Intro
This proposal outlines a go-forward plan for the liquidity of StakeWise tokens in Uniswap pools via SWISE incentives. Deep liquidity will help to reduce slippage and bolster the sETH2 and rETH2 pegs, and liquidity mining incentives are a proven way to attract and retain LP liquidity.
It is also essential that the sETH2 <> ETH pool is able to reposition its liquidity without requiring LPs to manually redeploy, in the event the pool moves out of the defined concentrated liquidity range. For this, we introduce Terminal’s Rebalance CLI utility.
This is both a governance proposal and a partnership proposal. We are putting forward our permissionless platform, xToken Terminal, as the service provider for StakeWise liquidity incentivization. Terminal allows projects to deploy a highly configurable Uni V3 liquidity mining (LM) program in a matter of minutes with no dev work or technical expertise required. Terminal is permissionless and rigorously tested, providing an out-of-the-box solution that saves projects time and money.
Designing a Liquidity Mining (LM) Program for StakeWise
sETH2 currently has deep liquidity on Uniswap V3 and an ongoing liquidity mining incentives programs across three pools:
- sETH2 <> ETH: 5,000,000 SWISE per month
- sETH2 <> rETH2: 500,000 SWISE per month
- sETH2 <> SWISE: 500,000 SWISE per month
sETH2 <> ETH has recently fallen out of its concentrated liquidity range and StakeWise and its community are reevaluating options for how to best proceed with the distribution of SWISE incentives.
Based on our understanding of the current incentives program, our review of the community forums, and our experience with ETH liquid staking providers, we recommend that StakeWise:
- Maintain its liquidity on Uniswap V3, as Ethereum’s highest volume and most capital efficient DEX.
- Continue incentivizing a narrow-ranged sETH2 <> ETH pool with SWISE rewards.
- Deploy an additional incentivized sETH2 <> ETH pair with a wider liquidity range to act as a secondary source of liquidity, should rebalancing be required.
- Continue incentivizing sETH2 <> rETH2 with a narrow range and sETH2 <> SWISE with a full range.
Asset pair and liquidity concentration
For the pools which currently utilize concentrated liquidity, we’ll be able to retain those concentrated ranges, yielding high capital efficiency for traders and LPs. Though our liquidity will be highly concentrated, we may want to increase the ranges slightly in both directions given recent market conditions where pegged assets across the ecosystem have deviated from their true price.
| Pool | Range | Notes |
|---|---|---|
| sETH2 <> ETH (primary) | Narrow | Pegged assets can use narrow ranges though we recommend extending in both directions slightly, due to market volatility |
| sETH2 <> ETH (secondary) | Wide | Wider range recommended in the event the primary source of liquidity falls out of range |
| sETH2 <> rETH2 | Narrow | There won’t be a secondary liquidity source so we recommend extending in both directions slightly |
| sETH2 <> SWISE | Full | Concentrated liquidity not recommended due to SWISE price volatility |
Rebalance/migration strategy
As StakeWise has experienced, periods of market volatility can cause even pegged assets to fall out of range. xToken’s Rebalance CLI empowers projects with the ability to reposition liquidity without requiring their LPs to manually migrate. This allows for the best of both worlds: maintaining a high degree of capital efficiency while minimizing the burden on LPs. LPs are able to continue to participate in rewards without paying the gas costs of migrating to a new pool.
The CLI is best-suited for pools with concentrated price ranges on asset pairs with sufficient secondary liquidity to rebalance against. The primary sETH2 <> ETH pool fits the use case as long as there is a secondary liquidity source, such as the secondary sETH2 <> ETH pool on Uniswap V3 described in this proposal, or even liquidity external to Uniswap V3, such as on Curve.
Here’s an example of how the Rebalance CLI will work:
- 1 ETH is currently equal to 1.0133 sETH2. Over time, as sETH2 accrues value, the relative value of sETH2 to ETH should increase.
