StakeWise V3 Liquidity - SWISE

[pnut]

The primary trading venue for SWISE is a UniSwap V3 pool paired vs sETH2. Given the liquidity and token supply of sETH2 is expected to diminish as stakers transition over to the V3 ecosystem, it is important to revise the liquidity for SWISE in time for the launch of StakeWise V3.

Learnings From Experience and Changes

Routing issues

SWISE has been actively trading on the secondary market for over 2 years and this experience gives StakeWise DAO the opportunity to reflect and identify avenues for improvement. The TVL of the SWISE-sETH2 pool has been consistently strong, ranging between $5M-$7M on average, but slippage has often plagued traders of SWISE primarily due to routing issues. When trading SWISE on traditional aggregators against any asset other than sETH2, a high level of slippage is encountered. See the comparison below between trading from 100 ETH to SWISE directly on UniSwap (left) compared to 1Inch (right):

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This routing issue impedes investment into SWISE, impacts trading volumes, and should be resolved as the highest priority. The routing issue is expected to be because SWISE is paired vs sETH2, rather than ETH. With this in mind, we propose the first departure from the existing approach to SWISE liquidity.

The change we are proposing is that the new liquidity pool for SWISE should be paired against ETH. This will help avoid issues with routing, making the token more liquid and desirable by market participants. osETH-SWISE pairings can be explored further down the line once osETH liquidity is sufficient and the DAO can be confident any routing problems are resolved.

Concentration of liquidity

Another factor impacting slippage is how efficiently capital is deployed within the liquidity pool. Currently, SWISE liquidity is distributed across the full price range, rather than concentrated around the market price of SWISE. This leaves a lot of liquidity dormant, contributing to higher slippage and lower trading revenues for Liquidity Providers (LPs).

StakeWise DAO actively encourages full-range deployment with the current incentives regime, providing maximum rewards to full-range liquidity. Seeing that it’s not the optimal way to ensure we minimize slippage for SWISE, we suggest a departure from the existing approach.

Moving forward, we believe LPs should instead be rewarded for simply having liquidity in-range, whether it is full-range or concentrated. This gives LPs greater freedom in how they deploy their capital: those seeking more trading fees can concentrate liquidity in the narrower range, while those not comfortable choosing a narrow range can continue utilizing a wide range, even as wide as full range liquidity.

Any position that is in-range would be earning the same amount of incentives, based on the volume of liquidity provided, and trading fees would scale higher the more concentrated one’s position is. Distributing incentives to any active range ensures StakeWise only rewards LPs who are actively contributing to the pool’s liquidity, while not forcing them into taking more risk than they’re comfortable with.

Proposed SWISE Liquidity

Decentralized liquidity should continue to form the cornerstone liquidity for SWISE, with UniSwap V3 as the primary trading venue. UniSwap V3 is the most battle-tested DEX and consistently attracts the highest trading volumes. The capital efficiency of UniSwap is also multiples higher than other DEXs given the ability to allocate liquidity to specific price ranges and offers a route for SWISE to trade in a sustainable manner. A SWISE-ETH pool already exists on UniV3 with a 1% fee tier, however, a new pool should be created with a 0.3% fee tier to help improve trading efficiency.

The high degree of freedom that UniSwap V3 provides does, however, increase the complexity of liquidity deployment. The simplest route for LPs is to continue deploying capital full-range or choose wide price ranges, removing the need to actively manage liquidity positions. For LPs who wish to deploy their capital in a more efficient manner, guides will be created to help them understand the risks and rewards. The Charm Finance team has also offered to launch and optimise a SWISE liquidity strategy using their Alpha Vault technology. Alpha Vaults are an automated liquidity management solution for UniV3 and will help LPs who wish to combine capital efficiency with ease of deployment. Historical testing of a SWISE Alpha Vault has shown positive results, with around 10x improvement of capital efficiency vs full-range liquidity and double-digit returns for LPs even after considering impermanent loss and Charm’s fees. This technology is experimental, however, and the risks must be displayed to potential users.

Incentivising Liquidity

StakeWise DAO will still be reliant on incentives to bootstrap SWISE liquidity to start with. For LPs who provide liquidity directly to UniV3, SWISE incentives can be claimed via the StakeWise V3 UI, similar to the V2 Farms page. If an Alpha Vault is deployed, its users will be required to stake their Alpha Vault shares into an incentives contract in order to be eligible for the SWISE rewards.

