Uniswap V3 pool incentives extensions and the latest vote disaparity

Hello fellow DAO members!

A few things first!

Why liquidity pooling is incentivized

Let’s remember why we incentivize pooling liquidity, I’m not the best person to ask this to, however, a few obvious reasons come to mind:

  • Incentivizing liquidity drives liquidity to the pool
  • We want to drive liquidity to the pool to create deep liquidity and allow the price to fluctuate very minimally when anyone exits or enters a staking position through the pool
  • Liquidity mining programs are a great way to distribute governance tokens and it helps to engage the community, incentivize voting and active DAO participation. Sure, we know that the most active DAO participants may not coincide with the largest wallets, but it sure helps get people in when you’re giving them voting power in exchange for helping us maintain deep liquidity in the pools.
  • Incentivizing the rETH2/sETH2 drives liquidity to it as well, this differentiates StakeWise in a significant way to other staking protocols, where users can’t compound their rewards, here they can!
  • See the first reply by @amphoria which further highlights disadvantages to pooling which are compensated by the rewards.

What happened

Recently, a governance vote passed on the third extension of incentives for the sETH2/ETH and sETH2/rETH2 pools. This vote, as opposed to the first extension and the second extension was NOT overwhelmingly in favour to actually extend the incentives.

After some quick and dirty data analysis of the 3 extension votes, some interesting trends and figures show (I hope you like barplots, because that’s all we need):

Some good news

Consistent voters’ SWISE count is on the rise

Albeit not significantly, voters which voted in all three extensions seem to be acquiring more SWISE, my guess is that most of these increases come from the Uniswap incentives, but after close inspection, some sold, some bought, but as a whole, they’re on the rise:

Other interesting information

Extension votes 1 and 2 had a significantly lower amount of SWISE in votes

It’s not black magic, we know this last incentives extension vote was anomalous, but it helps to illustrate by how much.

Every time there’s less unique addresses

There could be many reasons for this, but my guess is that since if a voter sees that their balance doesn’t seem to make any difference to the outcome of the voting, the user is not exactly encouraged to vote.

The first two votes were much more in favour of extending than the third one (in terms of unique addresses)

There’s more addresses voting no than yes in the third vote than in the previous two. Consider this does not take into accoun the wallet’s size, so there’s wallets with lower amounts of SWISE voting no, before voting no, there’s a whole month of rewards where you can voice your opinion and say whether you agree, disagree with the program, or whether you consider the incentives must be adjusted, anything, but voice your opinion, we actively encourage it and want it.

Prior to this last voting, the ‘no’ option had basically no support at all (in terms of SWISE amount)

Before there may have been addresses which voted no, but they held virtually no SWISE.

Some things we need to ponder

The meaningful addresses that voted no

These two addresses represent about 34.4% of the SWISE used in the third extension vote, about 91% of the SWISE used to vote no was also coming from these two addresses. Quickly going on etherscan we can see that the SWISE used was acquired over 4 transactions as follows:

The plot shows a cumulative sum.

Whatever the motives are behind this decision by these two wallets to vote ‘no’, us DAO members that care want to hear your motives!

If you disagree with extending the program, make your voice be heard, come to the forum and post, post here, post anywhere, but let us know why!

PS: I promise I know how to make way prettier plots than this, but bear with me, we need practicality, not beauty.

Discussion

  • Why did this occur?
  • If the overwhelming majority of the DAO agrees with the program and these two wallets don’t say anything, we need to make sure that we can safeguard these votes. It wouldn’t take a ton more SWISE hoarded by wallets like these to defeat an important vote that could hurt the protocol by causing liquidity to get out of the pools due to lack of incentives.
  • Whether or not these two users decide to comment under this post or not, we need to remember WHY the incentives are there and WHY we push to keep it like this. If you consider the amounts need to be adjusted, say so! if you think there are issues with the incentives, say so! voice your concerns and opinions!
  • If there’s anything you see wrong in this post, point it out please. If you want the files I used to produce the plots, I can also share them, just DM me on discord.
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As a modest investor in the LP, the SWISE is required to compensate for two losses:

  • As sETH2 trades at a small discount to ETH there is a small amount of Impermanent Loss. I invested when the split of sETH2/ETH required was 89/11%. It is not 53/47%. In that time my total holding of sETH2 plus ETH in the LP has decreased by 0.39%. Although this doesn’t sound like a lot, the fees earned in the LP are insufficient to make up for the IL.

