RFC Renew Arrakis liquidity mining program

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The Arrakis program has been live for almost 5 months on Polygon (Original thread: Uniswap V3 Liquidity Mining Rewards). Through that time, the deployed positions have behaved as expected and the position has always been in range (from 0.000275 WETH/POOL to 0.0011 WETH/POOL).

Over the past months, the rate at which the vault has been incentivized is 250 POOL per week / 1,000 POOL per month. The POOL refill transactions can be checked here: POOL deposit_reward_token Arrakis - Google Sheets

Currently, the vault has approximately a total of $35k in value deposited. Taking into account the current POOL price of $0.94, the vault has a total value of around 37,200 POOL. This is over our initial goal of 33K POOL, but below TVL previously reached.

The incentives APR offered by the vault is currently (1,000 / 28 * 365) / 37,200 = 35.04%. This makes it rank #2 on the new Arrakis UI showing the vaults with highest APR

Screen Shot 2023-04-12 at 12.29.19 PM
Screen Shot 2023-04-12 at 12.29.19 PM1234×592 275 KB

The Finance Team has a budget of 6,000 POOL for the quarter as per the TBR proposal: TBR-Q2-2023 - Renewal Finance Team. Current rewards end on the 20th of April (last refill Polygon Transaction Hash (Txhash) Details | PolygonScan), which means that at the current rate, extending those for the rest of the quarter would cost 3K POOL ending on the 13th of July (Arrakis gauges work with 28 day periods)

The Finance Team suggests renewing at the current rate of 1,000 POOL per month with commitment for 3 months. This commitment can give assurance to potential participants wanting to be a part of the program.

Have any questions or comments for us at The Finance Team? Please share them with us here in the thread or on the Discord.

  • YES - Let’s renew
  • NO - Let’s not and I can explain
  • OTHER - I have another suggestion

0 voters

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Thanks @underthesea and the finance team for pursuing this!

I would like to see more about what impact the program has had.

In the last five months:

  • how has it impacted the levels of liquidity?
  • has volume changed because of it? Has volume increased?

I’d like to see more impact analysis before we just go dumping another bunch of POOL into liquidity mining. It seems like to me that even an insane APR of 35% isn’t really attracting anyone.

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@underthesea - thanks for this! I really appreciate the clarity of your posts; you consistently provide valuable, well-structured information that makes it easy to dig in and engage.

After reading through:

  1. I’m interested to know the answers to @Brendan’s questions; does the Finance Team feel the incentive is achieving the intent? Conversely, what would be the expected impact of not renewing?

  2. My (simplistic) assumption is that the Hyperstructure’s… um… structure… should create greater organic incentives for LPs. Is this a fair assumption, and - if so - what would it mean for the future of these incentives (if anything)?

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Happy to address your questions @Brendan and @nopey.eth

  • how has it impacted the levels of liquidity?

The protocol owned liquidity on Polygon only has 7 ETH below the current price. The Arrakis program more than doubles that liquidity by adding 10 ETH.

The rewards have been consistent to Arrakis since we started 5 months ago and the liquidity has too. That 35%ish APR is our goal. It’s a realistic market rate for providing liquidity on a volatile pair. Even stable pairs like USDC/DAI are incentivized at ~10% and BTC/ETH pairings closer to 30%.

For a long time we incentivized POOL/WETH liquidity on Uniswap V2 at a similar rate (30-40% APR). We see this Arrakis program as a significant improvement because of the efficiency of the liquidity in the defined range compared to an infinite range.

So yea I disagree with this. It’s not a bunch of POOL really, and the APR is not insane. This program is attracting the liquidity we expected in our original deployment.

That being said we might look at our options here.

  1. We end the program and have less liquidity on Polygon (and total liquidity)
  2. We end the program and use ETH or USDC from treasury to add 10 more ETH under the price paired with pool effectively having the same liquidity
  3. We keep the program going as suggested
  4. We increase the incentives to attract more participants

Do you prefer 1, 2 or 4 as opposed to 3?