All rewards will be calculated and distributed by the proposed Liquidity Committee according to that month’s SWISE allocation. Just like with the proposed osETH liquidity, StakeWise DAO should take a data-driven approach to the liquidity and incentives of SWISE, with analytics in place to allow the Liquidity Committee to allocate capital in the most efficient manner.

Liquidity migration

It is imperative that SWISE liquidity is migrated to the new pool in a timely and orderly manner. The 500k of SWISE allocated as rewards for the current SWISE-sETH2 liquidity pool is due to end on Monday 18th September. It is proposed that 250k SWISE be used to bootstrap liquidity in the new SWISE-ETH pool whilst incentives are still present in the SWISE-sETH2 pool. After a 1-2 week period, incentives in the new pool will be increased to 100% (500k SWISE), with all incentives to cease in the old sETH2 pool.

Centralized liquidity

The Core team cannot publicly discuss the details of the SWISE listing plan due to legal agreements in place. What we can say, however, is that we are in discussions with several T1 and T2 exchanges and are looking to partner with a leading market marker to facilitate listings. More information on this partnership will be shared in due course.

Listing SWISE on quality exchanges will not only help with the liquidity for SWISE, but bring exposure to StakeWise and help foster the image of a mature, quality project within the space.

Conclusion

This proposal aims to provide a smooth transition of the SWISE liquidity throughout the launch of StakeWise V3 alongside improving the experience for SWISE traders. The SWISE liquidity strategy will evolve over time, with various discussions already ongoing regarding a tokenomics revamp and potential deployment of SWISE liquidity on Balancer. Any Balancer liquidity as part of a tokenomics revamp would be complimentary to the above UniV3 liquidity. As always, feedback from the community is highly valuable and will help finalize the SWISE liquidity strategy before being put to a formal DAO vote.

Following feedback from the community, the following revision is made to the osETH liquidity strategy:

» StakeWise/SLC to actively explore an osETH and/or osETH-BB-a-WETH pairing as soon as possible with the aim to fully migrate incentivised SWISE liquidity away from the SWISE-ETH pool. The caveats here are:

1. this can only be feasible once osETH liquidity is sufficient and
2. the routing issue is mitigated, for example via the use of a SWISE <> osETH-BB-a-WETH pairing. Consequently, there will likely be a situation where StakeWise has both a SWISE-ETH pool and a SWISE-osETH(osETH-BB-a-WETH) incentivised in parallel to test the new pool and to safely facilitate the migration of liquidity.

[ottodv]

Sorry but slippage for 100 sETH2 against SWISE is also huge. Doesn’t seem to be a routing issue, but more because the size of the sETH2-SWISE pool can’t accomodate such a large swap without slippage. Swapping 10 ETH causes a lot less slippage.

100 sETH2 (high slippage)

10 ETH (little slippage)

Secondly, creating an ETH-SWISE pool, means we have to incentivize that pool much more to create the same market depth, because ETH doesn’t accrue staking rewards and investors would want to be compensated for that loss.

Thirdly, it removes one important investment opportunity for osETH, it doesn’t signal trust in our own staked token to become a standard “better” ETH to hold if we don’t use it ourselves.

[pnut]

@ottodv

Sorry but slippage for 100 sETH2 against SWISE is also huge.

Completely agree - slippage is way too high even if we ignore the routing problem. The DAO basically has two choices to resolve this:

1. Continue with the full-range liquidity regime (either on UniV3 or an AMM such as Balancer) and just ramp up the pool TVL such that we achieve the desired slippage.
2. Encourage the deployment of more concentrated capital.

The former would be expensive and exacerbate the problem of the DAO funding high levels of dormant liquidity. This leaves the latter as the preferred route and hence the suggested adjustment to how LPs are rewarded (just need to be in-range, rather than full-range).

@ottodv

an ETH-SWISE pool, means we have to incentivize that pool much more to create the same market depth

Also agree with this sentiment. We’ve gone back and forth for months with the UniSwap team and teams from the various aggregators to look to resolve the routing issue. Sadly, no resolution is not in sight, with no-one willing to accept it is a problem from their end. Given the importance of resolving the routing issue, pairing against ETH seems like the only option for now, just like how RPL does on UniV3.

