Incentives for the sETH2/ETH Pool on Uniswap V3 [Aug 2022]

Proposals
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It will soon be time to launch the monthly vote for our SWISE liquidity mining program. For those who might have missed last month’s vote, the DAO voted to cut the SWISE rewards in half for the main sETH2/ETH liquidity pool. This was due to the high pool APY following the removal of liquidity as users de-risked during the turbulent market conditions (link to the proposal is here). This post will discuss the impact of that decision ahead of August’s vote.

The below graph shows how the pool TVL evolved over the month (purple bars) alongside the changes in SWISE price (black line). All values are denominated in ETH, rather than USD, to remove ETH/USD price volatility.

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Our goal is to find a balance between providing sufficient liquidity for sETH2 whilst managing the SWISE emissions of the protocol. Whilst a 30%+ APY for liquidity mining looks great for LPs, it is not sustainable for us as a protocol and it will ultimately hurt SWISE holders in the long run. After reducing the pool APY from ~35% to ~15% in July, it is clear from the graph that we still experienced meaningful TVL growth before the main SWISE rally.

The pool APY is now hovering around 35% again. Given this, we as a team are suggesting a further reduction in SWISE emissions within the sETH2 pool (from 2.5M to 1.25M). This will reduce the APY to levels where we still saw TVL growth at the start of July, whilst accounting for the recent SWISE price appreciation.

This analysis is from a very small sample however, and we must continue to monitor the relationship between pool TVL and SWISE emissions over time. As mentioned previously, we can always add extra SWISE rewards should we see a large drop in TVL intra-month or if the pool APYs drop too low. We cannot, however, remove SWISE rewards once they have been submitted.

We would love to hear the views of the community on this further reduction in emissions ahead of August’s vote!

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I think there’s a bit of nuance here.

First, the APY is ~27% now, it sure would be nice if we consider the trading APY but I always like equating it to zero because it only is above zero if there is meaningful trading activity, something that could be artificial due to people dipping into or out of the pool due to the APY increase from SWISE price appreciation. Also, trading APY shouldn’t be considered unless it’s extremely consistent (it isn’t) as it has zero costs to the protocol and is entirely up to the market, which is mostly out of our control.

Then there’s staking APY, which also doesn’t really cost the protocol beyond normal operations, but for the sake of argument, we can assume it does cost something to the protocol as supporting operations and node operators has a cost. But this is also largely dependent on the portion of sETH2 in each LP position, which fluctuates as well and has fluctuated meaningfully since we jumped into the current range.

Reducing emissions to half would land an APY of ~15% (ignoring trading fees), which is largely OK, but the question here is how long do we expect SWISE to remain at current prices or how much more do we expect it to appreciate?

The price of SWISE is entirely up to the market to decide and while we have seen liquid staking pool tokens appreciate recently (similarly with LDO and RPL), how sustainable is this rise in price, how long will it last and beyond speculation, what supports it? is the merge narrative strong enough for staking pools to sustain a continued rise vs ETH? I certainly believe it is, but I’m not the market.

If we want to drop emissions, I would more cautiously say drop from 2.5M to 2M or somewhere around that. Halving emissions straight up seems somewhat overconfident in the price of SWISE, which is out of our control.

Unless you know something we dont ser :eyes:

The sample size is also small not so much because of the time we’ve evaluated but also because the price has appreciated extraordinarily (~3.5x or so) which does not happen often and we can’t be sure will be sustained or continue.

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Very valid point regarding the trading fees, they have been unusually high causing an inflation of the overall APY figures. I agree that we should assume them to be zero when deciding the number of SWISE incentives as their longterm average is pretty low (0.1-0.3%).

As of today, ~22% of the APY from the pool is coming from SWISE, ~3% from staking yields. In my opinion, we have room for a 30-40% reduction in SWISE emissions to bring the APY down to a reasonable level.

You’re absolutely right regarding SWISE price too. We do not know where the market will price it in a months time. If we can’t predict the market, all we can do is take the current market price to decide the level of incentives in my opinion. If the price pumps further, then we will have this exact discussion again next month :grin: If it drops significantly vs ETH, then we can look to add further SWISE rewards to the pool intra-month should it be necessary to bring APYs back to a healthy level.

