Uniswap

In progressing forward with the Optimism Uniswap Protocol Liquidity Mining Program, we are seeking community input for Phase 2 where 100k $OP will be disbursed over 3 weeks time. Before providing our parameter recommendations to adjust for Phase 2, we wanted to take a step back and highlight some key takeaways from Phase 1.

As part of the Phase 1 retrospective, the Uniswap Community Analytics Program (UGPCA) promoted a bounty (Bounty #20 - Optimism Liquidity Mining program) to explore the impact the LM Program had on Optimism, on the Uniswap protocol, and on the community selected pools.

The winning analyses below:

• @xiz_zelos - https://medium.com/zelos-research/optimism-liquidity-mining-program-analysis-35fe7a105314
• @1chioku - https://dune.com/1chioku/0ptimism-liquidity-mining-round-1
• @superamscom - https://dune.com/springzhang/uniswap-optimism-liquidity-mining-program-performance

We summarize some key takeaways of the impact of Uniswap on Optimism below:

• Many LM-related tokens flowed into Optimism before the start of LM. The number of users interacting with the cross-chain bridge increased significantly before LM started
• The liquidity of Uniswap on other chains has not been significantly reduced because of OP’s LM
• The liquidity pattern of Optimism Uniswap LM-related pools shows that there may be liquidity migration between different fee pools. Impact on incentivized liquidity pools:
  • WETH-DAI 0.30% / DAI-USDC 0.01% - The liquidity of the two pools has increased due to LM
  • WETH/USDC 0.05% liquidity in this pool has not increased significantly
  • Overall, the capital efficiency of the three pools has improved, LM also reduced the transaction slippage on the pools, but this effect is less significant in the WETH/USDC 0.05% pool.Partner projects
• LM has increased the liquidity locked in each partner project and the value and the TVL at the end of LM phase 1 is higher than before the start
• Arrakis attracted the most liquidity, followed by Gamma Strategies and xToken Terminal

Just like for Phase 1, we are seeking the Uniswap community’s input to help determine new parameters for Phase 2 of the Liquidity Mining Program. We are looking for community feedback on the following:

1. Potential new pools to add
2. Potential new fee tiers to add
3. Additional LM managers

We suggest the following updates:

1. Replace WETH-USDC 0.05% with WETH-OP 0.05%
2. Add OP-USDC 0.3%
3. Add WETH-WBTC 0.05%

This would expand the LM Program to incentivize 5 pools instead of 3. As a refresher, one point of discussion from Phase 1 was to potentially add longtail assets as a contrast to the major pools. For more information, check out the discussion on Phase 1 ([RFC] The Optimism-Uniswap Protocol Liquidity Mining Program). Additionally, we would love to hear from any new potential Automated LM Managers who would like to be included in Phase 2 and beyond!

After community discussion, if multiple updates are proposed around parameter updates, we will create a 3-day Snapshot poll with the most popular options on January 4, 2023. Otherwise, if there is clear consensus, we will move forward with our recommended updates to kick off the program without a vote.

Thanks a lot @kenneth for this analysis!

I just wanted to give some feedback on the following:

With regards to replacing WETH-USDC 0.05% with WETH-OP 0.05%, both xToken and Gamma Strategies have received 300K OP each to incentivize the WETH-OP 0.3% pair for 6 months. I think xToken may have a couple more months in their program, and we’re planning to launch our program for the next 6 months soon. That’s currently the most dominant pair on Optimism at the moment, and it will still get incentivized for quite some time. I think if we were to make the switch, it would be some time in phase 3 perhaps, but it may not be necessary. There isn’t much competition for that pair at the moment, but the 0.3% WETH-OP pair will likely be dominant for a while given the current incentives there.

I agree with adding OP-USDC 0.3%, and I think that can replace the WETH-USDC 0.05% pool.

image2088×456 73.9 KB

With regards to WETH-WBTC 0.05%, I don’t see much volume or traction for WBTC on Optimism very much at the moment.

image2094×158 19.1 KB

I would suggest adding wstETH-ETH 0.05% on Uniswap. Given the tight correlation, we can do pretty tight ranges on wstETH/ETH and get higher TVL per incentives. I will ask the Lido team if they would also be willing to co-incentivize that pair to see if that would make it more amenable for the Uniswap community to approve this pair. They’re currently co-incentivizing this pair on KyberSwap Elastic, but I think Uniswap’s offering of co-incentives are a lot stronger.

