StakeWise V3 Liquidity - StakeWise Liquidity Committee (SLC)

[pnut]

Alongside the overhaul of StakeWise’s liquidity strategy, StakeWise DAO requires a revised approach to liquidity incentivisation. Currently, the DAO votes on a monthly basis to assign SWISE from the DAO treasury across the protocol’s 3 liquidity pools. This vote takes 5 days - a 3-day voting period and 2 days of voting cooldown. Whilst this is a highly decentralized way to provide liquidity incentives, it is too inefficient to effectively incentivise the proposed new liquidity pools. Under the new liquidity strategy, the DAO will need to assign capital across various markets/platforms on a weekly basis and be able to adjust incentives on-demand based on market conditions. The StakeWise Liquidity Committee (SLC) is proposed to increase the efficiency of capital deployment whilst maintaining a decentralized approach that protects the DAO treasury.

SLC Responsibilities

The proposed SLC will have three responsibilities:

• Be the driving force behind StakeWise DAO’s liquidity strategy for mainnet and crosschain/L2s, advising the DAO on the latest developments and proposing strategy updates.
• Deploy incentives across the various bribing markets / AMMs.
• Monthly reports on the state of the DAO’s liquidity and how capital is allocated for incentives.

SLC Structure

In order for StakeWise to be a leader in the liquidity space, it must have SLC members who are up to speed on all the latest innovations and market trends to advise the DAO on how best to position itself. The proposed SLC will consist of 8 members: 3 core team members (Dmitri, Kirill, and Jordan), and 5 community members who are true DeFi natives with an expertise in liquidity. The core team already has a network of liquidity specialists that would be ideal candidates for this role. Further details will be provided in due course on the prospective members, but it is important to first decide on the overall structure and role of the SLC, which is the focus for this proposal.

The DAO should compensate the community members of the SLC with a fixed monthly USD amount, paid in SWISE. A figure of $1k per month is suggested. Given how important liquidity is to the protocol and the significant costs involved, paying to have liquidity experts as advisors will likely save the DAO costs in the long-run and help optimise the trading efficiency of the protocol’s tokens.

SLC Process

The SLC will be subordinate to the StakeWise DAO and ultimately act on the liquidity strategy approved by the DAO. Each month, the SLC will propose a budget to the DAO based on the expected liquidity costs for the upcoming month. This budget will include a 10% capital buffer to account for intra-month market movements, plus the SLC compensation. These monthly budget proposals will follow the usual DAO voting process and send the approved SWISE to a Safe (previously Gnosis Safe) controlled by the SLC.

This Safe will be a nested 2 of 2 multi-sig, meaning both the signers are themselves Safe multi-sigs. The diagram below shows this architecture. One of the signers of the SLC Safe is a multi-sig controlled by the core team, where only 1 team member is required to sign. The other signer of the SLC Safe is a multi-sig controlled by the community members - a 2 of 5 multi-sig.

In order for a transaction to be processed from the SLC Safe, the SLC requires at least 2 community members to sign the transaction and at least 1 core team member. This set-up strives to find a balance between efficiency and security: the low thresholds of both signers reduce the overall number of signatures required to execute a transaction, whilst the nested multi-sig structure ensures that a transaction cannot be executed without the approval of a core team member.

The SLC is accountable to the DAO and must report on its performance after each month, detailing how and where capital was deployed and the rationale behind it.

Conclusion

The robust DAO governance process has protected the protocol and its treasury for over 2 years and should remain in place following the launch of StakeWise V3. The proposed SLC provides a path to improve the deployment of assets for liquidity incentives without sacrificing the safety of the protocol. The core team welcomes feedback from the community on the proposed SLC. Following this discussion, a Snapshot will be initiated to vote on whether the SLC is implemented and to elect the SLC members.

