BED Liquidity Mining (xy =k AAM) - some comments

Hi All,

With the passing of the BED product votes it’s obvious for everyone to be thinking about launch and liquidity mining.

I’m pretty (/ over) active in the INDEXcoop and we have established some insights into Liquidity mining on uniswap V2 and how it can be managed. However, this is not an exact science.

One additional note, while I’m involved in the coop, there is no way I can commit the coop to anything. The aim here is to try and educate the Bankless community in how the coop thinks about liquidity mining and so hopefully avoid any misunderstanding.

The coops liquidity framework was described here and is based on this blog.

The basic idea is that you can design a liquidity mining strategy by the following process:

  1. Identify a target pool size ($ XXX m USD)
  2. Estimate the % APY that the market will settle on (Fees and mining rewards)
  3. Calculate the daily $ USD value of reward tokens.

#1 is actually a combination of 2 considerations:

  • What size a pool traders need to avoid significant price impact / Arbitrage bots need to keep BED close to the net asset value (NAV).
  • Encouraging massive Assets Under Management (AUM) is good as it raises the overall profile of the BED product(and thus helps build customer confidence)

As BED in built upon set Protocol contracts (Like $MVI and $DPI), it is a simple product with 3 very liquid components, that means that exchange issuance (i.e. creating Via “Token→ ETH + wBTC + DPI → BED”) is cheap so we don’'t need a deep pool for optimum trading vs exchange issuance.(Minting $MVI from ETH via 15 tokens, at a gas price of 137 gwei, cost 0.34 ETH…).

While slippage is all about the user experience in buying and selling, AUM is about marketing and demonstrating product market fit. i.e. a totally different objective.

#2 really determines how much Income LP’s need to stay in the pool. For $DPI and $MVI, we see the market settling at about 25% between fees and rewards.{I can dig out the figures, but the split varies between DPI and MVI, and between Uni v2 and Sushi swap).

For me, the APY required to get liquidity depends on the attractiveness of the tokens and the risk of divergence loss, and the security risks. I’ll accept a lower APY from a pair where I like both tokens (DPI and ETH) and where I expect them to be correlated over long term. So, I would expect higher APY from ETH:DAI, or from ETH:[small cap moonshot].

The good news for Bankless DAO and INDEXcoop, is that I would expect a low APY for this pool (possibly below 20%). BED and ETH are both attractive tokens, with good security, and I would expect them to be pretty correlated (BED is 33% ETH, and I don’t see x10 relative performance for any of the three in the next x months).

The bad news is that I don’t expect much trade volume for BED:ETH, so fees will be low. I suspect that most BED users will purchase and hold for a long time. While this is good for AUM, and streaming fees, it is not good for LP APR’s. Index funds like DPI get trading volume from whales taking short term positions in/out of DeFi. There is no reason for a whale to buy / hold / trade BED (Other than LP’ing), so I don’t expect significant trade volumes for BED.

#3 is simple maths, and then you need to convert it into the number of reward tokens to be placed in the staking contract for distribution over the next 30 days. INDEXcoop generally use a 20 day Time Weighted Average Price (20 TWAP) using coingecko prices [I have no idea why we use 20 days].

After the initial 30 days, the calculations become simpler as you can use the current AUM in the pool / staking contract. The APY doesn’t need to be estimated, as there is now a history of what LP’s have been receiving.

Additional Notes:

  • INDEX fund tokens price action behaves differently to governance tokens, we want high liquidity, and we need to consider NAV. Deviation from NAV is generally considered bad for token holders.
  • As a result of these differences, it is impossible to pump and dump a well designed Index fund token.
  • I expect that BED will trade in a pair with ETH. It’s the main training counterpart on L1, and as it’s 33% of the product it reduces divergence (‘Impermanent") loss for LPs.
  • INDEXcoop has generally had our main liquidity on main net v2 Uniswap.
  • Following the initial 60 day staking contract for DPI:ETH, we have moved to a 30 day contract that can be replenished with tokens. This allows LP’s to stake with the knowledge of how long the rewards will last, and if we decide to renew rewards, we can do so without the LP’s doing anything.
  • To date INDEXcoop has never used dual reward staking contracts.
  • Uniswap v3 changes the game for liquidity mining, it’s become much more complex for LP’s and harder to incentivise. There are new tools being developed within DeFi. However, it may be preferable to launch BED on a standard xy=k pool as it’s simpler for LP’s and helps grow AUM - I think this is TBC.
  • L2 markets may be cheaper for LP’s and users, but BED will need L1 liquidity as BED tokens are issued and redeemed on L1. This means that arbitrage via issue and redemption will happen on L1 (and then between L1 and any L2 liquidity).

Moving to #archive

Please reply if you’d like to keep it open