- Let’s say the current price range of the primary sETH2 <> ETH pool is between 0.96 and 1.06 ETH per sETH2. sETH2 begins to increase over time and the pool is at risk of falling out of range.
- The StakeWise pool manager can use the Rebalance CLI to migrate the price range from, for example, 0.96 to 1.06 ETH per sETH2 to 0.98 to 1.16 ETH per sETH2. In one atomic transaction, the CLI accepts the new price range as a parameter, swaps assets as needed and repositions the contract’s liquidity into the desired range.
- The CLI uses Uniswap TWAP oracles to confirm that the NAV of the pool post-rebalance is at least 99% of the NAV pre-rebalance. Additionally, pool managers will only be able to rebalance once every 24 hours to avoid churn.
For reference, management of Terminal pools is entirely non-custodial. We (xToken) do not have any control or influence over deployed pools. We’ve implemented a number of careful safeguards into the CLI in order to ensure effective rebalancing. As we are a non-custodial protocol, this feature would need to be operated by the StakeWise team and/or community, with support available from the xToken team.
Incentives program proposal
In light of this analysis, we’d like to propose that StakeWise continue to incentivize the three existing Uniswap V3 pools with the same rewards allocation, while adding a wider-ranged sETH2 <> ETH pool to act as a secondary source of liquidity.
To ensure the secondary sETH2 <> ETH pool retains yields attractive to LPs, we recommend incentivizing an additional 1,000,000 SWISE per month. We believe this distribution of incentives will ensure the secondary pool is an adequate source of liquidity despite having a less concentrated range.
| Pool | SWISE per month |
|---|---|
| sETH2 <> ETH (primary) | 5,000,000 |
| sETH2 <> ETH (secondary) | 1,000,000 |
| sETH2 <> rETH2 | 500,000 |
| sETH2 <> SWISE | 500,000 |
We believe SWISE rewards should be re-evaluated each 4-week period, allowing for community oversight on the effectiveness of the program (Terminal allows sponsors to renew rewards on a pool in a few clicks).
With that, we invite comments and questions from the community!
On Security
Those who are familiar with the previous version of our project know that at our peak we managed over $100m in assets, specializing in native staking strategies and later getting into liquidity strategies. In fact, for several months after Uniswap V3 launch, we were the largest provider of Uni V3 managed liquidity (peaking at $25m). Those who are familiar with our project also know that we had security incidents in spring/summer 2021, related to our deprecated asset management product line. Since then, we’ve bolstered our security practices and have developed a rigorous and intentional process. Additionally, the Terminal liquidity mining contracts have been audited by ABDK, have been the subject of an Immunefi bounty program for several months and have undergone several months of internal review.
Appendix: Some Basic Math on Uniswap V3
It’s well understood that incentivizing a sETH2 pool on Uniswap V3 would be many times more capital efficient than a similar incentive on Uniswap V2. But how much more?
Let’s start with some assumptions:
- StakeWise pays out $1000 in incentives per week on a sETH2 <> ETH pool
- LPs demand an APR of 10%
- There is no other liquidity in the Uniswap pool besides for the incentivized liquidity
- For simplicity, 1 sETH2 = 1 ETH = $2500
- Our Uni V3 range will allow for 0.25% price deviation in either direction (tick range of [-30, 20]
Under these assumptions, both a Uni V2 and a Uni V3 pool would accumulate slightly more than $500k in TVL (~104 sETH2 + 104 ETH).
Now to test the gains in capital efficiency from V3. Say you wanted to exchange 40 ETH for sETH2:
- On V2, you’d receive 28.83 sETH2
- On V3, you’d receive 39.96 sETH2
Even on a small scale, you can see the massive gains that come with concentrated liquidity. V3 yielded 39% more sETH2 in this case!
For further reading, refer to Uniswap’s June 2022 study which showed that “fee returns on non-rebalancing Uniswap v3 positions outperform comparable Uniswap v2 positions by an average of ~54%.” Source: When Uniswap v3 returns more fees for passive LPs