[ottodv]

I’d suggest the DAO voting a top up whenever the SLC safe reaches a certain minimal threshold (set at approx 1 week of liquidity incentivisation). The SLC doesn’t have to spend it all. And the DAO could assign for more than 1 month if it so wishes (and have to vote less often), actually I’d suggest voted every x weeks - so that it’s in sync with the incentive adjustment schedule of the SLC. We could start with voting for 5 weeks worth of funds. (The first vote should add the 1 week buffer too.)

[ottodv]

@pnut

it is too inefficient to effectively incentivise the proposed new liquidity pools. Under the new liquidity strategy, the DAO will need to assign capital across various markets/platforms on a weekly basis and be able to adjust incentives on-demand based on market conditions.

Could you expand further on this claim?

Let’s discuss this further after V3, to really understand the new ecosystem better before rushing into decisions that introduce extra complications that may not be necessary (and also introduces a governance structure that doesn’t include any community members).

[pnut]

Each AMM has its own nuances with regards to how incentives are deployed. Balancer and Curve have weekly gauge votes to determine the number of emissions into the pools. The AURA and Convex systems on top of Balancer/Curve have a bi-weekly cadence for voting. StakeWise would need to be bribing across various platforms to get emissions into its pools from the weekly/bi-weekly voting markets and sometime even migrate those bribes mid-week to new platforms as and when the markets change. As soon as you starting adding L2s/cross-chain liquidity into the mix, the complexity increases further.

@ottodv

Let’s discuss this further after V3, to really understand the new ecosystem

This whole liquidity strategy, including the SLC, is designed ready to go live in time for V3 in order for osETH to obtain the necessary liquidity for its price oracles and integrations.

Granted, it is way more complicated than the current incentives regime, but it is absolutely necessary if StakeWise is to mature its liquidity and compete in terms of utility of its LST.

[ottodv]

Thanks for the explanations, makes it clearer what you are referring to.

@pnut

StakeWise would need to be bribing across various platforms to get emissions into its pools from the weekly/bi-weekly voting markets and sometime even migrate those bribes mid-week to new platforms as and when the markets change.

Hold on a moment. So what’s happening here? Instead of just dropping our own swise rewards to liquidity providers directly, you suggest we somehow acquire voting rights in those platforms, or bribe them so that liquidity providers can be rewarded in ANOTHER token than Swise?

To do that I assume you have to sell Swise to buy whatever token is needed to pay those bribes in.

This doesn’t feel good to me.

We want liquidity providers to gain a stake in Swise, not Balancer or Curve. And why would we use our scarce resources to promote the acquisition of another project’s tokens?

What’s wrong with just incentivizing liquidity providers with a reward in Swise to be claimed on the farming page, like before?

These are the sort of discussions we should be having with the community, before setting up a whole new governance system that just starts doing things that we as a community may not agree with.

[pnut]

SWISE can be used on the bribing marketplaces, so no need to sell. Would love for the DAO to be more proactive with its incentives, such as utilising USDC reserves when SWISE is depressed in value, but we are not there yet. Maybe something we can explore once we have the SLC framework in place.

Incentives are not a strong way to decentralise a DAO and/or build up a protocol-aligned set of token holders as LPs are often mercenary capital. Steakhouse researched LDO LPs and showed 85% of LDO rewards were sold immediately and 10% were sold within six months. 55% of the sold tokens were converted into ETH and 35% were converted to USD (indicating the preferred assets of LPs).

At the end of the day, utilising the bribing mechanisms will give StakeWise an increase in capital efficiency of around 1.2-1.4x depending on market conditions (i.e. for every $1 of SWISE we get between $1.2-1.4 emissions to LPs). Rather than the simple $1 of SWISE for $1 of incentives we get at the moment. This is why the example liquidity costs on the osETH proposal show a much improved capital efficiency (40-60% depending on the metric).

[ottodv]

You sidestep the question a bit. So do LP providers receive the Swise, yes or no? If no, then it gets sold somewhere on the way.

