[SWIP-6] Incentivize Liquidity for sETH2/SWISE Liquidity Pool with $SWISE

Following almost universal support for @dreth’s proposal to deploy sETH2/SWISE liquidity pool on Uniswap V3 and repeated suggestions about creating a new pool, there is a need to act on the proposal and actually deploy. In order to encourage LPs to contribute capital, we would like to put forward a SWIP about incentivizing liquidity in the new sETH2/SWISE pool (0.3%) with 500,000 $SWISE for the first month (December 2021). Here is more info about the proposed campaign, including safer farming terms for this IL-prone pool, and a forum pool to cast your vote.

Motivation

Ever since the end of the liquidity mining campaign on 1inch, liquidity in the 1INCH/SWISE pool has been slowly melting away. This made buying and selling SWISE difficult, no matter the size of the trade, as high slippage and gas fees made transactions uneconomical. In addition, plenty of users simply cannot find the SWISE trading venue, which might be supressing demand for the token. As a cherry on top, pairing the token with another altcoin meant that the volatility has far outstripped that seen in assets paired against ETH or USDC. In conclusion, these issues with the 1INCH/SWISE pool inhibited trading in the token, curbed price discovery, and potentially cost the protocol more in liquidity mining rewards than necessary. It’s high time we fix them.

The proposal to deploy a sETH2/SWISE pool on Uniswap V3 was put forward by @dreth and the core contributor team deems it a strong one. The community also seems to have rallied behind the idea, as the post received an overwhelmingly positive response from other DAO members. However, while deploying the pool is a 2-minute business because of Uniswap’s permissionless nature, a DAO approval is needed to seed the pool with liquidity mining incentives in form of SWISE.

We propose to start with 500,000 $SWISE as an incentive in the first month of the pool (December 2021). This should comfortably offer 20% APY on ca $3.5m of liquidity, which is pretty strong given the current market cap of $7.25m. If this proves to be too high or too low, the DAO can vote in a different incentive in the consequent months, or cease supporting the LM campaign entirely.

In order to fund the liquidity mining campaign for this pool, the core contributor team will propose to (slightly) reduce the incentives allocated towards the sETH2/ETH and rETH2/sETH2 pools, thereby net SWISE emission per month will remain stable or be reduced.

Specification

  • Send 500,000 $SWISE from 0x144a98cb1CdBb23610501fE6108858D9B7D24934 to 0xA3F21010e8b9a3930996C8849Df38f9Ca3647c20 as incentives for the sETH2/SWISE pool.

  • Apart from this usual process of utilizing the Merkle Distributor in the distribution of SWISE, the core team proposes to tweak the method of calculating the amount of farming rewards per position. More specifically, instead of distributing more SWISE to positions in tighter ranges around the current price (current method in the sETH2/ETH and sETH2/rETH2 farms), we suggest incentivizing the full range (from 0 to infinity) specifically for this pool (ie others will remain unaffected). This means that users won’t need to take on more impermanent loss risk typically associated with Uniswap V3 vs traditional AMMs when farming SWISE.

Risks

One significant factor that must be taken into account is that the routing mechanism in Uniswap V3 has been tweaked some time ago, and so Uniswap won’t be able to execute purchases or sales of SWISE into any token other than sETH2. This means that buying or sell SWISE with any asset other than sETH2 would require 2 steps. The only way to resolve this is for the Uniswap development team to merge the PR we submitted for enabling routing for sETH2. Unless this PR is merged, having sETH2 as the counterasset to SWISE will be a major limitation.

The mitigating factor for this risk is the deployment of ETH/SWISE pool instead and an allocation of SWISE rewards there. While this is a considerably less attractive option (given the extra capital commitment for LPs who hold sETH2, and contradiction with the protocol’s goal of deepening sETH2 integration in DeFi), it would be the necessary step to finally enable price discovery for SWISE.

