As many of you have noticed, a whale recently dumped SETH2 and opened a Uniswap V3 position in the SETH2/ETH pool with a wide range. This put most of us that were already (and are) in the SETH2/ETH pool out of range. As such, the whale is now collecting nearly all of the SWISE rewards for that pool and dumping on the market, crashing the price of SWISE.
It makes no sense financially for anybody that was previously in the SETH/ETH pool to exit and re-enter with a wider range because this would require selling half of our SETH2 for ETH. Given how much SETH2 has dropped relative to ETH, this would be a 5% loss right off the top.
My suggestion is the following: next time we vote to continue SWISE rewards, we should NOT extend rewards on the SETH2/ETH pool. At least this would prevent the whale from collecting more SWISE and dumping.
One other thought would be to award some SWISE to those that trade ETH for SETH2, thus incentivising people to raise the price of SETH2 high enough so that those of us that were previously in the SETH2/ETH pool would be in range again.
First of all, thanks for posting your thoughts G - I have circulated this thread with the community, so looking forward to their contributions to this!
My personal thoughts are that stopping the allocation of SWISE rewards altogether is a draconian measure given the premise of liquid staking protocols is offering liquidity for staked ETH assets. While I dislike the current situation where many folks have been moved out of range based on outflows from sETH2, this is one of the risks of providing liquidity for our token. This risk doesn’t go away for the whale that took the price lower, because in emergency situations their ETH liquidity in the new range could get used up in basically the same way, so they’re also taking the same risk. They are earning a huge APR for it though, but again, the size of rewards they make is driven by them being one of only a few parties LPing in that range, meaning they take most of the downside risk. With ETH liquidity being of paramount importance to the protocol, I think their liquidity is a worthy contribution. Besides, since the APR is still so high, we will likely see others contributing to earn some outsized rewards, so their individual role will be reduced.
With regards to the incentive to acquire sETH2, I am personally not supportive of the idea because the discount should be enough incentive to acquire the token. The extra motivation through SWISE would likely help close the discount sooner but let’s not forget the reason for its emergence in the first place - it was stETH’s discount that started driving our price lower and forced LPs to pull liquidity because people were arbing the difference. In a situation where stETH doesn’t recover closer to 1 and yet we introduce incentives to restore our peg, we would essentially be paying people to go buy stETH as soon as our prices improves enough to make the arb lucrative again.
I respect the concern about being out of range and I sympathise because I am in the same boat. But I think it’s only a matter of time we get back into it, because a discount on an attractive asset like staked ETH is not going to last long. It should be driven by the recovery in stETH price, however, so there may be a month or two that we need to wait for it. Still better than diluting SWISE holders (including ourselves) to incentivize Lido’s peg restoration.
What I would personally support is a reduction in incentives issued to the sETH2/ETH pool, in order not to fix the price in a lower than ideal range, and limit the protocol’s spend during the bear market. What do you think?
I agree that pausing incentives is a bit draconian, but a reduction of incentives is something we can do. We are spending tokens set aside to pay for liquidity, when there is barely any liquidity to pay for. Reduction might be the move.
I would be in favor of allocation SWISE based on TVL locked Uniswap, independent of whether or not people are in range. Not sure if that is possible. But, it would at least help to distribute SWISE more widely among SETH2 holders.
While I do see why your preference is for SWISE to be distributed to all the LPs, I think that approach would miss the purpose of our farming program, which is to attract ETH liquidity in the pool at the best possible exchange rate to sETH2. SWISE is finite, and knowing how sensitive its price can be to the increase in supply, I would be wary of just handing it out to LPs with no ETH in their position (i.e. those currently out of range). The protocol would be spending precious resources on something that doesn’t benefit it.
With that being said, personally, I would support reducing the incentives to match the expected level of TVL so that the DAO doesn’t just give away loads of SWISE to LPs that still happen to have ETH and currently enjoy a massive APR by virtue of being the few to know about it / have ETH to take advantage of it.
I agree with @kiriyha. I do not think removing incentives would be wise. I think nothing should change and we should just let the market find a new equilibrium.