I think that when looking at liquidity on new chains we likely would not go with this route unless it was combined with incentives from a partner AMM. For our current situation I think this is worth renewing. Here are some of my personal opinions on why

  • We have a good amount of POOL on Polygon
  • Contributors receive POOL on Polygon
  • Liquidity is otherwise thin on Polygon
  • This program has been already running with the very aligned community members participating (and frankly taking on a big risk)
  • The cost is small
  • The partnership with Arrakis is good

We are still looking at more automated V3 approaches. Defined ranges have the downside of being speculative. Arrakis is leading the charge with automating liquidity but it’s still not quite there yet. We will hopefully be looking at testing their V2 this quarter.

Re: Volumes. We have been recording volumes for Polygon and Mainnet manually using the chart on info.uniswap. POOL Uniswap Volumes - Google Sheets If anyone knows a better way to get this data please let us know! My takeaway is that volumes could be used to sell a story but there are so many factors going on it’s not really data we should act on. Fees for LPs on Polygon are pretty average. Understanding that we need liquidity on Polygon (and soon other L2s). This creates cross-chain arbitrage which is a big part of the trading volume. We even see big volume spikes arbing between Uniswap and a penny pool on Sushi. The best takeaway I have is that we do see significant volume on Polygon. In March it was ~17% of the volume on Mainnet. While we have 317k POOL on Polygon compared to say we have ~5million circulating on Mainnet.

I would say no, at least not for a while.

Lets say we have $120m in TVL and 5% yield. That’s $6m a year or $500k per month. If 100% of the yield is liquidated and 75% of the POOL prize is sold, that would be $875k in volume per month. Currently we average similar at around ~$1mm per month. You can see this is a nice start for V5 but for trading volumes its not a huge ramp up.

Ultimately it’s returns that incentivize people to LP, be it only fees or with rewards. Without rewards it requires higher returns, which means less liquidity and thus higher slippage. I think we are pretty far out from letting the market handle 100% of POOL liquidity. With V5 coming we will be looking to have liquidity solutions on all L2s we plan to deploy on. Part of what we are doing here with Arrakis is keeping our options open.

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@underthesea do you have a graph showing the liquidity levels on that pair? That would be the most useful data to use to evaluate whether this program is successful.

The goal of this program is to increase liquidity on AMMs, so we need to see whether it has!

I’m not quite as concerned about volume, because there are other externalities as you mentioned. It’s not a clear signal.

Seeing a chart of LP levels would be extremely informative.

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Thanks for this really informative response @underthesea - I always learn so much!

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Total Polygon liquidity on Uniswap V3, the red outlined part represents the Arrakis program
image

BRONDER put together this Dune query that shows WETH and POOL flows in and out of the program. You can see that generally the program is in cruise control since the first month.

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https://dune.com/queries/2371164/3887766

In January we renewed these rewards based on a very similar operational status to today.

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Excellent! I couldn’t find it on info.uniswap.org, so I’m glad that @BRONDER made a Dune dashboard.

Looks like liquidity is currently sitting at 15k POOL and 10 ETH. The graph starts at ~1.3k POOL and had a good run at ~21k POOL.

We spent 6k POOL to incentivize ballpark 18k of POOL liquidity. Once the incentives dry up, then theoretically that liquidity may dry up as well.

In my opinion, I would prefer us locking the incentives in as liquidity forever, rather than spending it for temporary liquidity. We could have locked in 6k POOL (along with ETH) rather than renting it for five months.

I would vote to use funds to supply more PoL in a wide band and disown the liquidity, thereby locking it in forever. I think this is a better use of funds.

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Can you tell me where you get the 18k of POOL liquidity? The liquidity being incentivized is the 15k POOL and 10 WETH like you said. Which is actually closer to ~15,800/~10.5 right now. Total liquidity being incentivized is $39,580 quoted by Arrakis and with POOL = $1 that’s 39,580 POOL worth of liquidity. Again keep in mind our original and current goal is still >= 35k POOL of liquidity.