Conclusion

This all-important proposal is the first step towards enabling sustainable trading activity in SWISE, and one that has been eagerly awaited. We ask for all opinions on the subject matter, and look forward to the discussion of potential cons of this proposal.

Vote

Should the DAO allocate $SWISE incentives to LPs in the sETH2/SWISE liquidity pool on Uniswap V3?
  • Yes - I fully support the proposal
  • No - I do not support incentivizing liquidity
  • No - I disagree with the amount

0 voters

8 Likes

Fully supporting this, and in the near timeframe I imagine this is the best or only way to proceed. It’s also worth noting that with current gas fees, it will likely cost around $200 to provide liquidity or trade SWISE/ sETH2.

I’m sure the core team gets tired of gas complaints, and I know that there are a couple technical hurdles keeping the core staking contracts fixed to L1. However, as more L2 solutions come online, there may be some low-hanging fruit for portions of the Stakewise system to be made available on L2 systems making gas dramatically cheaper. ZkSync’s ZkSwap is a live L2 port of Uniswap V2 which might enable some future use of the liquidity pool there and increase SWISE liquidity. I’m sure other L2’s would be possible as well.

Anyway, let’s do this! And then later on make it cheaper on an L2. Happy to do some footwork on this if we go in that direction.

3 Likes

Thanks for making the proposal concrete, I hope this will be up and running very soon. The parameters, such as the incentives, seem well balanced.

I do have two notes:

Can you clarify if you mean that only positions from 0 to infinity will be incentivized, or that any position will be incentivized regardless of range? In the latter case I would add one more condition: that in order to receive incentives, whatever the range is, the current active price is in that range. This in order to avoid that people can add liquidity that will never be touched (very high price or very low) and still reap incentives.

Personally I feel very good about the sETH2/Swise pool, but not so much about an ETH/Swise pool. I’d like not to go that route, as long as Uniswap does not enable routing for sETH2, there’s always the 1inch interface that could be used to route it through the uni3 pools. You’d need to add the tokens to the interface and what not, for sETH2 and rETH2 anyway, but Swise is already there.

4 Likes

Yeah that was my question only those with the price within their range should receive rewards

1 Like

@ottodv @rustedpopcorn can confirm that only those providing liquidity with an active range will be eligible for farming rewards :slight_smile:

Personally I feel very good about the sETH2/Swise pool, but not so much about an ETH/Swise pool. I’d like not to go that route, as long as Uniswap does not enable routing for sETH2, there’s always the 1inch interface that could be used to route it through the uni3 pools. You’d need to add the tokens to the interface and what not, for sETH2 and rETH2 anyway, but Swise is already there.

There is good news - Uniswap reacted to our PR, and so there is a good chance that SWISE can be traded with any currency. Importantly, this also affects rETH2, which can now be traded for any currency as well (as @Faruk_Kerem would have hoped)! We’re still confirming re SWISE, but I am optimistic.

Fully supporting this, and in the near timeframe I imagine this is the best or only way to proceed. It’s also worth noting that with current gas fees, it will likely cost around $200 to provide liquidity or trade SWISE/ sETH2.
I’m sure the core team gets tired of gas complaints, and I know that there are a couple technical hurdles keeping the core staking contracts fixed to L1. However, as more L2 solutions come online, there may be some low-hanging fruit for portions of the Stakewise system to be made available on L2 systems making gas dramatically cheaper. ZkSync’s ZkSwap is a live L2 port of Uniswap V2 which might enable some future use of the liquidity pool there and increase SWISE liquidity. I’m sure other L2’s would be possible as well.
Anyway, let’s do this! And then later on make it cheaper on an L2. Happy to do some footwork on this if we go in that direction.

We appreciate the support and the concern about gas costs. The issue is very real for small LPs, and hence an L2 solution would indeed come very handy. It is something we want to do after v2 release, and I would be very happy to discuss all the alternatives available and hear your thoughts on the best option for us. Looking forward to it :slight_smile:

7 Likes