@ottodv

it doesn’t signal trust in our own staked token to become a standard “better” ETH

Again, completely agree, we need to encourage maximum adoption of osETH as a base asset and hence keep pushing to resolve routing issues.

[ottodv]

@pnut

from the various aggregators to look to resolve the routing issue.

I don’t see the routing issue you’re talking about. Changing from ETH to SWISE encompasses two steps: ETH-sETH2 and sETH2-SWISE, so two times a fee, that’s it, the numbers I tried don’t show there to be a additional routing issue on top of that.

@pnut

slippage is way too high

I don’t know that it’s too high, it’s a small market cap still, prices can go up or down a lot. All perfectly normal at this level. It will become less when the SWISE price increases significantly - which it probably will in the coming years.

Concentrated capital has downsides on volatile pairs for the liquidity providers. Even more so if the pair is ETH-SWISE, and you suddenly lose all your SWISE for a non-revenue generating asset like ETH.

How much effort must we put in facilitating day traders?

That said, I think there could be an OTC/order book solution for such situations. Have you looked into such mechanisms? Like 0x.

[pnut]

As mentioned, we are in discussions with market makers, so OTC routes are available there.

The routing has long been an issue. We’ve had numerous potential investors unable to buy SWISE due to high slippage on aggregators over the past year and we often have people on Discord asking about why they cannot buy SWISE in any size without slippage.

Agree that there are extra considerations for LPs when using concentrated liquidity. All we can do is try to educate users. Rocket Pool has never provided any incentives to LPs for RPL and they have managed to provide quality concentrated liquidity on UniV3, quality enough for them to be listed on all major exchanges without a market maker. For context, every exchange we are speaking to requires us to get an MM because our DEX liquidity is not sufficient - something has to change.

[ottodv]

@pnut

The routing has long been an issue.

Again you state this as fact. But I haven’t seen proof. The “proof” you provided in your opening post wasn’t the result of routing issues but of market depth/liquidity limitations that are normal in a small market cap token.

So again, can you show us proof of the routing problem without conflating it with the liquidity limitation in the sETH2-SWISE pool?

@pnut

numerous potential investors unable to buy SWISE due to high slippage on aggregators over the past year

Probably wasn’t due to routing issues, but rather liquidity limitations in the pool.

[kiriyha]

Hey @ottodv appreciate your thoughts on the topic - we had the very same deliberations for months, as @pnut said. Unfortunately, routing is a serious issue and the the proof is below.

1st image is entering 100 ETH worth of interest into 1inch, 2nd image is the same but on Uniswap. Routing obviously fails on 1inch, leading to 11 percentage points larger slippage.

Hope this clarifies it. We wouldn’t be pushing for something we know is false, or making public claims about it. Routing issues are tough to avoid if the token is paired against osETH in the very first innings of its existence, so we propose ETH.

[ottodv]

@kiriyha

Routing obviously fails on 1inch,

Yeah, 1inch sucks, it routes it through an ETH-SWISE pool.

This is basically 1inch failing to deliver the promise of the best and most efficient price to its users.

I don’t think we should be jumping through hoops to compensate for 1inch’s shortcomings.

Instead warn people not to use 1inch.

I’d much rather build a tab in the Stakewise app that routes the transaction properly. Just like the reinvestment tab.

[kiriyha]

I agree with the sentiment, but in practice usually $SWISE gets the blame for being illiquid / high slippage, rather than 1inch. I am the person who walks people through the routing issue and how to avoid it via support channels, and most of the time the routing issue / slippage ends up being a hindrance to people’s willingness to buy the token. Hence, as much as I like the efficient approach with the osETH-based pool, my take is that it’s best to deploy an ETH-based pool in the beginning and move liquidity to osETH-based pool over time, in order to ensure steady trading in SWISE without issues.

[Archer]

As @pnut and @kiriyha mentioned there is definitely a routing issue. The vast majority of DeFi users stopped interacting directly with DEXs and instead, they use DEX aggregators. 1inch has by far the largest market share when it comes to DEX aggregators (~70%), so it is important to be pragmatic and acknowledge that if these users are excluded SWISE is severely hindered in terms of exposure.