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I would be against reducing issuance for the next couple months. The next couple months as the Merge occurs will be extremely volatile especially for liquid staking tokens. IMO, we should be incentivizing further liquidity not less. The APY has been reducing almost every day as the market does its job and more liquidity enters to take advantage of this yield. I think we should continue to incentive this at least until after the Merge occurs and activity settles down. Also, generally I don’t think its the right approach to just say the APY is too high and therefore rewards should be reduced when there hasn’t been adequate time for the market to reach an equilibrium. These things take time. If in a couple months the APY is still here (highly doubt it) then I think it would be prudent to reduce rewards.

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Agree with the reduction.

Although a superhigh yield is juicy, it is not sustainable for the protocol. A 10%-15% yield is good enough to attract capital and The Merge inertia will probably push SWISE price up even further (meaning higher yields).

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We were in favor of the previous reduction and did a similar analysis in the lead up to the reduction from last month, which can be read here.

The one nuance I would add is that not all LPs are getting the highest advertised rate (28% as of today of which 24% is SWISE rewards). You’re only getting this if you are LPing in the most optimal reward range which is the smallest range around current tick price, and mostly SETH2 liquidity. Last month, the most lucrative range was mostly ETH liquidity, but since price has improved those older positions are out of range and most LPs have updated their ranges to reflect this.

However, plenty of LPs are getting lower effective APR on wider ranges, and a well-distributed set of liquidity should be one of the goals of the program. SETH2 price won’t be aided by having a huge amount of liquidity concentrated on a tiny range, even though this is what will give the high APR.

Once you move out of the tightest range, APRs drop quite dramatically, about half to 14% if you LP over two ticks, and decreasing by half for every additional tick you add to the range width.

Because of this, I would be cautious about reducing rewards by half again since this would those wider range positions have APR under 7%.

Is there some further analysis that can be done on the average APR that LPs are getting based on the full set of different ranges that people are LPing with? I think this would go a long way to getting some better data to help drive the conversation and set incentives. If we see that the effective total for the pool really is as high as 20%, then a larger reduction in emissions could be warranted. Without doing a full analysis, I think that most LPs are getting something quite a bit less than the 28% max-possible yield, so it may make sense to be more conservative on the emissions reduction.

I also agree with the points above that the next two months in to the merge could be quite volatile for the ETH market and for liquid staking derivatives, so it may be best to wait until after the merge (mid to late September unless there are issues with Goreli/Prater merge this week. That’s only a month or two of higher emissions, but it could help continue to support the SETH2 peg and also keep LPs incentivized to stay in positions through any merge volatility. Once the merge is off then staking dynamics could change drastically as well (staked yields up, liquid staking derivatives price up, liquid staking derivative token price up, etc.) and then we can reevaluate a further reduction.

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yes! though if we see a new crazy sustained SWISE rally, I think it’s fair to consider a bigger cutoff

I think 30-35% for august is very appropriate and then if this remains in september, finishing off up to that 50% or 60% cutoff in relation to july would make sense as well. Hopefully buy pressure > sell pressure so we can even lower it more to 1M in september, which would be really awesome.

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I agree. I don’t think it makes complete sense to change SWISE emissions monthly during this peri-merge time of high volatility. LPs should get rewarded for rebalancing and continuing to provide liquidity through this period. If anything, stakewise and the SWISE token would benefit from increased liquidity both on Uniswap and on other decentralized exchanges if possible! Decreasing SWISE rewards may have a negative impact on liquidity in the short term.

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I also didn’t realize SWISE is up over 400% since July lows vs ETH up 60% or so. SWISE also looks to be at an all time high, and up only compared to SETH2/ETH.

With that information I’d be hesitant to subscribe the high APR to just emissions being too high vs a combination of price action and speculation on SWISE value going into the merge. Still think a smaller reduction 10-20% at maximum or no reduction this month and waiting for the merge is a better course of action.

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I’m just a “minnow” here, but I’m in agreement with those who suggest that reductions in incentives be minimal during these next few months.

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I don’t think there’s anything wrong with adjusting it month by month, just takes more governance work :sweat_smile:

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I agree. Emissions should not be reduced in the near term.

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I agree. Emissions should not be reduced in the near term. Too risky for the protocol.