  • As my sETH2 holding has reduced from 89% to 53% I am earning less rETH2 than I would if I just staked the sETH2.

Without the SWISE compensating for these losses, I would have to withdraw my liquidity from the pool, and I would expect others to draw the same conclusions.

I should add that I am in the tightest liquidity band and yet the fees earned from the LP are a fraction of what I could earn by staking the ETH (and earning rETH2) rather than holding it in the LP, even if the sETH2/ETH ratio were 1:1 and therefore no IL.

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I think DAO voting based on the “wealth” of individual voters is intrinsically and deeply undemocratic. Not just in the case of Stakewise. I think it’s a problem in the entire crypto space (and stocks, too, as a matter of fact). We either have to change that and give each SWISE holder the same voting power, or we will have to live with the fact that a few whales have complete control over the DAO. That’s just how it works.

Another option would be to automatically assign the voting power of non-voters to the majority vote. But this can go south if all whales vote and vote against the majority.

I don’t know why one of the whales voted no in this instance. It would be interesting and important to find out.

2 Likes

Thanks a ton for this great overview and for initiating a conversation about yesterday’s vote @dreth!!

From what I gather, both wallets never meaningfully participated in liquidity provision, and instead accumulated SWISE via direct purchases. This gives me a reason to believe that these holders may not realize the extent that liquidity for staked ETH matters for our protocol, and perhaps have other motives in mind. I think what would be cool to look at is whether these wallets have previously voted “yes” in the LM announcement/extension votes, or participated in other votes at all. Knowing this info might shed light on what their motivations were. I suspect that the recent discussion about the protocol fee distribution might have influenced their decision to vote “no” on this proposal because ultimately it increases the circulating supply of SWISE. Let’s see.

From the team’s perspective, there were at least two lessons learned from yesterday:

  1. Every vote, whether an extension or not, should be preceded/accompanied by a forum post about the same topic. This is required to simplify the sharing of one’s opinion on the subject and initiating a conversation about one’s concerns before they are reflected in the vote. We do not know for sure the reasons behind the recent “no” votes (large or small) and can only make educated guesses. Instead, if there were a specific platform for these holders to share their thoughts, perhaps they’d tell us themselves.
  2. The way voting transpired this time (when the proposal was “saved”) will likely have consequences, like the “no” votes pouring in at the last minute to clinch the lead. This risk needs to be mitigated by engaging more SWISE holders in voting. There is a large proportion of SWISE holders who didn’t/don’t vote at all - these holders could make sure that the vote passes with confidence no matter what happens at the last minute. We need to incentivize their participation through either rewards or values, or ideally both, and make sure they understand the importance of certain proposals to the protocol. Hence, the SWAT initiative likely needs to contain something that incentivizes more active DAO participation to prevent risks like this from materializing.
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This is a good explanation of the importance of the liquidity pools! Thank you @amphoria.

Just a side note for those concerned: those who deposited to StakeWise after June 24th do not experience any IL from LPing, because they paid/received the same amount of ETH for their sETH2 when they bought it (to stake) and sold it (in the LP). If you have been with StakeWise for longer, then indeed you are exposed to selling sETH2 at a discount to what you paid for it, leading to small IL but presumably in exchange for the farming rewards. We are quite transparent about this.

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Is really good that the team is looking into how to make governance more effective and a suggestion I have, which I saw implemented in other protocols, would be to get SWISE holders to get incentive (in case we distribute fees) only if they actively partecipate by voting, this can be done directly or indirectly by delegating thier votes to team or community members without any lock, so they are free to sell or move coins at any time or change delegation when they want.Active members can propose thier self as delegators and can ensure that before every vote they share their ideas and vote decision so that users can decide to delegate to other users or vote for thier self, but enable the fact that if you want to get part of the fees you need to partecipate.

I think this will strenghten community and also push for partecipation.

Regarding the point that the whales voted no because they are not aware of the importance of the incentives to LPs i think is a bit wrong narrative…I mean these people market bought 100K+ USD in SWISE with very high slippage and I am 100% sure they tried out the protocol at least once well understand how important seth2/eth and reth2/seth2 LPs are and how important is to reward them, as this will affect also SWISE value and any future SWISE holder earnings. We cannot just pretend that since there is no seth2 in thier wallets they do not know anything and spent such amounth on SWISE blindly.

