HOP Liquidity Incentives on Uniswap V3

🐰Hop Ecosystem
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Intro
This proposal outlines a path forward for HOP liquidity incentives on Uniswap V3. This is both a governance proposal and a partnership proposal. We are putting forward our capital markets platform, xToken Terminal, as the service provider for HOP liquidity incentivization. Terminal allows projects to deploy a highly configurable Uni V3 liquidity mining (LM) program in a matter of minutes, no dev work or technical expertise required. Terminal is permissionless and rigorously tested, providing an out-of-the-box solution that saves projects time and money. We’re live on Ethereum mainnet, Arbitrum, Optimism and Polygon.

Hop will soon be distributing 80 million HOP tokens (8% of the total supply) to early users of the protocol. Hop is a community-led protocol, meaning the team is deferring tokenomics and liquidity decisions to token holders and delegates. This post will walk through the design considerations behind an LM program and hopefully result in greater community clarity on the path forward.

First things first. To facilitate swaps and keep slippage to a minimum in what will be a highly anticipated launch, HOP will need deep liquidity. We feel there is no better choice on Ethereum than Uniswap V3 – the highest volume and most capital efficient DEX.

Designing an LM Program for HOP
In designing an LM program, we first need to understand what we’re optimizing for. After spending some time gauging community sentiment, we believe these are the community’s top priorities:

  • Offering attractive yield opportunities to encourage holders to provide and maintain liquidity
  • Facilitating deep liquidity to minimize slippage
  • Providing a low-cost L2 onramp for token investors and LPs

With these priorities in mind, we can establish the key decision points for the program.

Network: ETH + L2 of choice
Ethereum mainnet is still the focal point of liquid markets, making an LM presence on Layer 1 essential. Additionally, the initial distribution of HOP will take place on mainnet, meaning that L1 will be the entry point for all HOP liquidity.

Given the very nature of the protocol, Hop already has a large presence on L2/sidechains like Arbitrum, Optimism and Polygon. It stands to reason that Hop should also explore incentives on at least one – and likely multiple – of these lower cost chains. Many LPs and investors are priced out of Ethereum and will not engage in the ecosystem in the absence of a cheaper alternative.

Asset pair: HOP<>WETH
To reach the widest audience, we recommend pairing HOP with WETH (wrapped Ether), both on mainnet and L2. MATIC could also be considered on Polygon, though WETH is ubiquitous across chains. WETH is the natural base pair in most cases and we don’t think there’s any reason to complicate the liquidity provision process.

Liquidity range: Full range
We believe any initial liquidity mining campaign should use the full Uniswap V3 price range. Although concentrated liquidity is one of the most appealing features of Uniswap V3, HOP will likely experience high volatility as it undergoes a period of price discovery. As price and volume stabilize, we may want to consider a program with a more concentrated price range.

Incentives Program Proposal
In light of this analysis, we’d like to propose a full range HOP <>WETH pool on all four of Ethereum mainnet, Arbitrum, Optimism and Polygon. We’re proposing a 1m HOP program paid out over 10 weeks, with 70% going to mainnet incentives and 10% each paid out on L2/sidechains.

We believe HOP rewards should be re-evaluated each 10-week period, allowing for community oversight on the effectiveness of the program (Terminal allows sponsors to renew rewards on a pool in a few clicks).

With that, we invite comments from the community.

On Security
Those who are familiar with the previous version of our project know that at our peak we managed over $100m in assets, specializing in native staking strategies and later getting into liquidity strategies. In fact, for several months after Uniswap V3 launch, we were the largest provider of Uni V3 managed liquidity (peaking at $25m). Those who are familiar with our project also know that we had security incidents in spring/summer 2021, related to our deprecated asset management product line. Since then, we’ve bolstered our security practices and have developed a rigorous and intentional process. Additionally, the Terminal liquidity mining contracts have been audited by ABDK, have been the subject of an Immunefi bounty program for several months and have undergone several months of internal review.

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Where is the link to the post-mortem following your 2021 security incidents, and what steps have you taken to bolster your security practices?