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I think this is a balanced approach - I agree that we should reduce emissions - I struggle a bit with cutting them in half. I think 2.5M to 2M is a more nuanced approach.

One thing I struggle with is that we should really be looking at not the fiat value but looking at it in relation to ETH.

That being said - I know that people are in it to make money, so I get it. :slight_smile:

I believe the community would be open to doing another review in a months time. Either way, we’re going to review.

Already right now (at this point in time), I’m starting to see the SWISE price drop - it’s volatile going up and it’s volatile going down. Both “camps” can say it’s going up or it’s going down.

However, I do think we should look to reduce emissions over time and I believe dropping to 2M is a more pragmatic approach.

And then in the next month, if we need to drop down to what we would have before, e.g. 1.5M or 1.25M we could do that.

Thoughts, ideas? We probably do need to wrap up this discussion so that it can be put to a vote and not let the rewards lapse - which I don’t think anyone wants. :slight_smile:

Maybe a quick poll to say who wants 2.0, who wants 1.5 and who wants 1.25 in the next day or so and submit for snapshot vote.

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Thank you everyone for your inputs here, this has been a really positive discussion with great inputs from everyone!

We ideally want to kick-start the snapshot for the rewards over the next 48 hours and I think @brianchilders made a great suggestion for a quick poll to decide the level of SWISE rewards for the snapshot.

It is clear there are two camps and it seems like a 50/50 split between holding the current level of rewards vs reducing by a conservative amount. I am consciously not going to summarise the arguements from both camps and encourage voters to spend 5 minutes to read the thread to make an informed decision on their own.

The one thing to highlight is the current pool APY is ~24% (2.7% trading fees, 3% staking APY and 18.3% from SWISE) following a drop in SWISE price over the last 24 hours.

How many SWISE rewards should be submitted to snapshot for the sETH2/ETH pool in the up-coming monthly vote?

  • Maintain current amount of SWISE rewards (2.5M)
  • 20% reduction in SWISE rewards (2.0M)

0 voters

*Poll will close at 09:00 UTC Thursday 11th August

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Ok - here’s where I’m going to land. I would like to suggest that we reduce the SWISE emissions within the sETH2-ETH pool from 2.5M to 1.25M. Originally I proposed 2M. Now that I’m awake - and recovered from my weekend, I’m a believer in what @pnut is proposing. Let’s reduce the SWISE emissions of the sETH2-ETH pool to 1.25M for next month’s snapshot. Or the next one after that.

Here’s why. Pure Speculation ahead.

Think Macro View. Think Bigger picture.

Idea/Value #1
As a DAO I want to control the amount of SWISE that is flowing out. I don’t want to necessarily increase the amount of overall SWISE rewards being handed out across all programs that we are running.

Comments #1
As @pnut rightly pointed out, the value of SWISE has been going up (against ETH). And others have shared their concern that it is a volatile market @halp1120 / @rduubs / @jayschoenherr / @porcupine / @pahlmeyer ) and that it should be more of a tempered approach - e.g. what @dreth suggested (2M). I used to be in the tempered approach camp.

Now I want to encourage our mindset / thinking to be a little more pointed. Why?

Let’s think about our referral program. We need to provide incentives. Where do we get the SWISE from? We can get the SWISE from the reduction in rewards for the sETH2-ETH pool. We now have 1.25M SWISE to play with, without having to increase the overall SWISE emissions. This supports Value/Idea #1.

Idea/Value #2
As a DAO, I want to increase the TVL of the StakeWise protocol.

Comments #2
In another thread we are having a discussion about incentive programs. The question is not whether or not we should have an incentive program - we should. The question is how does it get implemented. Small fish? (Individuals - Minnows & Whales) Big fish? (Companies/Protocols/Other Organizations) Both?

Regardless of implementation - let’s assume that we will be able to increase TVL by minting new sETH2. This supports Value/Ideal #2, which now leads me to the third and final idea of this post.

Idea/Value #3
An increase of TVL (Total Value Locked) of freshly minted sETH2 will naturally lead to an increase of Uniswap activity of those who wish to swap minted sETH2 for ETH (since the sETH2 was not obtained from the pool).

