The ShapeShift treasury primarily holds FOX and, similar to other DAOs, there is much desire to diversify/utilize its assets. Current avenues for treasury diversification involve actively selling or leveraging these governance tokens, typically through a combination of smart contracts and/or OTC agreements.
Uniswap V3 enables an alternative framework for DAO’s to simultaneously diversify their holdings and incentivize liquidity with reward distribution that caters to different risk profiles.
I. Single-Sided Liquidity On Uniswap V3
Uniswap V3 enables single-sided liquidity pooling where Liquidity providers (LPs) can deposit one asset at a price range higher than current price, or the corresponding pool asset at a range lower than current price. As the market fluctuates through and above/below a LP’s range, the provided asset is traded for the one it is pooled against. Fees are only collected when current prices are within the LP position range.
Note by providing an asset to a range above its current price, the position payoff mimics a perpetual covered call where that asset is traded for one it is pooled against (for example, ETH, DAI, or USDC) as its value increases.
II. Implementing Uniswap V3 for DAO Treasury Diversification
Allocating a portion of FOX tokens above their current price range on Uniswap V3 creates a perpetual covered-call payoff for the DAO, where if FOX token price increases, the allocation is automatically rebalanced to the offset pool asset. The offset pool asset is the asset the DAO wishes to diversify to, for example ETH or USDC. Once established, the DAO would only be responsible for ensuring they withdrew liquidity and revenue from trading fees.
Depositing a significant amount of FOX tokens to Uniswap V3 will effectively create a price ceiling. With that in mind, liquidity should be incentivized with rewards, weighting more toward specific ranges that help stabilize liquidity.
Incentivizing liquidity over a certain range could support the DAO’s periodic liquidity withdrawals but requires further investigation and discussion - will the community support a withdrawal of liquidity? Should a portion be reinvested to help continue supporting liquidity?
III. Liquidity Mining and Aligning Incentives
Distributing rewards can support prices and incentivize various participants. I imagine offering two reward pools: a single-staking reward pool that only takes in FOX and a pool for single-sided liquidity providers of the opposite asset on Uniswap V3. This would enable initial airdrop recipients and FOX hodlrs to deposit to the single-staking pool without taking on the current risks of a Uniswap V2 LP. Further, supporters are incentivized to deposit their other assets (ETH, USDC) to the Uniswap V3 pool in exchange for rewards. For example, an LP provides ETH to the FOX/ETH V3 pool at a price range below the current FOX/ETH price, the position acts as a perpetual short put - where if the price drops below the range the position holds 100% FOX. The user earns FOX rewards for providing the liquidity regardless, so if all goes well across the DAO the following outcome is expected:
- FOX hodlrs deposit FOX in single staking pool to earn more FOX, resulting in reduced FOX liquidity
- The DAO provides majority of liquidity on Uniswap v3 at price range above current and rewards all LPs of the opposite asset in the pool
- LPs of the opposite asset on V3 contribute to stabilized liquidity and are rewarded FOX for doing so
- As ShapeShift succeeds and price appreciates, the DAO can withdraw the assets it wished to allocate toward and LPs can withdraw their original single-sided asset without experiencing impermanent loss associated with Uniswap V2.
I’ve thrown this idea around to several foxes and am excited to share here for an organized discussion!