We have spent 4,590 POOL on the program (not 6k) so far. This RFC is about spending 3000 more for 90 days.

The other 3k POOL held by the Finance Team we want to test with Arrakis PALM, the automated Uni V3 strategy.

Putting the 3k or 6k POOL above the price is not going to do much for us in terms of building liquidity at this point. POOL needs WETH support under the price, above the price is price discovery. Community LPs are taking both sides of this proposition, risking their WETH under the price and their upside on POOL above price.

I’m against the notion of deploying V3 liquidity and burning the keys. Even if it were in an infinite range (which is inefficient = V2) it’s a bet on Uniswap V3 being relevant in a space where new versions are released annually. In addition I don’t understand why would POOL holders would want to deploy liquidity and burn the WETH and POOL fees generated? What’s the advantage of doing so?

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Ah; so it’s 15k of POOL being incentivized. I estimated the averaged POOL supplied to the contract based on the Dune analytics; I eyeballed it to be about ~18k.

It seems you think I’m referring to total USD of liquidity supplied, but I’m referring to POOL.

To me, burning 4.6k POOL to incentivize 15k of POOL isn’t worth it. Fundamentally I don’t think renting liquidity is worth it; we might as well use the incentive itself as liquidity.

I’d rather the fees were compounded as more liquidity (or possibly the POOL being burned!). Can Arrakis do that?

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I support continuing the Arrakis liquidity mining program! :slight_smile:
I’m one of the first depositors there and still provide liquidity, it’s nice doing something useful for the protocol with some POOL and ETH and being rewarded for it.
I don’t think it’s a decision between POL or liquidity mining, we can do both! :slight_smile:

I think the reasons @underthesea mentioned are good and make sense:

We have a good amount of POOL on Polygon
Contributors receive POOL on Polygon
Liquidity is otherwise thin on Polygon
This program has been already running with the very aligned community members participating (and frankly taking on a big risk)
The cost is small
The partnership with Arrakis is good

So the Pros outweigh the Cons in my opinion. :slight_smile:

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On a high level, it seems the community needs to decide if the protocol should:

  • Incentivize liquidity via LM rewards; AND/OR

  • Build protocol-owned liquidity (POL) positions

Liquidity Mining

External Programs

In the past, the community has explored different solutions to bolster POOL liquidity on Ethereum mainnet:

  1. PTIP-40: Olympus LP incentives & POOL pool Distribution | Vote Outcome
  2. PTIP-45: Fei / Ondo LP Partnership & PTIP-50: POOL Liquidity Management| Vote Outcome

Both of these experiments produced lackluster results and were reviewed in detail.These were managed by external protocols, who offered incentives that didn’t offset the divergence loss (a.k.a., impermanent loss) that the positions realized.

Community-Led Initiatives

After the Fei/Ondo Liquidity-as-a-Service program ended, PTIP-61 was posted, where it was proposed that 600k POOL be placed above the then market price and that would provide liquidity when the price of POOL moved up in USDC terms.

As an offshoot of that discussion, the Finance Team proposed a pilot POL program on Polygon, where community members held POOL but no real liquidity existed to allow more community members and users to acquire POOL and further decentralize ownership of the POOL token.

PTIP-69 was the result of this discussion, where 25k POOL and 12.77 WETH were paired together across three (3) POL positions. You can an analysis of that program in the Protocol-Owned Liquidity (POL) Analysis | Uniswap V3 [Polygon] | Part 1 post.

This initial research led to exploring a larger POL on mainnet, and potential options were presented in the following posts:

The Finance Team created PTIP-82 as of result of the discussions in the posts above, which passed and created the POL that was further expanded in PTIP-85.

Liquidity Mining in Relation to POL

The last discussion about LM on mainnet took place around PTIP-81, which was approved and distributed 150 POOL/day for a period of 60 days (total of 9,000 POOL).