And where does the extra 20%-40% you claim come from?

@pnut

showed 85% of LDO rewards were sold immediately and 10% were sold within six months.

Interesting, but what is it for Stakewise? I doubt 85% of Swise gets sold by LPs immediately.

@pnut

Incentives are not a strong way to decentralise a DAO and/or build up a protocol-aligned set of token holders as LPs are often mercenary capital.

If so this is a problem, it means we are not decentralizing the DAO, Swise’s main purpose being to decentralize control of the DAO.

[ottodv]

The steakhouse article you linked to is actually quite an interesting read. I don’t find it all that supportive of the conclusion you seem to want to draw from it (that it is “mercenary capital”), but rather:

“Steakhouse’s investigation found that most recipients of LDO incentives sold them immediately, indicating a need for long-term investment interest in the token.”

Which brings us back to the old ongoing discussion about distributing some of the protocol fees to Swise token holders.

[kiriyha]

@ottodv as always, there’s plenty of valid points raised here, and perhaps I can assist @pnut in covering them

Hold on a moment. So what’s happening here? Instead of just dropping our own swise rewards to liquidity providers directly, you suggest we somehow acquire voting rights in those platforms, or bribe them so that liquidity providers can be rewarded in ANOTHER token than Swise?

This is correct - the proposed plan is to pay SWISE to the holders of Aura / Convex tokens in order to receive their votes in the allocation of incentives from the underlying protocols (Balancer / Curve). The logic here is that using bribes allows us to reduce the cost of incentives per dollar of liquidity, because $1 of incentives paid as bribes leads to >$1 paid in incentives to LPs.

We want liquidity providers to gain a stake in Swise, not Balancer or Curve. And why would we use our scarce resources to promote the acquisition of another project’s tokens?

I think from the protocol’s perspective, payments to LPs are a maintenance overhead, where cost is a key consideration. There indeed is need to decentralize the token ownership, but I don’t think that the protocol has a mandate to do so through payments to LPs specifically. Our resources are scarce indeed, and from the perspective of longevity it makes sense to keep the spend on attracting liquidity to its feasible minimum. Bribing is an effective way to achieve this.

These are the sort of discussions we should be having with the community, before setting up a whole new governance system that just starts doing things that we as a community may not agree with.

Agreed on this - hence why we published our thoughts about the liquidity pools and their incentivization some two weeks ago. I know that August is a vacation month for many (myself included this year), but we did our best to circulate the message about the proposals in the community channels in order to get prompt feedback.

You sidestep the question a bit. So do LP providers receive the Swise, yes or no? If no, then it gets sold somewhere on the way.

There is no expectation that the $SWISE paid as bribes will be immediately sold - much like the LPs who you argue might be interested in holding SWISE long-term because of the token’s potential (instead of immediately selling it), the users who receive bribes have a similar decision to make. For the protocol, the decision matrix ends up being whether bribing is more efficient economically or not.

Ultimately, we must be aiming to maximize the usage of the protocol, while keeping the costs to maintain it to a feasible minimum, bringing more value to the Treasury. We believe we have found a cost-effective way to do this with bribes, and looking at the bribing ecosystem that emerged since the start of Curve Wars back in 2021, we are not the only ones who see value in it.

This certainly affects the LPs because their remuneration changes to a different token, but that doesn’t mean they cannot continue increasing their share of SWISE. They can use the rewards earned in BAL or CRV to buy SWISE if they prefer to maintain long-term exposure to the token.

[ottodv]

@kiriyha

They can use the rewards earned in BAL or CRV to buy SWISE

That just doesn’t work well in practice. At best only a few will make the effort.

Now we are going to drop Swise to people who have no relation to Stakewise - Aura and Convex token holders - except maybe coincidentally. This is going to put downward pressure on the Swise price.

Thus I think it’s a fair question to ask what percentage Swise of currently distributed to LPs is being held and sold, because we are moving from that to a situation where likely 100% gets sold.

