This proposal outlines a revised approach for our liquidity mining efforts that combines ongoing liquidity mining incentives with a concerted effort to control our own liquidity. This would effectively extend and modify the current phase, which ends in late-February.
The strategy entails maintaining liquidity mining rewards near or at current levels for an additional 4.5 months, while at the same time aggressively increasing the DAO’s Olympus Pro bond LP token purchases. This could reduce the effective cost of liquidity mining, while also jumpstarting a program to put the majority of the DAO’s liquidity in its own treasury.
The Big Picture
Currently ShapeShift is spending a substantial amount of FOX in order to maintain our liquidity mining program. This plays an important role in both ensuring that FOX has a presence on Uniswap and throughout the DeFi ecosystem, as well as expanding the universe of FOX holders.
At the same time, the DAO is operating in an environment where various newer DeFi protocols have enabled protocol treasuries to hold their own liquidity. This new paradigm allows projects to enjoy the best of both worlds, ensuring that there’s sufficient liquidity while avoiding typical downsides that arise from liquidity mining–for instance, “mercenary” liquidity providers who quickly head for the exits and sell a token soon after they earn those rewards.
The two steps contained in this proposal would effectively allow the DAO to engage in both behaviors: continuing its liquidity mining rewards while also using its ample FOX reserves to begin purchasing its own liquidity via an Olympus bond.
What this proposal would do:
1.) Continue our current liquidity mining rewards in the Uniswap FOX/ETH pool for an additional 4.5 months, targeting a 75% APR or higher (funded with 13.5 mil FOX over the period). This mirrors our current approach.
2.) Utilize our current FOX/ETH Olympus Pro bond in order to aggressively purchase our own liquidity. Specifically, the DAO would fund an Olympus Bond program over the following 4.5 months (concurrent with the ongoing LP program) to purchase FOX/ETH LP tokens, targeting $40 million worth of liquidity. $60 million worth of FOX would be earmarked and deployed for this purpose over the course of the 4.5-month period.
Note that the strategy outlined here doesn’t speak much to how exactly we’ll implement the LP repurchases via Olympus. This ambiguity is intentional; it leaves our team enough flexibility, with respect to both position sizing and timing, to react to market feedback. For instance, If our bonds are not selling and/or liquidity starts rapidly declining (and not just because of markets in general dropping), this would suggest that we should adjust the strategy.
That said, it’s likely that we’d begin the program very aggressively, perhaps with 10X to 20X our current purchases, in order to quickly increase our Protocol Owned Liquidity.
With respect to management of the revised bond program’s parameters, the existing FOX Bond Committee would be a logical choice; it already had competency and knowledge around these operations. The Committee’s current term expires at the end of the current bond program. Should it be amenable to renewing for another 4.5 months under the modified proposal, its ongoing work would be invaluable in executing this proposal’s strategy.
What are the potential benefits of this strategy?
1.) This proposal arguably strikes a favorable balance between two goals: a.) continuing our liquidity mining in the near-term, and b.) adding our own liquidity to our treasury. This would have an advantageous knock-on effect of helping to diversify our treasury, since our LP tokens represent a claim on not just FOX, but also ETH.
2.) The effective cost of ongoing liquidity mining would be reduced quickly via the LP bonds the DAO buys, which would in turn be staked in the ShapeShift farming contract.
3.) The DAO would be in an improved position after acquiring meaningful protocol owned liquidity; there would be no need to engage in expensive ongoing liquidity mining programs, In turn, we could put that liquidity to work in an effort to earn rewards (for instance, via the farming contract). In severely adverse market conditions, ShapeShift could also serve as the “buyer of last resort,” helping to support the price of FOX by leveraging its own liquidity.
A hypothetical example of how this might play out:
The DAO deposits 13.5 million in liquidity mining rewards for a period of 4-4.5 months.
- Simultaneously, the DAO purchases liquidity via its Olympus Pro bond with $40-50 million worth of FOX.
- Owing to the liquidity purchases, ShapeShift would “reclaim” around 90% of the funds spent on the liquidity mining program. Half of those funds would be claims on FOX, while half would be claims on ETH (due to the fact that the LP token is FOX/ETH).
What are the potential downsides and risks?
A convincing argument could be made that we should begin drawing down our liquidity mining program during the next phase. The FOX/ETH farming program is the DAO’s largest expense. Even if a one-third reduction to the current program were to be implemented, roughly 7 million FOX would be spent during the upcoming phase.
(Note, however, that this strategy is predicated on the notion that LP buybacks via Olympus will greatly reduce the cost of our ongoing liquidity mining–even if it’s kept at current levels–with an eye toward subsequently ending or greatly reducing our liquidity rewards following the upcoming 4.5 month period.)
What exactly does this Proposal do?
1.) On February 22nd at 9am MST (48 hours before the second round of FOX/ETH liquidity mining ends), deploy a third round of liquidity mining rewards for the Uniswap v2 FOX/ETH Pool of 13.5M FOX rewarded over 4.5 months (targeting 75% or higher APR).
2.) Fund an aggressive Olympus Bond program over the following 4.5 months (concurrent with the ongoing LP program) to purchase FOX/ETH LP tokens, targeting $40 million worth of liquidity. $60 million worth of FOX would be earmarked and deployed for this purpose over the course of the 4.5-month period.
NO: No changes are made. (In this case, the DAO will need to pass another proposal if it wants to extend its liquidity mining program past late-February).