Liquidity mining incentives for the Uniswap V2 POOL-ETH pair have ended and haven’t been provided since 16 November 2022. The pair still has 74,953 POOL & 35.3033 ETH provided as liquidity as of today.You can see the POOL-ETH pair on Uniswap V3 for comparison, which largely consists of POL held in the protocol treasury.

After community feedback that POOL incentives for supporting POOL liquidity were one of the only remaining ways to earn on POOL in the absence of POOL liquidity incentives provided to depositors and provided as a drip to the POOL pool in the past.

During the PTIP-81 discussions, community members provided feedback such as:

I hold zero DeFi tokens that don’t offer some sort of staking. I hold UNI, COMP, Aave, & Matic. All those tokens offer staking in some form. To me, some sort of staking is pretty much just an industry standard.

There was also feedback that community members who held POOL on Polygon had limited, if no, utility and had to bridge to mainnet to trade POOL, which was costly.In this vein, the Finance Team created a pilot program proposal, where Arrakis would be used to test a liquidity mining program on Uniswap V3, while making it easier for people to provide liquidity in an interface similar to the Uniswap V2 experience.

The goal, as outlined in the previous proposal, was stated as:

If we reach a cruising altitude of 33k POOL or more in total liquidity value then we will look to continue this incentive program.

In an update on 3 January 2023:

Currently 42,800 POOL value ($28,849.24 TVL / $.674 POOL price)

Which brings us to the current discussion.

Strategy Moving Forward

While I agree that establishing POL positions on target networks will be vital to supporting the hyperstructure, is it worth investing in POL on Polygon? The liquidity mining experience can be seen as either a waste of POOL or as a way to get more Poolers involved in LPing ahead of the hyperstructure, where the need for incentives may be reduced due to natural growth in volume (and subsequent trading fees).

The program has met past goals and has satisfied previous requests from the community, so it’s been successful in its objective.

I’d like to see a broader discussion about where POL needs to be prioritized, how much of the protocol treasury should be reserved for this purpose, and how much of the non-POOL assets will be needed for this. Allocating non-POOL assets toward any expense at this point with the protocol treasury declining with no growth in assets to support future development and adoption of the protocol should be focused on supporting growth, adoption, and development of the protocol.

For context: 3,000 POOL represents 0.078% of the protocol’s POOL holdings.The original aim to further decentralize ownership of the POOL token on Polygon has been successful given there are 35,797 addresses holding POOL on Polygon vs. 8,598 holders on Ethereum mainnet.

It seems important to decide what the objective is going forward, how strategy informs the objective, and how the community gets there.

Worth providing this context, imo, as it fills in the missing gaps in this discussion.

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Thanks everyone for the feedback and thoughts in the thread. Before I get into the recent posts I just want to let everyone know that we will be renewing the rewards for the next 3 months. This decision is based on our funding for our team budget request, and the majority of feedback being positive. The voices against are heard and we appreciate the discussion. Please note that after the three months (ending the 13th of July) there are no guarantees this program will continue.

I want to reiterate here that it is not burning 4.6k POOL to incentivize 15k of POOL. We have plenty of POOL we can throw at liquidity (and it’s there already waiting for an uptrend in price), what we don’t have as easily is the pairing of WETH. The Arrakis incentives are currently securing $23k+ worth of WETH that provides support under POOL’s current price, in addition to the ~15k POOL above.

That $23k of ETH is a major chunk of our total POOL liquidity currently in an active range. On mainnet we have 30 ETH or so that is in an active trading range. So having ~10 more is pretty vital to the current liquidity operations across chains.

This is indeed how our current program works for participants. We have applied yesterday to pilot their V2 and I’m pretty sure that yes, we should be able to compound the rewards as part of a custom automated strategy.

Agree, thanks for chiming in with your experience as a participant.

I think its important for folks to realize the volatility of the token we are talking about and the risk that LPs are taking on which equates to the 35% reward. In December over a period of only two weeks the token went from .0006 WETH/POOL to .0003 WETH/POOL. Participants in the program were looking at pretty whipsaw divergent loss. Most of them stayed the course. This type of conviction should be rewarded. Full disclosure: I was not in the pool at that time, and am not currently in the pool.

