Andrew Kang Profile picture
10 Oct, 15 tweets, 3 min read
1/ Liquidity Mining rewards are currently wasteful and suboptimal

We can be smarter about defining reward amounts

I present a simple framework for determining DEX LM rewards
2/ First Step - Identify how much liquidity you need

Use Uniswap wBTC/ETH Pool as an example

Benchmarking to the most liquid CEXs, Uniswap is already on average 3x more liquid on a +/- 2% Depth basis
3/ Parsing through onchain transactions, we see a dozen or so 6 figure transactions per day.

Around 1 transaction/day that is >$500,000 & <$1,000,000. Don't often see larger in a single transaction.

Some traders maybe splitting transactions for better execution
4/ So this tells us that even if we were to reduce liquidity and TVL by 67%, this would be on par with the top CEXs and it would also sufficiently service the vast majority of wBTC/ETH traders
5/ The next step would be identifying what yield will the pool equilibrate to? Yields from different strategies in crypto generally tend to drift towards each other since traders will move from capital from less profitable strategies to more profitable
6/ Given the (relatively lower) risk of IL, and current borrow/lend rates of ETH & BTC, I think 15% would be fair here.

UNI rewards are currently 18.5%.

LPs also receive Tx fees, currently projected at 3.5%.

So 22% All-in

This invites an overliquid pool to get ever larger
7/ So imagine we reduce the pool size by 1/3 to get to the desired liquidity levels

TVL: $540M -> $180M
Yield: 22% -> 66% (10.5% Tx Fee + 55.5% UNI)

Tx Fee here doesn't change, but UNI rewards can be. Solve for Yield = 15% and that's your optimized reward
8/

15% Yield = 10.5% Tx Fee + X% UNI
X = 4.5%

4.5% (new) / 55.5% (current implied) = 8%

Conclusion:
UNI Rewards for wBTC/ETH should be 8% of what they are now

83,333 UNI/day -> 6,666 UNI/day
9/ This framework can roughly be applied to any DEX. Just be sure to use some critical thinking around nuances. For example, if you are incentivizing liquidity for a token that has very low CEX liquidity but high potential volume, than maybe you shouldn't use CEX as benchmark
10/ Some caveats - tx volumes can fluctuate, so can UNI price. These will result in dynamic yields.

What's interesting is that both of these can be measured onchain, so you can theoretically program a dynamic reward based on a target depth & yield %
11/ Obviously, UNI farmers would be against reward reductions. We've already seen a @CurveFinance proposal for rewards reduction voted down by one of the largest miners.
12/ Here's where we see a problem with onchain governance. The largest miners don't have much UNI themselves. They farm and dump.

BUT they have large resources and have the strongest incentives to vote. Nothing stops them from borrowing a large amount of UNI to vote against
13/ There are a few solutions to this that I think all on-chain governance systems should implement, but that's for another discussion.

Let's see what happens with UNI.
14/ For projects that haven't yet launched and therefore don't know baseline protocol usage and token prices, try thinking about liquidity mining more tactically. No need to have a 5 year plan upfront

15/ Think scientifically. IMO launch for a week or two first with no rewards and see how much traction there is.

Then try a 1-2 week pilot program. Analyze the results and optimize. LM rewards can be useful but dilute other tokenholders - they should be efficiently spent

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More from @Rewkang

28 Sep
1/ Oracles Usage in AMMs

Many AMMs (@synthetix_io, @Bancor, @BreederDodo, @perpprotocol, etc.) have adopted oracles to provide reference pricing, but does it really work?

I'll explain 👇 Image
2/ These AMMs use oracles in many different ways. Some use the prices from the oracles to derive a "Zero Slippage" quote price for any size trade (A). Others use them to "rebalance" to external market prices (B). The last group uses them to determine funding rates (C)
3/ These projects that utilize AMMs can roughly be bucketed into the categories above

A) Zero Slippage - @synthetix_io @CoFiXProtocol
B) Rebalancers - @BreederDodo @Bancor
C) Perpetuals - @perpprotocol @MonteCarloDEX
Read 13 tweets
28 Sep
1/ There seems to be a common misconception that AMMs won't work because LPs can be constantly arbitraged

Let's clear that up.
2/ First of all, yes LPs constantly get taken by arbitragers. There was rough analysis pre-DeFi explosion, that 70%+ of Uniswap volume came from arbitrage.

There is a lot more soft flow from directional traders these days, but significant volume still comes from arbitragers
3/ The is one false logical assessment that the misconception threads back to:

- Arbitragers make profit from taking from Uniswap LPs
- Uniswap LPs suffer IL from trades
- Trade volume predominantly come from arbitrageurs

-> Therefore, IL is value from arbitrage profit
Read 11 tweets
23 Sep
Where are we in the DeFi market?

We're definitely not at the 2018 stage of the market where we see a long bear market

Probably somewhere between First Sell Off and Bear Trap

Some analysis below.
1/ Technicals

On the drop, we retraced around a month's worth of price action. At the top, futures never were egregiously in contango, compared to being backwardated -50% APR as recently as early Jul

This indicates that market was only slightly overextended via derivs
2/ Short interest in DeFi coins continue to grow on the way down with LINK OI doubling on the drop in the last week.

But still ~30% off the OI highs in early Aug

H/T @CL207
Read 12 tweets
21 Sep
One of the most commonly noted downsides of Optimistic Rollups as a L2 scaling solution is the 1 week exit period

This can be ameliorated by liquidity providers which market make both chains allowing for near-instant settlement

1% fee for 50% implied rate
0.30% for 15%
The implied rate is the rate of return that liquidity providers expect for locking up their capital to provide near-instant settlement (they lock their token X on L2 through the exit gateway for 1 week and provide you some token X which already exists on L1)
Probably starts near 1% fee as opportunity cost in low risk yields are high in crypto currently, but as competition grows and more capital enters this space, this will probably trend lower to 0.2 - 0.4% over the next year or two
Read 6 tweets
20 Sep
CreamY creates deep liquidity between stablecoins and their yielding counterparts through a single pool

I imagine this creating a pretty deep liquidity blackhole that becomes a focal point of crypto trading with many positive externalities

0/
1/ First read this article to understand what creamY is at a high level

The stablecoin pool consists of: USDT, USDC, TUSD, BUSD, yCRV, yyCRV, yUSDT, yUSDC, yTUSD, cUSDT, cUSDC, crUSDT, crUSDC, crBUSD.

medium.com/cream-finance/…
2/ This greatly increases the utility of yield generating tokens because now they can become much better MoE

i.e. Through aggregators, I can trade directly from e.g. ETH to yyCRV (ETH > USDT [Uniswap] > yyCRV [CreamY]) instead of trading ETH > USDT, depositing twice to get yyCRV
Read 7 tweets
17 Sep
AMMs revolutionizing exchange trading & liquidity provisioning isn't just a hope, it's already happened

If you aren't routing orders for through DEXs then you are not getting best execution Image
People like to hype up the prowess of professional MMs. "How can you even hope to compete with guys like Jump trading?"

Jump MM's Coinbase's books. These photos should speak for themselves ImageImage
Received word that Jump wasn't involved in MM'ing YFI. Usually contracted MMs are loaned inventory from foundations, but for @iearnfinance there is no foundation, so no contracts to put in place.
Read 4 tweets

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