Depending on the market, this selling pressure will depress the Swise price, the question will be: is the 20%-40% extra capital efficiency you guys claim, not simply going to be undone by pushing the Swise price down through this mechanism?

[pnut]

That just doesn’t work well in practice. At best only a few will make the effort.

If keeping exposure to SWISE depends on the effort extended, then I think we cannot credibly claim that current LPs not selling is a sign of tokens being distributed only to the long-term supporters of the protocol; can very well be about the effort / cost to liquidate as well.

My simple thesis is that whoever is farming SWISE now or will be receiving SWISE as bribes will always think about whether to keep the token or sell based on the three criteria:

1. Upside & earnings potential, ie incentive for holding the token
2. Slippage today, ie cost to liquidate
3. Downside potential, ie cost to holding the token

I think today, people are mostly holding due to the upside potential & slippage experienced on large orders. If we move to a bribing model, those who prefer to keep the upside in SWISE can maintain it by using BAL/CRV sale proceeds to buy SWISE. There are inefficiencies involved, of course, like the trading fee and potential slippage. However, if those who receive bribes indeed instadump tokens on the market with high slippage, large farmers who buy SWISE will benefit from the lower prices. In other words, if there is no dumping, then the bribing model will work as intended; if there is dumping, those who want the upside from SWISE when LPing for the protocol can preserve it.

Thus I think it’s a fair question to ask what percentage Swise of currently distributed to LPs is being held and sold, because we are moving from that to a situation where likely 100% gets sold.

We did the analysis you asked about, and found that about 43% of accounts who farm SWISE end up dumping immediately or selling the token within 180 days of claiming. This is based on a random sample of 89 accounts who have ever claimed the tokens - I picked 100 at random using a list of random numbers and eliminated 11 duplicates to get to this result.

In terms of volumes, the picture is different: ~ 75% of all farmed SWISE is held and only 25% has been sold, but the picture is different between large accounts and small accounts. Large accounts (those who claimed 1M SWISE or more) are mostly holding on to the token, having sold 20% of what has been farmed by them. All other accounts (sub-1M SWISE claimed) have sold 52% of what they have claimed.

For those interested, here’s the Excel used to find these (see bottom of summary tabs for summaries, otherwise you’ll get lost - it’s not a clean doc): SWISE-farming-analysis.xlsx - Google Sheets

Below is my interpretation of the findings, thoughts & additional info from others we consulted with.

It’s clear we’re not reaching Lido numbers of dumping, but overall there’s still a significant share of dumpers & sellers among those who farmed <1M SWISE total. There’s also a significant divergence in behaviours of those who farmed very large amounts and those who farmed <1M SWISE so far.

Anecdotally, I am under the impression that the currently low level of SWISE selling by large farmers is on the one hand driven by their support for the protocol and expectation of the upside, and on the other by the lack of depth in liquidity for significant orders. The difference in behaviours of large farmers and small farmers would seem to corroborate this observation: smaller farmers can sell more easily because they’re less affected by slippage, and so they do. Still, we’re not touching Lido numbers, and that’s potentially due to the upside that even the small LPs expect.

Overall, the results of this quick analysis could suggest that we risk losing the advantage of large farmers selling only a low share of claimed SWISE if we move to a bribing model. However, this risk was known and present before - losing these large accounts is always a risk. Ultimately, it will only work out as long as people believe in the upside of SWISE. Providing capital is used with an expectation of profit, after all.

There is anecdotal evidence that the bribing model will work as intended ie not causing an increase in SWISE selling on the market vs today’s numbers. See screenshot below (names removed) for commentary:

This exchange suggests that the holders of Aura / Convex take the potential upside into consideration when allocating votes organically. However, there’s no denial that platforms like Votium optimize for immediate liquidity and instadump the tokens. We can put monitoring in place to examine user behaviour for those who receive SWISE bribes based on the platform used. The SLC can then use this information to help decide which voting platforms to use rather than simply looking at the $ cost per unit of liquidity.

