TLDR - POOL liquidity is heavily balanced to POOL because of the downtrend in price. We evaluate 3 possible changes to the current liquidity setup for the community’s review; at this time, the Finance Team recommends making no changes to protocol-owned liquidity positions.
Introduction
In the past year, we deployed protocol-owned liquidity on Mainnet and Polygon, and we have run a campaign to incentivize liquidity on Polygon. In this post, we’ll examine the current liquidity situation and explore potential updates. As we look forward to PoolTogether V5 and the increased trading volumes of the POOL token, we’re excited to collaborate on a go-to-market strategy that incorporates liquidity considerations.
State of liquidity
These are the details of POOL liquidity across Mainnet and Polygon.
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Total protocol owned liquidity on Polygon 4 WETH / 48k POOL= $48k
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Total protocol owned liquidity on Mainnet = 63.94 WETH / 550k POOL = $614k
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Total Uniswap V2 liquidity on Mainnet 35 WETH / 75k POOL = $131k
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Total Arrakis Polygon liquidity on Polygon 7.4 WETH / 24k POOL / = $34k
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Total liquidity 110 WETH / ~700k POOL = $827k
This post will primarily focus on Mainnet liquidity, as this is where the majority of trading volume occurs and where new considerations are most likely to arise for now. Additionally, an updated review of Mainnet Protocol Owned liquidity can be found on this sheet.
POL was last evaluated at the end of January. Here is a rundown of how the positions have moved since then
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At the end of January POL included 39 WETH and 275k POOL in liquidity
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Added 60.27 WETH and 200k POOL on March 1st
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Combined totals 99.27 WETH and 475k POOL
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Today the positions total 63.94 WETH and 550,738 POOL
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An overall drop of 35.33 WETH and an increase of 75,738 POOL
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75,738k more POOL * 0.00045716 = 34.62438408 WETH
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We have generated around 3,514 POOL and 1.67 WETH in fees in that time
On net we see a small divergent loss that is more than covered by fees
Liquidity Relative to Price
Because a lot of POOL liquidity is on Uniswap V3, the slippage for POOL trading is dependent on the amount of liquidity in the active trading range. Essentially the liquidity that is near the current price. This chart shows a downtrend in price starting in March.
Mainnet Uni V3 liquidity
To the left of the current price we have a lot of liquidity setup for POOL price discovery. This is well positioned for the long-term with the bulk of the liquidity supporting up to a ~3x in price in ETH terms.
To the right we can see our active liquidity has a wall that can be sold into that goes down to .0004 WETH / POOL. Below that the liquidity is thin with 40 WETH in our buyback range deployed from (0.0001995 - 0.0004512). Without any changes to the current setup and price falling below .0004 we should expect significantly higher slippage for traders compared to now.
The three options we can consider now are
- Rebalance Mainnet
- Add Liquidity to Mainnet
- Arrakis PALM
Rebalance Mainnet
With our current POL on Mainnet we could rebalance the WETH we have under the price. We have 23 WETH in active trading and 40 WETH in the buyback. An option would be to spread that 63 WETH from the current price to a tighter bottom. Perhaps .000275. This would increase slippage for downward price movement from the current price, but decrease slippage if price goes below the current active trading range of .0004. The Finance Team does not suggest this because of the amount of WETH we have to work with and the practicalities of governance custody of the liquidity. The time from proposal to execution adds complication in expected results and the public knowledge possibly motivating more immediate sell pressure.
Add liquidity to Mainnet
Another option would be to deploy more capital from the treasury to bulk up the liquidity under the price. Adding extra liquidity could initially help to support the POOL price and reduce slippage. However, it comes at a cost for the Treasury, and the resources could be better leveraged later for liquidity solutions specific to PoolTogether V5. Again the Finance Team does not recommend doing this at this time.
Arrakis PALM
Arrakis V2 introduces more flexibility to manage Uniswap V3 positions. They now offer a service called PALM in which they maintain a rebalancing strategy for protocol owned liquidity. In our talks with them they have offered to work with us, but the minimum engagement is $100k in liquidity. This liquidity would be managed in a tight active range with some funds held in a reserve.
PALM offers a unique opportunity where we can put forward only POOL and rebalance that to WETH. As opposed to recently where we have used treasury USDC to buy WETH when deploying liquidity on Uniswap V3.
From what we have seen on Dune dashboards of vaults using PALM, protocols only need liquidity roughly equal to daily trading volumes. We ballpark our daily volume for POOL is around $25k. The $100k in liquidity would likely be more than sufficient. Depending on simulations at deployment we generally see that 20-50% of the liquidity in PALM is actively LPing with the remainder in the reserve.
While PALM is a very promising solution for capital efficiency and mitigating impermanent loss we do not recommend using it at this time for POOL liquidity. Arrakis V2 is relatively new, and the PALM strategy is a trusted service managed by individuals and not yet open source. We had hoped to try it with a smaller amount but because of the maintenance required from the Arrakis team this will not be possible at this time. Hopefully more permissionless and accessible strategies for rebalancing liquidity on Arrakis V2 will become available in the near future.
Conclusion
We have put a good amount of resources into POOL liquidity over the past year. We are setup really well for any price discovery. If price continues to decline our current deployments would result in an increase in slippage for sellers. In this post we have considered rebalancing our current position, adding to it, and using PALM. While we believe these are all valid considerations we do not recommend pursuing any of them at this time but welcome community opinion.
The Future
The FInance Team believes our strategy for the next 3 months should focus on the needs of PoolTogether V5. Knowing what chains we will be deployed on will be very important to forming this strategy. We recommend focussing on a limited number of chains as liquidity across chains introduces arbitrage which comes at the cost of LPs.
We welcome anyone interested in discussing these topics to reply here or contact us on the Discord.
Relevant Posts
July 2022 - Protocol-Owned Liquidity (POL) Analysis | Uniswap V3 [Polygon] | Part 1 - 
Ideas & Discussion - PoolTogether
Sep 2022 - Part 3: POL considerations and next steps - Ideas & Discussion - PoolTogether
Jan 20 - Mainnet POL Review
Feb 9 - Strengthening our POL Position
Apr 12 - RFC Renew Arrakis Liquidity