I think we should really try and understand what pushed such vote and is probably the case around “Stop inflating the market with SWISE without defining its value and providing it proper liquidity” SWISE value floats 25-30% at every buy/sell and if you have 500k-1M SWISE in the long term this might not be ideal, even more in circulating supply keep increasing.

To be fair we focus mostly on a couple of whales, but other small holders voted no and i think a lot of liquidity providers are not happy with the rewards as SWISE cannot be sold without dipping the price 20% and if you are not a big LP claiming it to “only vote” might not worth it because of gas fees.

I would not understimate this under the narrative that 2 greedy whales, who never visited once stakewise app did not want others to have more SWISE so they voted no, because I do not think this is the case at all.

Maybe we should also look into other details is the amount proposed to reward LPs correct?
The below numbers were proposed as incentive for the next 30 days:
6,000,000 SWISE goes to the sETH2/ETH pool
500,000 SWISE goes to the sETH2/rETH2 pool

Are these SWISE amounts distributed in a month appropriate? is that too much or too small? Unfortunatlly we do not have the transperncy and a justification for every vote to go into such details but they are all things I think we should review and think about at least for the next round.

I have been hammering this for long on both forum and discord, I think we need to go quickly with something that really provides value for people to HOLD SWISE long term, and the first proposal from the team to distribute all fees to SWISE holders without rescrictions(no lock, no seth2 holding) is a good and simple way to start, then let us incentive SWISE liquidity on UNI, and review how SWISE needs to be distributed ( i suggested to lock a protion of SWISE rewards to LPs for a certain amount of time, e.g. 50% you get immediatly other 50% is vest and escowed for 3 months).SWISE is our protocol token and it needs to be treated as a valuable asset dirstributing 6,5M SWISE in a month seems a lot even to me to be honest and it was a detail I overlooked.

SWISE market cap is of 4M now and we have a great protocol with unique features market cap can go 10X and that could be a lot of money which is given away, is good that we are in early stage and is good to reward early adopters and supporters but if SWISE do not gather enough value for people to hold it it will just be a farming dump coin and LPs will leave anyway even if 10M SWISE are offered every day.

Just my thoughs but let us proritize SWISE value and community partecipation this will be the base for a natural growth of both TVL and adoption

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More engagement is a good thing, seeing more Swise vote (regardless how they voted) is at least a positive. I am guessing that a lot of people don’t vote because they see the result as a foregone conclusion. If this nail biter vote shows us 1 thing, that is that you should vote because it’s not always foregone conclusion. Voting is also free, so there’s no reason not to do it.

Rather than speculate I’d like to hear from people who voted no, and the reasoning they had.

Address aren’t identities, 1 person can have many addresses. And conversely several people can be investing together under one address (for instance to reduce gas fees).

This is like shares, the bigger your investment the bigger your vote, regardless how you structure your ownership.

Just picking this word out. We don’t have delegation at this time. Maybe that’s an idea in itself?

However given how much stuff there is still to implement (such as an UNI pool for Swise) the priority of implementing delegation might not be very high.

I agree, however, this last 3rd extension vote is a bad example of this, as there were less unique addresses than with any other past vote.

I’ve briefly talked to @kiriyha about this, I wanted to propose myself as a delegate, so I mentioned creating a forum section where people can post their delegation address and whoever wants to delegate their votes to them can do so. The mechanism is already in place, we just have to start using it somehow.

small plug: if anyone wants to delegate votes to me, you can delegate to dreth.eth, I won’t just do whatever i want with it, but I think it’d be cool to have a forum section for delegates.

Voting is one micro activity that we could reward with a small claimable Swise payout. Say something between $1 and $5 worth of Swise for each vote.

I really do not agree on this, we should not just give away SWISE for everything done…SWISE is valuable…SWISE holders should get protocol fees and voting should be an incentive its self…people should buy SWISE or earm it providing value to the protocol so they can vote we should not pay out SWISE to SWISE holders because they are voting, i feel this is conceptually wrong and the best way to kill SWISE value. I already think too much SWISE is given away, we are at the begining and I hope that @kiriyha and @tsudmi review next emissions for lp rewards as inflation might be too high long term

@kiriyha and @tsudmi I think it would be great if before next vote for farming rewards we could have an official vote to confirm distribution fees to SWISE holders and SWISE uniswap liquidity with related reward allocation, I think it would be nice to clarify these points and take a final decision in order to avoid same situation we had in the last voting on farming rewards

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