Currently, Quest is by far the most economic platform and provides a route for more organic voters who align with the protocol, eg LQTY doesn’t see any dumping of their token for this reason. Until we start bribing, however, we cannot know what % of bribes will organic and more likely held vs instadumped. It still comes down to whether or not people see value in holding the token, if they do, then StakeWise will attract organic voters who are more protocol aligned.

Another important consideration is that over time we will increase the LP base for the token with the growth of the protocol, and I would expect the share of tokens sold by large farming accounts to increase, bribes or no bribes. This would be both as a result of selling to de-risk/take profit by the people who farmed until today, and as a result of more large participants entering the pools for the purpose of yield extraction (ie farm & dump).

Hence, to an extent the end game is always that incentives will be instadumped by industrial farmers, which is why large protocols move away from them over time. I believe we will end up in the same situation one day, and will want to plan ahead for a route where no incentives are distributed in the late stage of protocol development.

So to conclude this discussion, I believe that economically bribing makes sense, and while it comes with risks of more selling pressure, these risks are not guaranteed to materialise. Especially if we consider the potential need to build & maintain all the smart contract plumbing for distributing rewards ourselves, it makes sense to at least try bribing to see what happens.

[ottodv]

@pnut

~ 75% of all farmed SWISE is held and only 25% has been sold

This aligns more with the impression I had.

So this is the situation we are moving away from.

@pnut

Anecdotally, I am under the impression that the currently low level of SWISE selling by large farmers is on the one hand driven by their support for the protocol and expectation of the upside, and on the other by the lack of depth in liquidity for significant orders.

I have it from good sources, that large farmers are driven by support for the protocol, and their interest in accumulating Swise.

If they were interested in dumping their rewards, they could easily go farm something else which they could easily dump.

[pnut]

Thanks again for your input here @ottodv! Your concern regarding the potential for bribing to increase SWISE sell pressure is completely valid. Currently, StakeWise rewards LPs who directly use the protocol and who are for the most part not dumping (at least for the large token holders), whereas when bribing the protocol would be sending SWISE to entities who might not be well-aligned and could dump. In light of this, I propose the following updates to the osETH liquidity strategy:

» Monitoring must be in place to evaluate what happens to SWISE used as bribes to determine whether or not bribing does indeed increase the sell pressure compared to direct SWISE incentives. Analysis to also be done on the type of LPs in the new pool.

» Should sell pressure increase due to bribing, a fallback plan should be in place to reduce the amount of bribes and increase direct SWISE incentives. Direct SWISE incentives can be achieved by deploying SWISE emissions directly to users of Balancer and/or Aura. Quest, for example, would allow the SLC a high degree of flexibility for how capital is deployed as bribes vs direct incentives and provides a path towards a hybrid of bribing and direct incentives.

It is also worth mentioning that, as stated in the original osETH proposal, the goal is to minimize the $ cost of liquidity TVL. Ultimately, StakeWise should look to bring the amount of SWISE emissions required for liquidity down to 0 and avenues should be actively explored to achieve this. I propose the following updates to the osETH strategy based on this:

» Make it clear that the goal here is not just to minimise the need for liquidity incentives via SWISE emissions, but to reduce those emissions to 0 in time.

» Actively explore the addition of solutions/liquidity pools that can help StakeWise obtain this liquidity goal, such as deploying a Boosted Balancer pool between osETH-ETH to test the appetite of such pools with LPs.

Please let us know if there are any concerns still outstanding!

[ottodv]

We are completely on the same page!

Monitoring what happens to distributed swise together with flexible fallback scenarios for now, and the shared goal of eventually getting to a situation where the liquidity pools work without additional incentives/bribing.

[pnut]

The DAO vote for the SLC is now live: [LIVE] StakeWise Liquidity Committee (SLC)