Comments #3
This now starts to create a fly wheel effect - where previously we were concerned about the activity of swaps of sETH2-ETH pool. However, since we were able to honor Value/Idea #1, Value/Idea #2, the Value/Idea #3 brings it all together and helps to offset the reduction of rewards given for the sETH2-ETH pool.

Closing thoughts
Here’s our north star - we have to be able to get to a point where we are making the $ on trading fees alone and not depend on the protocol to give us rewards. Eventually these rewards will no longer be available - the Liquidity Provider should not be dependent on the DAO to make it interesting to provide liquidity. The trading fees should be doing this.

I am not the final say in this - and I encourage others to post their ideas and thoughts - but I think the combination of the reduction in fees for the sETH2 - ETH pool and then taking the offset of 1.25M and put it towards @pnut 's proposed incentives program would help then increase the utility of the sETH2 - ETH pool which would lead to an increase in trading fees / rewards.

Please consider this when voting whether or not we should keep rewards the same or we should head towards a reduction.

(cc: @kiriyha )

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SWISE price is down 30% today which meaningfully reduces the APY and further illustrates the volatility we can expect to see between now and the Merge. Personally, it makes no sense why we would be cutting the rewards into this environment especially after we already cut them significantly last month. I will be voting no to this proposal.

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I love your ideas Brian and I think the direction of this is accurate, but I’m not convinced that it’s 100% safe at the current time to proceed with halving the rewards. It just seems overconfident right now. Later on I think it’s the direction that should be taken.

I stand with my opinion that 20 to 35% reduction is an appropriate reduction.

Consider that there’s a few whales that could decide to sell a meaningful amount of SWISE (in the millions) and in a split second reduce APY by ~1/3 or even more. Reducing the emissions by half coupled with this scenario would mean you have a period of time where it is likely not worth the risk to pool, especially for those in the SWISE-sETH2 pool (despite that being at the moment the best performing pool of all since June given both price appreciation of ETH and SWISE and SWISE beating ETH returns.)

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I can patiently wait a month @dreth - and am ok with going down to 2M with the understanding that we have consensus on the macro direction. :slight_smile:

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Understood @halp1120 - thank you for being candid and voicing your opinion. Glad to see people speaking up. :slight_smile:

As a liquidity provider - I understand that what I’ve shared is cutting into my own rewards personally and if the proposal is voted to reduce, I would be sad to see them go.

Here’s where I struggle with your analysis. While the SWISE price is 30% down today, what is not being taken into account is the overall trend.

I personally like to use logarithmic scale when looking at time series of data.

At the risk of coming off as sounding pedantic (please know that this is not my intent) - the reason to use logarithmic scales is to resolve an issue with visualizations that skew towards large values in a dataset. For example, if a few points of data are much larger than most of the data, the use of a logarithmic scale will provide better data visualization and will make it easier to spot patterns and identify relationships.

The use of logarithmic scales is also very common in datasets for acidity (pH scale), spiciness (Scoville Heat Scale), and earthquake intensity (Richter Scale). For most other datasets such as sales data or customer survey data, the use of a logarithmic scale is not so apparent until you visualize the data.

If we use the CoinGecko chart for SWISE (source: StakeWise Price in USD: SWISE Live Price Chart & News | CoinGecko) we can see that there is an option for logarithmic scale. This is what I tend to look at when analyzing the numbers.

If we look at the chart in a linear fashion - we can see the volatility as described. With lots of spikes in the past month of August.

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However, if you apply the logarithmic scale to it (click on Logarithmic), you see an interesting pattern.

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You are now able to see that the data (over one year) suggests that there may be some seasonality to the price. Notice that the price also dipped in July of 2021 and started trending upward in August / September / October and so on. (Note here: I am not implying causation, I am only noting a correlation.) The current data that we have today suggests that the SWISE token appears to be following the same seasonal trend as last year. This is why I supported @kiriyha 's comment on why gas prices were so low in the Discord. The data seems to suggest that the summer season has an impact on the SWISE price. Now does it have an impact on the entire crypto market? I don’t know the answer to that - I’d have to do some further exploration.

You’ve prompted me to provide some detail around what I am thinking and I thank you for that @halp1120 - hopefully this explains why I’m thinking what I’m thinking.

But I do understand the concern about the loss of rewards. It’s always sad to see money go away.