The depth of liquidity in the AMM and bonders stake determines the amount of volume the hop bridge captures among its competitors. The more volume it captures the higher the APY LPs + bonders. Thereby this relationship compounds. More liquidity â more volume â more apy â more liquidity â more volume â more apy âŚ
Deep liquidity kicks off this causal chain and at some point it sustains itself to a monopolistic position that offers the highest organic APY among all bridges. It is therefore economically justified to bootstrap liquidity with subsidies to outcompete the liquidity competition can provide and clear volume otherwise missed.
The HOP token would have been a great way to subsidise APY for liquidity initially. Unfortunately it is in a weak spot 1) because it was launched in a bear market and 2) because in my opinion the HOP team underestimated the importance of liquidity and it seems it did not make any market maker agreements that would have allowed CEX listings and thereby tapping into sources of demand. Thus more issuance of the HOP tokens in a market without demand and no liquidity would likely cause a downward spiral of the token price and thereby have no sustainable effect on the LP+ bonder APY.
I do think that one reason why there is literally no demand for the HOP token is that larger long term investors cannot buy in size. Therefore I suggest a private sale of treasury tokens should be made with a lock up of a year (I believe that despite market conditions numerous long term serious VCs would be interested in a key L2 infrastructure play with one of the best teams behind it). The proceeds should be converted into the tokens that hop bridge supports and be added to bonders+ LP rewards as an APY boost. This would have the effect of bootstrapping liquidity to kick off the causal chain mentioned above agressively. The goal is to advance within the causal chain to a point where liquidity is so deep that APY does not need to be subsidised anymore but provides the highest APY among other bridges organically.
I do think the price of the HOP token is an important goal as well in order to finance the operations and grow the team of builders/enablers behind the hop DAO. The narrative that all tokens are valueless governance tokens should be extinguished from the start and a fee switch that extracts revenue for HOP holders should be viewed as a certain future event. However at this stage I believe that APY for bonders+ LP is the priority number one and a fee switch should be deemed appropriate once organic APY minus fee is the highest among bridges.
Note: This opinion is based on intuition and not backed up by data.
If you like this proposal feel free to delegate your HOP tokens to me. My aim is to see Hop become the number one bridge in every relevant metric while not compromising on security.
My delegate address: 0x7453713a2539a9e9E25849EB8eD94c13E9E7138A
thanks for taking the time to write up this proposal. I think youâre making great points.
However, I disagree with this statement:
âThe goal is to advance within the causal chain to a point where liquidity is so deep that APY does not need to be subsidised anymore but provides the highest APY among other bridges organically.â
I donât think that total bridging volume (not only Hopâs, but all of it) will ever be as large as that it can lead to organic APYs larger than competitorâs who put liquidity mining on top. If you think otherwise, I think such a decision (worth Millions of Dollars) really requires some hard numbers and projections. Handwaving will lead us down a dangerous route. Also, youâre ignoring the fact that there is an opposing force in your line of thoughts. Higher APYs attract higher TVL which leads to lower APY. Thus I donât think itâs at all clear that what youâre saying is true (âhigher TVL â (higher volume) â higher APYâ). I think itâs true until you reach some sort of cliff and then youâll quickly converge to an equilibrium (in which TVL doesnât increase APY anymore). We need to reach this cliff without liquidity incentives. Also, this additional volume comes exclusively from whales (since large TVL is irrelevant for dolphins) and theyâll use aggregators anyway. So you wonât really achieve a stronger than linear boost on our volume if you increase TVL (because the aggregators give us a cut of the whaleâs volume proportional to our relative TVL â thus if you increase the TVL you only get a roughly linear increase in this cut *1).
Furthermore, LPing in bridges is amongst the most dangerous things where one can deploy oneâs money nowadays since the attack vector space not at all understood yet. Bridges being still quite new (and all of them being very different technically) and far more complex (large attack surface) than old protocols like Curve.
Thus, I think if OTC sales are done as you suggested, the raised money, which is meant to be allocated for liquidity incentives, should instead just be used as protocol owned liquidity directly. Long term we could also think about taking a small cut on protocol fees to further grow this protocol owned liquidity. If there is one thing that the last 2 years have shown us, itâs that liquidity is not loyal AT ALL. It WILL eventually leave. So if a protocol wants to be sustainable it needs to grow its own liquidity and it needs to start doing this early (when itâs still successful). Once Hop owns enough liquidity it kinda becomes unstoppable.
Liquidity mining means burning money unsustainably imo. We should not do it!
*1) Itâs a bit more complicated than that because of the shape of our AMM curve, but in practice you can assume itâs roughly linear without being too far off.
I think the current liquidity of hop is insufficient, and it can not bear the demand of the next wave of market peak. At present, only Odyssey activities have led to a liquidity crisis. If multiple chains carry out activities at the same time during the market peak, the current liquidity of hop will be seriously insufficient;
It is necessary for hop to improve TVL through liquidity mining. A goal can be set, such as increasing the liquidity by 10 times;
Personally, I think it is necessary for liquidity mining, but I think the mining cycle and quantity should be a decreasing curve, and the hop pledge reward + handling fee destruction should be started synchronously to protect the rights of the hop holders and form their own economic closed loop.