I see many, many Reddit submissions with various proposals over the last few months - can you give an example of a protocol that has implemented xToken Terminal and how it has earned the moniker ‘rigorously tested’ aside from internal review following security incidents? You launched your first pool on April 27 (XTX/xXTKa)., which is your own governance token.

Why is your platform, xToken Terminal, more beneficial than other alternative single-point liquidity providers, or more beneficial than not relying on a single point at all? What does your protocol stand to gain by offering to be the service provider of Hop’s liquidity mining?

In the Rocket Pool DAO forum, where another of your proposals is live, there are legitimate questions from the dev team that to me have not been sufficiently answered, specifically: (1) Relying on one platform to deliver liquidity is a single point of failure (which is a heightened concern given 2021 security incidents), and (2) liquidity distribution rights leave liquidity up to political winds (e.g., Curve bribes and Tokemak). I would like to see more fleshed out answers than simply ‘incentivizing Uni V3 liquidity would be a step in the right direction.’

There are also the following concern:

(3) liquidity incentives deepen liquidity without a matching rise in trade volume, making LPs dependent on incentives to be profitable. Your paraphrased answer: this is a real concern about which we should be vigilant, but incentives should probably just be seen as an expense

Ok, but how does classifying an incentive as an expense help? If there is no matching rise in trade volume, all we’re doing is depleting the treasury faster, and early LPs are rewarded while later LPs might be left holding a bag. This is exaggerated by the proposal suggesting LM campaigns across 4 networks.

Are you “chadmc” in the Rocket Pool DAO forum that commented on the xToken Terminal: “This proposal makes so much sense. Love the real world example at the end!”

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One thing that should be noted is that a small team, which includes myself and @lito.coen from the Hop team, has been working on a UniV3 liquidity-mining campaign on Arbitrum and Optimism for the Uniswap DAO.

Details here:

I’m a fan of XToken and certainly interested in more players in the UniV3 farming game, however my slightly-biased opinion is that Hop should join Uniswap and provide incentives through this interface.

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Hey dybsy, sorry for the delay. Temporarily traveling and in another timezone. Thanks for these detailed questions. You’ll make a great delegate.

First, some notes on the platform. We launched about two months ago and have worked with several projects including Hundred Finance, Galleon DAO, and CitaDAO. We’ve also sponsored rewards on pools with our native token and governance token. We’re deep in talks with about ten other projects and are looking forward to launching some new pools soon.

In comparison to other liquidity mining as-a-service options, we feel our biggest differentiators are our deep investment in UI/UX, the end-to-end optimized experience (e.g., users can deploy a pool onto Uniswap V3, configure and launch a liquidity mining program, and reinvest rewards back into the pool without leaving Terminal and within a few clicks), robust feature set (e.g., multi-token incentives, token vesting, etc.), and the fully permissionless and non-custodial nature of the protocol. We published an article exploring the various provider options here: Uniswap V3 Liquidity Mining: Exploring the Options | by xToken Team | xToken | Apr, 2022 | Medium

On the security front, we’ve been audited by ABDK and have an ongoing Immunefi program since well before launch. Internally, we have been testing these contracts since September. The post-mortems from last year’s incidents are readily available on our Medium.

On the point about creating a single point of failure, we respect that this may be a concern for some. We don’t think this proposal in any way precludes paying out incentives via another platform. We actually think that dividing incentives across multiple platforms – Terminal, the UniswapV3Staker, Gamma and others would be great.

Not entirely clear what argument you’re putting forward re political winds. A Uni V3 incentive would be totally separate from the Curve and Tokemak ecosystem, or any other protocol with political elements.

On the point about trade volume, there will definitely need to be an analysis down the road on the effectiveness of incentives and the cost the protocol should take on paying for liquidity. But in the short term, we believe the protocol should facilitate at least some liquidity. We don’t think this is a controversial opinion. We don’t agree with your suggestion that incentives across four networks will lead to the treasury being depleted faster. We think the community should pick an amount they’re comfortable with paying out in LM incentives and then should divide that across the 4 networks. If the community decides to only incentivize 2 networks, the number of HOP tokens paid out won’t change. There will just be liquidity across fewer networks.

Lastly, to address your last point, chadmc is our community manager who is a RPL investor and long time member of several subreddits with large RPL community representation.