As we are nearing the deployment of sETH2/ETH and sETH2/rETH2 liquidity pools, it is important for the DAO to consider how to incentivize the prospective LPs to add liquidity. This proposal is a
phase-2 follow-up from the earlier discussion around Balancer v2 pools and features a proposition to assign 0.6% of the $SWISE supply (6,000,000 $SWISE) per month to the sETH2/ETH pool and 0.05% of the supply (500,000 $SWISE) per month to the sETH2/rETH2 pool.
Below we will briefly discuss the motivations for these LM campaigns and expected farming APYs based on the proposed sizes of these programs, and open the proposal to a forum vote.
Liquidity mining is the bread and butter of DeFi. Capital allocators routinely seek farms with the best yields, always keeping the risk of impermanent loss in mind. LPing in pairs where Ether is paired with a volatile asset (like some token) is routinely subject to huge impermanent loss, which must be compensated with an outsized yield from liquidity mining incentives. On the contrary, for the correlated assets like sETH2, rETH2 and ETH, the risk of impermanent loss is limited. Hence the amount of liquidity mining incentives must reflect that.
With this as background, let us focus on how much $SWISE to allocate to each of the liquidity pools the DAO wants to deploy. We propose to keep the initially discussed amounts mostly intact, since a boost to capital efficiency from Uniswap V3 allows to allocate fewer tokens than would otherwise be required for offering good APYs while keeping slippage low. Hence, the proposition is to allocate:
- 6,000,000 $SWISE (0.6% of the supply) per month towards the sETH2/ETH pool
- 500,000 $SWISE (0.05% of the supply) per month towards the sETH2/rETH2 pool
Now for the calculation of the size of liquidity such incentives could support at 20% APY:
- 6M * 12 * $0.06 / 20% / $2,400 * 1,000 = 4,500 sETH2 + 4,500 ETH
- 0.5M * 12 * $0.06 / 20% / $2,400 * 1,000 = 375 sETH2 + 375 rETH2
These calculations show that the amount of liquidity that can be attracted into the sETH2/ETH pool is broadly consistent with the amount that is required for offering very low slippage on even the largest of trades (~15-20% of the total sETH2 supply). Meanwhile, the incentives in the sETH2/rETH2 pool would support drawing almost the entire amount of available rETH2 supply as liquidity. Considering that some people will find it cost prohibitive to deploy liquidity based on the amount of rETH2 they currently have, it is possible that either the APY in the sETH2/rETH2 pool will be higher or that the price of rETH2 will rise vs sETH2.
The reason for choosing 20% as the benchmark is to keep the pools’ APY competitive considering the stable nature of the assets involved. When combined with an (expected) higher APY from trading revenue than in comparable pools (thanks to a ~7x higher trading fee and 5x better capital efficiency), a 20% LM incentive should help the total APY exceed 40% in the sETH2/ETH pool and remain above 20% in the sETH2/rETH2 pool. Note that these calculations should not be considered investment advice and are mere projections based on several reasonable assumptions.
We propose to set these incentives for the first month as a start and allocate additional rewards as we go along. If it becomes clear that we have found an equilibrium point and the pools are functioning as intended, the team suggests running each incentives campaign for longer than 1 month at a time to preserve continuity in the market’s expectations regarding the programs. Otherwise, we suggest that the DAO extends the incentives monthly and adjusts the size of the programs according to the market conditions.
- Send 6,500,000 $SWISE from
0xA3F21010e8b9a3930996C8849Df38f9Ca3647c20as incentives for the sETH2/ETH and sETH2/rETH2 pools
- Yes - I fully support the proposal
- No - we should change the size of the program
- No - I do not support incentivizing liquidity