[Request For Comment] - Revised HOP Liquidity Incentive - Continued Discussion

Introduction

Please reference [RFC] How to Increase [Liquidity for the HOP Token]

Over the past several weeks, there has been an on-going conversation around deepening liquidity for the HOP token, which plays an important role in governance and incentivizing deposits into the protocol’s cross-chain pools. I posted a Snapshot vote, which may have been premature as the Request for Comment post was only ~ a week old. 611 users joined the vote with a vast majority of the voting power choosing to not immediately move forward. The loudest criticisms were that the RFC was not posted long enough and the proposal was not detailed enough to be truly put to vote.

It is worth noting that many community members agreed with the underlying sentiment of the proposal, including many of those that voted “No Change.” There were hundreds of voters scattered across each of the multiple choice voting answers and dozens of community members who weighed in on the forum Temperature Check. I apologize for potentially rushing the first proposal through the process, however, I attempted to follow the recommendations put forth in a previous forum post and have not received exact feedback on what violations may have taken place.

After many discussions with the community and feedback from the community call and Discord discussions, it came to my attention that sufficient liquidity for HOP could be established through a longer-term / partnership focused strategy with the creation of a rETH / HOP pool on Arbitrum or Optimism. In a conversation with Rocketpool representatives, @dybsy found that the Rocketpool DAO would be willing to provide 100-200 RPL in co-incentives to a rETH / HOP pool to kickstart utility of rETH on Arbitrum or Optimism.

The purpose of this proposal is to continue the discussion around ways to improve DEX liquidity of the HOP token, as discussed in the previous RFC, while adding greater context to the specific technical, monetary, and time requirements each solution would mandate.

Problem Statement

The HOP token is extremely illiquid in its current state, with liquidity fragmented across Optimism, Arbitrum, Polygon and Ethereum mainnet. To make matters worse, this liquidity is scattered across several different DEX’s, so that even whilst using a DEX aggregator, liquidity is still too thin to buy or sell without experiencing dangerously high slippage and commonplace sandwich attacks. As of April 12, buying 1 ETH worth of HOP via the DeFiLlama DEX Aggregator would result in 2.33% of price slippage. This creates a number of problems as outlined in the following section.

Logic & Benefits of Increasing Liquidity

HOP’s illiquidity can negatively impact the growth of the protocol and the community in several ways, including:

  1. Prospective (and existing) community members becoming more hesitant to join the DAO, participate in governance matters, and/or contribute time and resources to the protocol once realizing they would take upwards of a 5% haircut (or being sandwiched attacked) just to make an initial investment. This effectively serves as a tax on new contributors and may prevent more experienced individuals from joining the community. Greater liquidity would incentivize more participation from a wider demographic of crypto native participants. Although holding HOP is not necessarily a prerequisite to participating in the community, it can be used as a tool to align economic incentives between contributors, delegates, delegators, liquidity providers, the core team, and all other stakeholders. The HOP token’s stability and transactability can ultimately reflect favorably or unfavorably on the protocol itself, whether or not it is integral to performing the protocol’s core functions.

  2. HOP is primarily used as an incentive token for the protocol’s bridge pools and plays an instrumental role in ensuring that a sufficient amount of cross-chain liquidity exists for transacting users. LPs are rewarded with HOP for performing this critical function (2.2M HOP per month). Those participating in providing liquidity to the bridge often sell some or all of their HOP rewards, as a result of its lack of value proposition and poor liquidity. This further accelerates the liquidity crunch on DEXs, as it turns into a race to be the first one out the door. It would be in the best interest of all stakeholders if the price of HOP is not drastically impacted from continuous selling pressure from bridge LPs. It is also worth mentioning that there is not an infinite supply of HOP tokens. There will come a time where either HOP bridge LP emissions must stop entirely or be dramatically reduced. To provide the same level of economic utility to LPs while meeting the significant increase in transaction/user demand that we all hope to achieve, will require HOP to have a standalone value proposition allowing for such a reduction in supply emissions (while maintaining the same or greater dollar value). However, before that can even be discussed, sufficient liquidity must be available for purchasers.

Key Assumptions

The Hop treasury currently holds 826K OP (~$2M) and 1.67M ARB (~$2.5M). If 10% of these treasury assets were redirected to HOP/rETH liquidity providers, alongside 200 RPL over the next 12 months, the annualized yield would be upwards of 52.9% at the current level of liquidity ($850k). While it’s difficult to estimate the precise impact on notional liquidity added from this rewards program, it would likely be material.

As the Hop bridge is likely to add support for rETH in the near future, it makes sense to increase the utility of the token across other networks. This incentivized liquidity pool could easily drive rETH bridge volume and recoup some of the lost treasury emissions via bridging fees.

