Fellow DAO members,
Last week we published a proposal to deploy the liquidity pools for sETH2/ETH and rETH2/ETH on Uniswap V3. It has engaged the most people to date and sparked a lively discussion about the peg, arbitrage, trading fees, application of sETH2 in DeFi and other topics. We commend everyone who joined the conversation and present an updated version of the proposal that includes feedback to your comments.
In particular, we officially propose deploying the sETH2/ETH and sETH2/rETH2 pools on Uniswap V3 together with a proprietary farming contract that allocates the more rewards the tighter one’s liquidity is centered around the market price. We propose that the trading fees for the sETH2/ETH and sETH2/rETH2 pools be set to 0.3% and 0.05% respectively. The proposal about the size of farming incentives will be published separately.
Let’s keep it simple: the liquidity pools for sETH2 and rETH2 would enable early exits from staking, compounding and integrations of sETH2 into the wider DeFi ecosystem, and deploying them on Uniswap V3 would allow StakeWise to achieve these objectives with ~5x less liquidity than was previously deemed necessary.
The majority of the commenters seemed to support the idea of setting a 0.3% trading fee in the sETH2/ETH pool as means to boost trading revenue for liquidity providers and hence attract more liquidity into the pool. The development team believes that this idea has good merit until the natural arbitrage opportunities emerge in Phase 2 (e.g. buying sETH2 at a discount and redeeming at par directly from the Pool). However, we expect that the DAO will likely be forced to migrate liquidity to a pool with a 0.05% trading fee after Phase 2 to maintain the liquidity pool’s viability as a bridge between sETH2 and ETH. For now, the DAO is likely better off setting a higher trading fee to ensure the LPs are well compensated for providing capital.
Now for the rETH2 liquidity. Upon reading @ottodv’s suggestion about setting up an sETH2/rETH2 pool instead of an rETH2/ETH pool, we consulted a prominent market maker about the idea and reached a conclusion that having this pool is indeed a far better choice. There are several advantages to doing this:
- An sETH2/rETH2 pool offers direct swaps between rewards and principal, which is a very attractive proposition for stakers looking to compound their staking rewards.
- Users withdrawing their rewards by selling rETH2 for ETH would contribute to the trading revenue in the main sETH2/ETH pool, as the rETH2 -> ETH trades would always go through it.
- Most anyone could provide liquidity in this pool, because the capital requirements are very low and all that is needed is sETH2 and rETH2 - the assets that are already in everyone’s possession. (@Skunk747 we hear your concerns about the high capital requirements to earn extra $SWISE from LPing in the sETH2/ETH pool, and this pool should address these concerns)
In order to maintain the feasibility of compounding, we suggest to set the trading fee in the sETH2/rETH2 pool to the lowest possible level of 0.05%. We look forward to your thoughts on the change of strategy for the rETH2 pool and the suggestion about the trading fee!
Finally, the “withdrawals” form suggests that the amount of ETH looking to exit the platform is within our previous expectations. Hence, we will reactivate the previous proposal to seed the sETH2/ETH liquidity pool with 0.6% of $SWISE per month in the separate forum post. Similarly, the proposal to seed the sETH2/rETH2 pool (formerly rETH2/ETH) with 0.2% $SWISE per month will be reactivated shortly.
- Deploy sETH2/ETH liquidity pool with a 0.3% trading fee on Uniswap V3 and encourage provision of liquidity in a tight range by assigning more farming incentives to the LPs in tighter ranges
- Deploy sETH2/rETH2 liquidity pool with a 0.05% trading fee on Uniswap V3 and encourage provision of liquidity in a tight range by assigning more farming to the LPs in tighter ranges
One important consideration about the sETH2/rETH2 pool is that the farming incentives attached to this pool (and consequently rETH2 itself, as per this proposal) are likely to cause an appreciation in rETH2 vs sETH2 and ETH, owing to rETH2 being a rarer asset. Hence, LPs must be wary of setting too tight a range around the market price and should remember to keep the trade-off between the size of farming incentives and the risk of impermanent loss (i.e. liquidity becoming “inactive”) in mind. More on this is coming up in our guide for the Uniswap V3 LPs.
- Yes - with the trading fees set to 0.3% and 0.05% respectively
- Yes - but with different trading fees
- No - I do not support the sETH2/rETH2 pool idea
- No - I do not support the deployment on Uniswap V3
If you vote for an option that involves a “No” or a change in the trading fees, please leave a comment explaining your decision - it will help the DAO members to understand each others’ perspectives and will lead to the solution that benefits the most stakers.