivizes another whale to come in and do the same thing. In fact it will be even easier because there is less liquidity at the current tick than there was before.
It is almost +ev to do this as well if you can expect to get yield back almost immediately because of the way rewards are set up, anyone with enough size to move the price down to the next tick and then LP in this range will get a huge APR. It would only take 500 ETH or so to do this and there is plenty of SETH2 outstanding that could be put to use to rerun the same scenario and push SETH2 down to an even lower price. While there is some level that market participants may step in to buy SETH2 at a discount, realistically it is quite a bit further below the current price based on where the other staked ETH derivatives are trading (SETH2 still trades at a premium to the others).
Some more thoughts (open to feedback here)
If possible, I think the most effective way to move the SETH2 price back up to it’s previous range (relative to ETH) is to allocate some SWISE token to those who purchase SETH2 – perhaps the SWISE could be claimable in the future rather than right away in order to prevent an arbitrage situation from occurring.
Another option is to allocate SWISE in proportion to how much SETH2 one has in the uniswap pool (or how much SETH2 one holds overall, either in the pool or in their wallet or staked). Those of us that had tight ranges in the SETH2/ETH pool are now sitting 100% in SETH2, whereas the whale that dumped the prices has a wide range and has a mix of SETH2 and ETH. One possible downside of this, however, is that the whale may want to dump the price further so that 100% of his tokens are allocated to SETH2.
Overall, we need to be very cautious about how we proceed and think about possible unintended effects. I encourage everybody to be as critical as possible to all suggestions here, including those that I have listed above.
Yeah. I like the idea of distributing SWISE to SETH2/ETH just based on total liquidity provided – whether or not it is in range. This would reward early uniswap participants as well as new ones.
I like the idea of allocating more swise to wider ranges as that would support less degen behavior. Is that technically possible?
It makes sense to distribute Swise based on $ amount in the pool instead of $ amount / range or however it is now BUT I imagine the current system was setup by people much smarter than me and there must be unforeseen consequences of ignoring a positions range when calculating rewards.
Just some thoughts - feel free to disagree and post other thoughts.
I agree with this. We should keep things as they are and let the market find a new equilibrium.
I personally believe that the current incentives are perfectly fine. Maybe as @StrangetoshiNakamanl proposed, perhaps making wider ranges that are active liquidity receive incentives with a meaningfully less dramatic APR dropoff than the current one would be a good change given the high volatility and the fact that we’re spending so much time at near lower and upper bound levels of liquidity ranges.
Stakewise has a unique rewards mechanism that incentivizes liquidity in their Uniswap V3 pools. Of interest is the SETH2/WETH pool that serves as the main liquidity center for their liquid staked ETH derivative.
Using a similar formula to Uniswap v3 fee calculations, emissions are streamed to LPs who have liquidity in range. Tighter liquidity ranges get more rewards using Uni v3’s quadratic formula for fees.
SWISE rewards have been some of the most generous among the staked ETH options.
Large sells in June lead to a depressed price of SETH2, pushing most of the liquidity out of range. This lead to a large spike in rewards for the liquidity that was still in range.
First week after price decrease saw LP aprs over 100%. Whales quickly adjusted their strategies and moved to the optimal or close-to-optimal LP range in order to maximize their APR. In practice that meant LPing mostly ETH in a tight range between the tick below current price and the tick above current price. We looked in to other positions (view all positions here, and plug addresses in to the Watch Address section of Stakewise site).
A good example is analytico.eth who entered with a 97% ETH position at the end of June. This position is earning 38% as of writing.
We can see that most of the largest LPs are running a flavor of this max-rewards strategy and therefore currently earning between 20-40% apr. Even the largest LP 0xe20 with a conservative low tick of .976 is earning 14% as of writing.
This is an attractive farming set up, as SWISE yield is claimable daily, APRs were as high as 100% early on, and the position is mostly ETH. Inventory risk and impermanent loss risk are comparable to LPing in any of the other liquid staked ETH. SETH2 price has also performed better that the others.
With the points above, it is likely that Stakewise is overpaying for liquidity at the moment. A high-level comparison of LP rewards for stETH and rETH:
- stETH: ~6% on convex, ~10% on Balancer, projected 33% on Aura
- rETH: 2% on convex, 2% on balancer
So Stakewise is offering the highest rewards. It also comes without the additional contract risk of Convex or Aura. Those two platforms also add their native token to boost the yield. Stakwise by contrast is paying just SWISE at an industry-leading yield for holding mostly ETH in a vanilla Uni v3 position. Quite lucrative all things considered.
We estimate that an emissions cut of 50% would still represent attractive yield for narrow-range LPs while reducing dilution and SWISE concentration in a small number of whale wallets. Most of these LPs were previously LPing for 10-15% SWISE rewards before the SETH2 price dropped. We can expect that they will continue to LP for a similar yield. Therefore it would make sense for Stakewise to reduce emissions in the short term. It would also make sense to formalize a target liquidity amount and APR that can be use to adjust rewards going forward. This way if liquidity providers start to exit, rewards can be adjusted accordingly.
It would make sense to have some community discussion on these points and use it as a base for the July rewards proposal.
excellent analysis !!
I am sorry to have forgotten to mention that your comment was used as basis for proposing a cut to the emissions for August. thank you - this was top-notch.