Other popular crypto protocols use several different tools to increase liquidity depth for their native token, including: inflationary token emissions, working with external market making firms or “bribing” DEX governance tokens: CRV, VELO, etc.

To provide a few examples of protocols that invest in increasing their native token’s liquidity: two of Hop’s largest competitors, Synapse (SYN) & Stargate (STG), bribe via Hidden Hand to direct emissions to their pools.

Potential Risks

Moving forward with an incentivized rETH / HOP pool runs the risk of further fractionalizing HOP liquidity, as rETH will be a newly integrated asset to layer 2 networks. While there are multiple benefits (Capital efficiency, partnership, driving bridge volume) to partnering with Rocketpool on this endeavor, it is possible that we may be too early in adopting rETH as the base pairing on a layer 2. If we were to complement RPL emissions by distributing OP and/or ARB incentive rewards from the DAO treasury, it will also reduce the number of different ways these tokens can be spent to grow the protocol/DAO.

It is also valuable to consider potential downsides and have alternative options for community members that disagree with this proposal, therefore I have again included a few options to consider as alternatives below.

Potential Paths Forward

These are by no means finalized and are just meant to exist as examples for potential solutions. It would be great to get community engagement and try to narrow down 1 to 2 solutions before moving forward with an official vote.

  1. Incentivized HOP / rETH pool on Camelot or another Arbitrum DEX
  • Provides utility for rETH on L2 & strengthens Rocketpool partnership
  • Stronger capital efficiency as the LP gets exposure to staking rewards
  • Will likely receive co-incentives in RPL - which is also available on Arbitrum
  1. Incentivized HOP / ETH pools on Arbitrum & Optimism
  • Use ARB, OP or HOP emissions to concentrate liquidity on a smaller number of DEXs within the layer 2 ecosystem
  1. No Immediate Changes

My Ask & Promise on This Proposal

I think that it would be valuable to leave this RFC posted for 2 weeks before moving forward with a temperature check - giving the community sufficient time to weigh several options and provide their thoughts. I will also try to garner community support on what the best Snapshot structure would look like, assuming sufficient support is realized, including what will be specified in the potential outcomes and what type of voting would be preferred.

My ask is to get involvement from large community delegates, including @olimpio , @lefterisjp , @superphiz and @david-mihal before the voting stage. I think it would be very helpful to get their opinions on the proposal during the RFC step, so it may be understood what they are looking for in a proposal as they have a large majority of the active voting power.

2 Likes

solarcurve from Balancer here :slight_smile:

we’d love to become the home for HOP liquidity on every network but I’ll focus on Arbitrum here since that seems the main one being discussed. BAL incentives will soon begin on rETH/weth on Arbitrum, thanks to RP’s IMC placing the first bribe on that pool in the most recent voting round. By pairing with rETH on Balancer users can take advantage of our smart order router (when trading through our UI) and as rETH liquidity deepens against weth that will help reduce the price impact of trading HOP.

Another major advantage is Balancer returns all earned Arbitrum protocol fees as voting incentives on Arbitrum pools. This creates a positive feedback loop - as our Arbitrum TVL and volume increase, protocol fees increase, voting incentives on Arbitrum pools increase, Arbitrum pools see higher BAL emissions which leads to higher TVL, etc. Hop pairing with rETH on Balancer automatically participates in this mechanism.

Finally, Aura is laying the final preparations to deploy on Arbitrum. This means any pool with BAL emissions will be able to also take advantage of AURA emissions, greatly increasing the ROI of any voting incentives that Hop allocates towards bootstrapping this liquidity pool. It’s also very likely Balancer and/or Aura will soon implement an incentives program where any voting incentives placed on Arbitrum pools are supplemented by ARB from Balancer DAO’s allocation.

tldr lots of good reasons for Hop to join the Balancer ecosystem on Arbitrum! We’re big believers in rETH pairings as well.

1 Like

I’m still not convinced that the Hop Protocol/DAO would benefit from paying for liquidity, especially when liquidity isn’t a core component of the protocol (unlike an asset like SNX or RPL).

If the concern is truly to “allow new community members to purchase HOP without significant slippage”, then one option is the HOP DAO could place some single-sided HOP positions in Uniswap V3. This would provide liquidity for new users to buy HOP, and would end up diversifying the HOP treasury if the HOP value accrues.

What this wouldn’t do is provide exit liquidity, which is what I suspect this proposal is truly aiming for.

If the community does decide to spend money to increase liquidity, my preferred option would be using something like Bond Protocol to purchase LP tokens in exchange for tokens. This would at least provide permanent liquidity, owned by the DAO itself.

7 Likes

I agree with the idea of protocol-owned liquidity @david-mihal

5 Likes

@david-mihal @dybsy thank you both for weighing in. Want to reiterate that this is not a proposal to garner exit liquidity, it is meant to economically align incentives between several participants within the community.