I personally think these liquid staked ETH products will see much more volume in the future, especially when the Shanghai update allows for staked ETH withdrawals. We could start seeing a lot more volume in this pair, and it would be good to have a sustainable source of liquidity here. At Gamma, we’ve run some profitable simulations on wstETH-ETH even without the incentives, so I think if we were to get some bootstrapped liquidity here, that would be long-term beneficial.

Good analysis from the Gamma team across the board. We (xToken) also agree that there’s an opportunity to lean into the ETH liquid staking space on Optimism, bringing in Lido, RocketPool and others.

Thank you for this. Maxim, the founder of Overnight Finance here. We have created delta-neutral strategies based on Arrakis and Gamma - ETS. We were a major liquidity provider to Arrakis’s wETH/USDC vault, expect to be the major provider to both Gamma and Arrakis once the program resumes.

I would like to make a proposal about the pairs to be incentivized and offer for Overnight Finance to participate in the liquidity mining program as Uniswap’s partner.

First, it could be helpful to have a specific vision of what we are trying to achieve on OP. So far, Polygon is by far the most successful of Uniswap implementations outside of mainnet ( i was not permitted to include the screenshot of the Polygon’s pool analytics page).

Pairs leading by volume are ETH/USDC, Matic/USDC and USDT/Matic - all 3 are crypto-to-stable pairs. None of them are 0.3% fee tiers. Obviously, OP and Matic are not the same as OP is not a gas token, ETH is. But if Uniswap is to lead on OP, it should put its efforts in

• wETH/USDC -0.05%
• OP/USDC - 0.05% (not 0.3%)
• wETH/DAI - 0.05% (not 0.3%)

There is an opinion expressed and supported above that wETH/USDC is fine as is and should not be promoted, and other pairs require incremental rather than a major push. Although, tactically justified, i think this is wrong strategically: Uniswap is not leading on OP in the most important pairs and is at par/behind Woofi and Synthetics (I tried and was not permitted to include 1inch trade routings for 100K USDC trades into OP and ETH - but they show very high percentages for Woofi and Synthetics, often exceeding those of Uniswap)

Bottom line, a major push on wETH/USDC and promoting lower fee tiers on OP/USDC and wETH/USDC should be the strategic goals and LM program needs to target to achieve it.

Second, I would like to propose to include Overnight’s delta-neutral strategies ( 'ETS") based on Uniswap V3 on OP into this LM program by compensating underlying volatility rather than a uniform reward distribution improving the APY. I clarify below how that would work and what unique benefits this approach would bring

Overnight’s has been producing delta-neutral strategies based on Uniswap V3 (example on our dApp) and Quickswap V3 (example on our dApp). Essentially, people mint the ETS with USDC (or DAI), which is then used to borrow wETH and farm wETH/USDC on Uni V3 within a [concentrated] liquidity range. The position is then regularly rebalanced using external bots. Profit is calculated daily in USDC and passed over to ETS holders via rebase.

The delta-neutral strategy based on Uni V3 is profitable per se, without rewards. But it can have negative days, e.g. recently during FTX collapse or Binance FUD. The not so often daily losses are the major barrier to bringing conservative stablecoin yield maximizers into ETSes - this investor segment is more concerned with not losing rather than maximizing profits; if this çoncern’ is eliminated by Uniswap with rewards, that would channel significant liquidity to underlying Uniswap crypto-to-stable pairs.

Thus, we propose for Uniswap to allocate part of the LM program to ‘çompensating ETS negative yield on the days it occurs’ rather than providing the usual rewards increasing APR on average across the board. This can be done by deploying and seeding overnight’s insurance for the respective ETSes (example on our dApp).

This approach to LM would provide the following benefits to Uniswap:

• stimulate concentrated liquidity where Uniswap excels rather than wide liquidity, where Uniswap is close to par with all the Uni V2 forks
• bring new liquidity from the ‘stablecoin investor segment’ into crypto-to-stable pairs, the source of liquidity Uniswap has not fully tapped into yet
• reward efficiency as measured by trading volumes per unit of rewards - by spending rewards only on compensating negative days; also due to underlying profitablity of delta-neutral strategies on Uniswap V3 per se and larger volumes that concentrated liquidity drives

I understand this is unconventional approach and Overnight are not a well known player. We are obviously open to a long DD and backtesting of our ETS technology. However, I suggest to just give it a try and assess the results after Phase 1. Also, tagging @OPuser , the leader of the Optimism’s DeFI committee C, which recently awarded Overnight a grant to promote its products, including ETS. I hope @OPuser could provide a reference.

At your disposal to answer questions here and over video if necessary.

Merry Christmas everyone!