Incentivize Liquidity for sETH2/ETH & rETH2/ETH Liquidity Pools with $SWISE

Ideas
1

StakeWise tokens, sETH2 and rETH2, were created to enable seamless entry and exit from staking before Phase 1.5. Our DAO has always relied on the idea that liquidity pools will facilitate swaps of StakeWise tokens into ETH and back. As we approach the creation of liquidity pools for sETH2/ETH & rETH2/ETH pairs, the team would like to put forward an idea to incentivize liquidity provision in these pools with $SWISE.

Motivation

One of the selling points of the StakeWise protocol is its tokenomics. However, the tokens start to work their magic and draw people into staking only when sufficiently deep liquidity pools for sETH2/ETH and rETH2/ETH pairs exist. Having deep liquidity in these pools is fundamental to the inclusion into lending protocols and other places where sETH2 and rETH2 tokens can change hands as synthetic ETH assets.

Considering that capital allocators in DeFi are constantly searching for the best yields, one sure way to achieve deep liquidity for the tokens would be to incentivize liquidity provision for them. The team believes that $SWISE incentives could be offered to the providers of ETH and sETH2/rETH2 capital in the pools in order to achieve this goal.

As an initial idea, we propose the following:

  • Allocate 0.6% of the $SWISE supply (6,000,000 $SWISE) per month towards sETH2/ETH liquidity pool
  • Allocate 0.2% of the $SWISE supply (2,000,000 $SWISE) per month towards rETH2/ETH liquidity pool

The choice of $SWISE allocations is driven by the relative importance of having liquidity in two tokens.

  1. Having abundant liquidity in the sETH2/ETH pool would serve as a springboard for achieving widespread adoption of sETH2 in the DeFi ecosystem. In the team’s opinion, this justifies allocating a 0.6% weight to the sETH2/ETH pool, which is a much higher weight than for its rewards counterpart.
  2. The incentives attached to the rETH2/ETH pool need to compensate for the opportunity cost of staking rETH2 or selling it to achieve compounding. Our internal models show that for a large set of scenarios, a weight of 0.2% meets this criterion.

Specification

For each liquidity pool, a special gauge contract would be created for the collection of farming rewards. Any $SWISE and other rewards earned by Liquidity Providers (e.g. $BAL tokens, rETH2 earned by sETH2 tokens in the liquidity pool etc.) would be collected in this gauge contract. The StakeWise DAO would commit to allocating $SWISE into the gauge contract for users to claim according to their share of the liquidity pool (based on the number of their LP tokens). Users might need to stake their LP tokens in the gauge contract to have continued access to these rewards. In this respect, the team aims to achieve as simple a claim process as possible.

The farming process should be simplified for the end users - from the number of steps they need to take to the interface through which they can engage in the process. The StakeWise team would be responsible for achieving this.

Drawbacks

Potential complexity of the process. Users need to have a simple interface to engage in liquidity provision and collect their rewards, and should spend as little gas as possible on such transactions. The StakeWise team has already started working on achieving this. In addition to the ongoing efforts, the farming of $SWISE could be automated with vaults - the team plans to add them in the medium term.

What are your thoughts on this, fellow DAO members? :wink:

6 Likes
2

I think this sounds well thought out, though I have a question - has the team thought about having a disinflationary supply, that decreases over time? I can understand if that is something that would be difficult to change at this point, with early investors already having bought in with a certain understanding of the tokenomics, but I was just wondering what that discussion was like and why this emissions model was chosen. Not saying it is the wrong choice!

I think it makes sense to have the gauge contract essentially work with a vault set-up - make the UI as simple as possible, and have all the rewards getting collected in one place. Could even have a system that auto-converts the BAL rewards for the group into SWISE tokens to put a little constant demand under its price. And, eventually, look also look into having a portion or all of that LP that is vaulted used as collateral via something like CREAM to add to the yield via lending. That last option is a little scary atm, given how many exploits they have had and given how new their lending on LPs is, but that would be a very nice feature to put in eventually to maximize returns to the community.

3

I think having a deflationary supply would be nice to consider, but I’d wanna explore the subject in more detail (from a monetary stand-point) before voicing a pro/con opinion on it. Interestingly, someone brought up the opposite idea - that of an inflationary supply - and articulated it really well (see Robert’s post here). I suggest we create a separate topic for the discussion about this.

Regarding the gauge - it would be ideal to have all the rewards collected in one place and accessible whenever users desire. Withdrawal/conversion/buyback of $SWISE with $BAL could be automated using the vault. The only thing that’s still unclear is whether $BAL could be collected into the same gauge as $SWISE and rETH2 - that’s for us to clarify with the Balancer team.

On the topic of LP token usage - I think you’re reading our thoughts here. We are exploring ways to allow using LP tokens elsewhere (not necessarily CREAM) to improve the capital efficiency for the user. So that an initial deposit of 1 ETH could earn staking rewards, trading fees, $SWISE, $BAL and extra income from the integrations we achieve (in the works: external slashing insurance product and usage as collateral, obviously).

4

This just makes sense overall. I love this idea, it’s what will probably keep the peg the best.

It’s too soon to tell, but what if the merge does happen around Q1 or Q2 2022. That’s way closer than it seems to me. Will this incentive remain after the merge?

Obviously governance can vote on how much or what will be released, but I still wonder how things will be then.

5

It is great that you thought of that!

It’s too soon to tell, but what if the merge does happen around Q1 or Q2 2022. That’s way closer than it seems to me. Will this incentive remain after the merge?

I have a suggestion that we keep any incentives running for 4-6 weeks at a time, with a review and a dynamic adjustment to the market situation (and the Merge in this case) before prolonging such campaigns. This way we provide sufficient clarity on the near-term incentive pipeline, which helps people commit to the project, but also keep the flexibility to adjust to the changing market conditions.

What do you think?

1 Like
6

What do you think?

I like the idea, would be a really nice use of governance, similar to how MakerDAO adjusts stability rate for DAI for example.

1 Like
7

I’m in! Supercharge me baby! Do really want to get an AMA going though to fully flesh it out. I need to understand it at a deeper level, and reading just doesn’t quite get me there. Thanks

1 Like