I have a few thoughts:

  1. Fully open to supporting protocol owned liquidity, I think this could also be done with rETH as a base asset and the proposal could remain relatively unchanged beyond that. I think it would be beneficial to both the protocol and community and it may mitigate some of the risks of being too early in adopting rETH on L2s. Something like Olympus Pro / Bond could be a valuable tool for us to use.

  2. I think that HOP’s price & liquidity are fairly important for a couple of main reasons. The first being that bridge liquidity providers are mainly incentivized for their services via the HOP token, as swap fees only make up a small portion of the yield. Second, I think it is valuable to have the community somewhat economically aligned with the protocol.

  3. Incentivizing a HOP / rETH pool would provide a couple outside benefits beyond increasing liquidity. As noted above, this solution would likely drive bridge volume on rETH itself and bring utility to the staked ETH token on other networks. Allowing LPs to use a staked asset lowers the opportunity cost for DEX liquidity providers & has been a pretty cool experiment on solving longer-term liquidity within the on-chain ecosystem.

fully with david here

@david-mihal while liquidity isn’t a core component of the protocol, I agree with @RichardShart in that bridge liquidity providers likely don’t want to see their HOP rewards diminishing in value over time. This may create a vicious circle with LPs eventually choosing to go elsewhere.

Bond Protocol seems to have a number of long term positives for both the DAO treasury and HOP buyers, but the UX may not be too familiar to folks. How could we best inform the governance community of it?

Perhaps exploring both a single-side Uniswap pool and a bond market is a possible approach?

1 Like

That is an outdated governance doc in that forum post, so it’s quite understandable that you would have been confused. See this thread by @Kene_StableLab for the most up to date process: Hop Governance Process v0

@cwhinfrey can you edit or remove the initial governance process thread of yours?

As for the actual topic of this RFC, I am not 100% swayed either way and need to think some more on it. The discussion is much higher quality though, so I’m looking forward to following it more.

1 Like

Regarding the issue of liquidity-providers leaving due to HOP liquidity, there’s one other option that could be considered:

Instead of using Bond Protocol to purchase ETH/HOP liquidity to hold in the treasury, we could also use Bond Protocol to purchase Hop LP tokens itself.

This would allow the DAO to ensure AMM liquidity for cross-chain swaps without perpetual HOP issuance, and would also diversify the HOP treasury.

3 Likes

That is a very interesting idea & may not even have to be mutually exclusive. Using a smaller portion of the OP & ARB allocation for increasing HOP liquidity and a slightly larger portion for buying bridge LP positions could be very valuable. I reached out to the Bond / Olympus Pro team to potentially weigh in on the proposal as well.

Hey Team! Joe here from Bond Protocol. Thanks for the consideration of us to assist with POL and liquidity consolidation.

Our bond markets are agnostic to ERC20 quote asset intake into treasuries, so we’d first want to align on that:

  • ETH - most of our recent POL deployments, Like Pendle, have opted for ETH bonds. It is more widely held than LP tokens, leading to lower barrier entry and generally tighter discounts. You can pair with treasury HOP for POL in key/consolidated pools and use our callback contract functionality to automate this. ETH just gives the most flexibility for liquidity use cases.

  • LP Tokens - you would source LP tokens from existing LPers, but any “new” bonders would need to create the LP token to participate, which would be a few txn barrier before participating in the program. You also get more exposure to HOP, vs net-new ETH.

We recommend focusing on a single market type/use case to start, with conservative capacity for vested HOP issuance. Esp if we’re deploying on an L2 (Arbitrum), we can launch markets as small as we would want (e.g. $15K, 2 wk market) to gauge demand and monitor performance; we can then ramp capacity as needed or introduce new use cases and concurrent markets. 14d vesting is our “standard” for POL bonds though we can increase to 21d, 28d vesting…but we would suggest gauging initial demand before doing any long-term issuances (30d+ vesting). Start small, scale up is our recipe for partner success and allows our partners to proof-of-concept our platform with minimal commitment.

Acquired assets from bonders are immediately transferred to the provided HOP treasury address (permanently owned); community bonders are granted the tokenized bonds immediately but cannot claim until the completion of the vesting period.

KPI’s we would look to for the bond program:

  • Avg Discount @ point-of-bonding (exchange rate, effectively HOP ROI)
  • Total Bonded Value
  • Unique Bonder addresses
  • Post-vesting conversion rate (LP’ing? Selling? Staking?)

Assuming the initial bond program meets targets, we would advise ramping capacity or exploring new Bond Market use cases - again, we can support any ERC20 quote/payout asset market for bonds, and you can create/modify/cancel markets at any time.

Please let us know if you have any specific questions on how this will work and we can dive into more details!

1 Like