Even if we look at other DEX aggregators using Defillama’s Meta-Dex aggregator, it is possible to observe that 1inch, Cowswap, 0x, and Kybeswap, all fail to properly route ETH<>SWISE (the exception being Paraswap, but again it is necessary to normalize this versus its market share).

That being said, I believe that later on, once osETH is sufficiently liquid, a complimentary SWISE/osETH Balancer pool can be a good option to diversify SWISE liquidity and reinforce StakeWise’s efforts for osETH to become a unit of account. Assuming a 50/50 ratio, this pool could potentially benefit from Balancer’s Core pool status if paired with osETH thus facilitating the long-term incentivization of SWISE liquidity.

One last thing to take into consideration is that with the current market conditions, the cost of liquidity for volatile pools is extremely high, as such, the opportunity cost of SWISE/osETH versus SWISE/ETH isn’t that relevant when compared to the total yield that the pool should require to attract liquidity. We tend to imagine that LPs are perfectly rational economic agents but in reality, marginal APR differences rarely cause behavioral differences.

[ottodv]

@Archer

it is possible to observe that 1inch, Cowswap, 0x, and Kybeswap, all fail to properly route ETH<>SWISE

That doesn’t really plead for those aggregators. If it happens with Swise it’s happening with many other tokens. Then these aggregators are just scams - costing people a lot of money.

[ottodv]

@kiriyha

I am the person who walks people through the routing issue and how to avoid it via support channels, and most of the time the routing issue / slippage ends up being a hindrance to people’s willingness to buy the token.

The conflation of the two issues isn’t helping here. I suppose once people know where to do the trade, it’s the slippage that stops them.

This is not related to ETH vs sETH2(osETH is the future).

Add: Can’t do a new post so adding it here:

My request to the core team is this:

What is the volume of a trade you want to facilitate without significant price impact? And what’s your definition of significant price impact?

Let’s have some concrete targets/goals.

[ottodv]

@Archer

it is possible to observe that 1inch, Cowswap, 0x, and Kybeswap, all fail to properly route ETH<>SWISE

I randomly picked another than 1inch from your list and got this on Kyberswap:

Versus the same on Uniswap:

Maybe it’s just me, but I fail to see the “routing issue” here.

(Other than 1inch which clearly can’t route properly.)

Paraswap, also seems to get it right:

[kiriyha]

Please try with 100 ETH - a 10 ETH order can be routed through the ETH/SWISE pool somebody set up on Uniswap V3 without much slippage because it’s a relatively small amount. It’s actually the route that both aggregators you posted as well as Uniswap route through. I am currently away from laptop but my hunch is that the issue will persist.

[ottodv]

@kiriyha

Please try with 100 ETH - a 10 ETH order can be routed through the ETH/SWISE pool somebody set up on Uniswap V3 without much slippage because it’s a relatively small amount.

They look quite similar.

Seems like Kyberswap routes it properly.

[Archer]

Kyberswap routes this through ParaSwap, you can check below. That’s the reason why LlamaSwap doesn’t display the Kyber router (didn’t check Kyber individually but they’re just redirecting you to ParaSwap).

LlamaSwap is an aggregator of DEX aggregators, it’s great for quick comparisons between different aggregators and gives you the best quote, I wish that this was more popular. Unfortunately, ~70% of users just go straight to 1inch.

[ottodv]

@Archer

Kyberswap routes this through ParaSwap, you can check below. That’s the reason why LlamaSwap doesn’t display the Kyber router (didn’t check Kyber individually but they’re just redirecting you to ParaSwap).

Isn’t it odd that Llamaswap doesn’t show Kyberswap’s correct rate - the one that Kyberswap shows when you go there directly (which it routes through Paraswap)?

We can conclude that 1inch sucks, and paraswap works great.

I don’t think we should be covering up 1inch’s failures. Instead build a Swise token tab on the Stakewise.io site, which guides people to the best way to buy Swise tokens. Maybe even like the reinvest tab.

[pnut]

I don’t think we should be covering up 1inch’s failures. Instead build a Swise token tab on the Stakewise.io site, which guides people to the best way to buy Swise tokens. Maybe even like the reinvest tab.