If there is no economic income model of the holder, the token will not be enabled, and the liquidity mining will only lead to the death spiral of mining and selling, which will not achieve our goal.
u/tiandao I think youâre conflating AMM liquidity with Bonder liquidity. The headache this week came from insufficient bonder liquidity. Afaik AMM liquidity has been adequate to handle all the activity that the Arbitrum Odyssey week has thrown at it. If Iâm wrong Iâd love to see data to prove it.
This last week has caused me to adopt the same views as u/madiba. Proponents for incentivised liquidity acknowledge it as a necessary evil because of it has negative effects on token dilution, it is unsustainable, and it is not accretive to governance or community building. I have long held the view that itâs a necessary evil as well but am shifting away from the idea that it is necessary at all.
Did we need to incentivise AMM liquidity to have record breaking volume and user numbers? No. We had record breaking volume and users last week without incentivised liquidity. So why do we need to incentivise AMM liquidity then?
chris and i had an in-depth discussion in discord about an impending AMM liquidity crisis. tvl is going down across the board. there is a minimum viable threshold we must keep our eye on and attempt to mitigate. incentivizing capital, even mercenary, in the short term should be our focus until the bridge becomes self-sustaining.
To me this is one of the most pressing topics for discussion at present. I think most would agree that whenever the next bull run in wider crypto takes hold (6 months? 12 months? 24 months time? who knows) the L2 ecosystems are going to explode and Hop will be right at the centre of this increased usage and volume. Having sufficient liquidity in place when this happens is going to be crucial otherwise competing bridges will take market share. My thesis is that there will be a power law distribution across the competing bridges, with one bridge having a majority of market share - if things are done right Hop will be the âwinnerâ here.
I do think during this time a liquidity mining program of some description is going to be necessary - simply because other bridges will be doing it. Once we get through the next bull cycle I think we come out the otherside with a dominant bridge that no one will then catch. A la Uniswap now.
The only thing iâm not convinced on with your proposal is the VC / whale money solution. Ideally there would be another way⌠not exactly sure what that would be right now. Need to think more on this.
would be great to have a better grasp on a minimum viable threshold to continue the conversation of a private sale with a lock-up period and consider diversifying the treasury
The ETH and USDC pools are able to sustain relatively large balances organically. I do believe liquidity mining for these assets still makes sense because it will help these bridges be more competitive for large transfers which will in turn bring in even more fees. Liquidity mining will also help these AMMs stay a bit ahead of demand rather than relying on periods of high demand to generate trading fees which in turn attracts more LPs. Staying ahead of demand rather than responding to it is important during times of high growth.
The DAI and USDT pools on Optimism and Arbitrum have been consistently shrinking. Lower AMM TVL leads to lower volumes leads to less trading fees and even lower TVL. These pools do not have enough organic demand yet to be self sustaining.
Thanks for all your feedback. Sorry for only getting back on this now. I have recently come across the concept of lockdrops. This basically replaces the need for a large fundraise while achieving the same goal of preventing a downward death spiral of the hop token price through farm and dump (and thereby taking the incentives to zero). The idea is simple you lock your LP positions into a contract for a given amount of time and get hop rewards only at the end of the lock period.
A high hop token price is very important in the short term to increase APY for LPs as any LM program at mimimum inflationary cost. I think an increase in the price could easily be achieved in the short term given current supply demand dynamics of the hop token. Circulating supply is very limited at below 55 m tokens for another 9 months yielding a current market cap of only $5.5m. Currently with volume being around $4m and LP fees (4bp if iâm not mistaken) at around $16k a day, the revenue generated per year is roughly equal to the current market cap. Meaning if half of LP fees would be taken away from LPs and being distributed as protocol revenue to staked hop tokens, the hop token would offer one of the highest organic yields in the industry. Say 25% of current hop token supply gets staked and half of LP fees get distributed to them, that is around $2.8m in fees per year for a staked hop token value of only around $1.5 m at current prices. This represents an APY well above 150% and mostly payed in eth and stables. This should very quickly dramatically increase the hop token price.
Taking away half of LP fees ofc also reduces LP APY. However with the hop token price higher the incentives to LP lies in accumulating hop tokens through the lockdrop. The increase in APY through the hop tokens received by LPs would more than make up for the 2bp lost in fee rewards by a very large multiple (depending on the amount of hop token emission and the actual hop token price).
To clarify the sequence of actions should be the following:
Launch the Lockdrop
Transfer half of LP fees to staked hop tokens
A temporary situation in which LP apy would be reduced by half without the hop token incentives in place would risk an exodus of current LPs, hence the sequence is important.
Also, youâre ignoring the fact that there is an opposing force in your line of thoughts. Higher APYs attract higher TVL which leads to lower APY. Thus I donât think itâs at all clear that what youâre saying is true (âhigher TVL â (higher volume) â higher APYâ). I think itâs true until you reach some sort of cliff and then youâll quickly converge to an equilibrium (in which TVL doesnât increase APY anymore). We need to reach this cliff without liquidity incentives. Also, this additional volume comes exclusively from whales (since large TVL is irrelevant for dolphins) and theyâll use aggregators anyway. So you wonât really achieve a stronger than linear boost on our volume if you increase TVL (because the aggregators give us a cut of the whaleâs volume proportional to our relative TVL â thus if you increase the TVL you only get a roughly linear increase in this cut *1).