Draft Proposal: Revised Liquidity Mining & LP Token Purchases

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?

YES:

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).

6 Likes

I am in full support of this proposal. I think this sets the DAO up for long term success while mitigating the short term liquidity consequences of if we dialed back LM too early right now.

I think after the next 4.5 months of this program the DAO will own substantial PoL and be setup with a plethora of options about how to utilize that liquidity to its benefit and turning down LM rewards substantially (if not entirely) after the end of the program with little negative effects.

I look forward to seeing the DAO own the vast majority of its own liquidity!

2 Likes

One correction on above @seven7hwave - I think $50 million worth of fox should be more than sufficient in terms of funding the bonding program. Assuming an average of a 10% discount 45 mil would fund everything we need and 50 mil would more than buffer us enough to adjust as needed.

2 Likes

I think this is roughly how we should handle it. I know this was the current discussions over the last few weeks, that this is the direction we should push. (one of the directions) , the debate would be the renew the current pool or not, i am hoping we dont need it, and can just do the other types. But i am not a tokenomics degen. I do hope that we continue to grow in a direction that benefits the dao.

4 Likes

I am in support of this generally.

Would the plan be for the current Olympus bond committee to continue their services through the end of this next round of bonds? Or would the TMDC Manage this moving forward?

I would be willing to continue as a member of the Bond Committee if that was the case.

2 Likes

Thanks for the feedback Jon - will modify this in the ideation proposal.

2 Likes

As described in the proposal, I think it would make sense for the Bond Committee to segue into managing this next, more aggressive phase.

3 Likes

Would love for @huntthewick @Josh @Neverwas @Marley and I all to be able to talk more about this for the tokenomics call on Tuesday this week with you! Would the Bond Committee be willing to be there for this call Tuesday?

Would you be willing to dedicate some time to that?

3 Likes

Absolutely. We’ll carve out ample time for this on Tuesday.

3 Likes

I support this as well. I notice that since the general market turndown (both crypto and tradfi), liquidity has dropped by nearly 30%. We need to own more of our liquidity. We currently own $1.7M of it, and should have more.

I am willing to continue serving on the bond committee to manage more aggressive bond program should this pass.

3 Likes