I would agree if the majority of people came through the StakeWise UI to trade SWISE, but that is most certainly not the case. Instead, we would be cutting SWISE off from the majority of DEX aggregation flows and not fixing this before such a major protocol upgrade would be a mistake.

Routing aside, there is another key point to mention here: pairing against ETH mitigates any uncertainties during the transition phase from sETH2 to osETH.

osETH is not yet live and thus it is impossible to pair SWISE with osETH ahead of the V3 launch. There is also no guarantee that osETH liquidity will be sufficient for the main SWISE pool in the months following launch. Keeping SWISE-sETH2 pool live for months after V3 launch also doesn’t make sense and is risky as the sETH2 supply and liquidity is expected to dry up as people migrate to V3.

Of course we want osETH-SWISE as our main pairing, but that is not possible right now. SWISE-ETH solves illiquiity risks during V3 migration and the routing issues. We can then explore an osETH pool ASAP once it is viable (hopefully by EoY).

[ottodv]

@pnut

I would agree if the majority of people came through the StakeWise UI to trade SWISE, but that is most certainly not the case. Instead, we would be cutting SWISE off from the majority of DEX aggregation flows and not fixing this before such a major protocol upgrade would be a mistake.

I doubt this, most people will visit the website of the project. I certainly visit the website of any project I am considering investing in.

@pnut

Routing aside, there is another key point to mention here: pairing against ETH mitigates any uncertainties during the transition phase from sETH2 to osETH.

osETH is not yet live and thus it is impossible to pair SWISE with osETH ahead of the V3 launch. There is also no guarantee that osETH liquidity will be sufficient for the main SWISE pool in the months following launch. Keeping SWISE-sETH2 pool live for months after V3 launch also doesn’t make sense and is risky as the sETH2 supply and liquidity is expected to dry up as people migrate to V3.

Those are valid arguments.

@pnut

Of course we want osETH-SWISE as our main pairing, but that is not possible right now. SWISE-ETH solves illiquiity risks during V3 migration and the routing issues. We can then explore an osETH pool ASAP once it is viable (hopefully by EoY).

So can we have an agreement to launch (not just explore) a osETH-SWISE pool as soon as possible after the migration to V3? With at least the same subsidy as the ETH-SWISE pool.

[pnut]

So can we have an agreement to launch (not just explore) a osETH-SWISE pool as soon as possible after the migration to V3?

I think this is absolutely fair given it is within the protocol’s best interest to pair SWISE with osETH asap, but it is important we are on the same page as to what needs to be in place before we can launch this pool. The two things that come to mind are:

A) Sufficient osETH liquidity

We do not need crazy levels of osETH liquidity to support a SWISE pool, but I think it would be fair to aim for a pre-defined threshold. For example, ~$15M (~9k ETH) TVL in the main osETH-ETH pool given there is around $5M in liquidity in the current SWISE pool. Arbitrary, I know, but you can see where I am going.

B) Path to resolve routing

This one is going to be more problematic. Let’s just focus on 1inch here given their dominance in DEX aggregation volumes. 1inch has a set list of ‘connector’ tokens (ETH/DAI/USDC/USDT) that its algo uses to calculate routing. The reason why the SWISE-sETH2 pool is not routing properly is because sETH2 is not a ‘connector’ token. 1inch are very reluctant to add new tokens to that list. Many teams have been trying, incl. Balancer, and even stETH/wstETH are not added.

There might be other solutions. The Balancer team suggested that we experiment with a nested liquidity pool, where we pair SWISE with the BPT for the osETH-ETH pool. 1inch has been able to route effectively through other such pools (GHO/3pool BPT, for example). That solves the routing, but it leaves SWISE only partially paired with osETH and adds complexity to LPs.

To conclude
In short, there is no quick fix to B. If we decide to proceed with an osETH-SWISE pool after only solving for sufficient osETH liquidity (A), then my question is what value does this osETH-SWISE pool bring? Granted it would provide some utility to osETH and SWISE holders, giving them a way to farm SWISE, but if it is not going to materially improve the liquidity and trading efficiency of SWISE, then I do not see why the protocol should be paying for it.

With at least the same subsidy as the ETH-SWISE pool.

Could you please explain the rationale behind this?