Agree, I think the only other consideration is that with Arrakis V2 we may have a new way to incentivize more efficient liquidity that has a different risk profile. Or simply use the automated strategies as POL.

Yes, I would say that the current Arrakis program is better than both of those and better than the Uniswap V2 rewards that we ran for a long time.

Thanks for writing out the historical timeline, great context.

My thinking is no. I personally don’t see a great reason to have V5 on Polygon POS. I foresee us having pool liquidity on a real L2, and I think in alignment with our ethos for Ethereum, we should expect the majority of our contributor POOL activity to migrate to a real L2. Just my 2 gwei.

Being that V5 does not network prizes across chains my thinking is that we should really focus our efforts instead of spreading ourselves thin across every L2 and sidechain available. At this point though we have no go to market plan and cannot really make decesions about where we want POOL to be in the middle of this year.

Good stat to highlight.

Agree we do not have a direction for POOL and V5, yet. But I will say that BRONDER and I have looked a good deal at the impact of yield liquidations and POOL prize swaps, and do not think it’s that big of a liquidity demand. If the protocol scales we expect the liquidity will scale pretty well with it. Of course we will have to consider liquidity on new chains. We will be talking a lot more about this as we have more community alignment on where V5 will be deployed. In the meantime, and after the discussions of this thread, I do think it’s prudent that we continue this program.

From my perspective our liquidity is quite well positioned for POOL to appreciate in value. If the downtrend continues then we will have to continue throwing treasury assets at it to support the price or simply decide to let the market do what it wants to do. We will have to consider our options and currently those are focussed on

  1. Protocol owned liquidity with Uniswap V3
  2. Community incentivized liquidity with Uniswap V3 / Arrakis
  3. Arrakis V2 as a potential new solution that we hope to test this quarter

Additionally I think we should consider other AMMs programs where we can partner for liquidity solutions.

Navigating these solutions in the interest of the community and POOL holders will continue to be our mission at The Finance Team. Your ideas and input are always appreciated. While we have the small 3k POOL funding to renew this program we have no other resources for new liquidity solutions. Future matters will be executed with POOL treasury and governance consent.

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Quick update - we have just pushed the 1,000 POOL for the next 28 days rewards into the gauge and do not have further funding to continue this program. Additionally The Finance team will be winding down at the end of this month.

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Sad to hear, but thx for the update! :slight_smile:
Any plans yet about LP on OP when we launch there with V5?
I could imagine providing LP there myself with my current Polygon position if there are enough fees to make it worth it. Not sure about how to choose the best ranges and would appreciate if Finance Team has any tips here or maybe could do another Arrakis program on OP, even with lower or no incentives, just to make it easier to LP :slight_smile:

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I think that would be cart before the horse. No need to build liquidity until deployment is imminent (hard date). From my perspective we still need to strategize on what chains to deploy on and we need to see a more clear schedule for V5 launch.

For OP specifically I’m watching Velo V2 release this week and keeping an eye on if they get more OP incentives.

We will definitely build liquidity on any chains V5 is deployed on but finalizing the launch details is prudent before making any moves.

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Thanks for sharing the comprehensive update on the Arrakis program. It’s always enlightening to see how these liquidity programs evolve and adapt to the dynamic DeFi environment.

While Arrakis has certainly made its mark, there might be merit in exploring additional strategies or tools to complement the current setup, particularly given the rapid expansion of the DeFi ecosystem. For instance, there are emerging platforms that offer cutting-edge liquidity management solutions. Consider DefiEdge, which optimizes liquidity management on Uniswap V3 and SushiSwap V3, on Polygon. They employ automated liquidity optimization to manage liquidity across chains efficiently.

In response to the author’s options, it could be worthwhile to explore the possibility of integrating such solutions instead of simply terminating or expanding the existing program. Just a suggestion, could bring about an intriguing blend of strategies!