[RFC] HOP Single Sided Liquidity

šŸ°Hop Ecosystem
1

Summary

Hop DAO should LP 25,000,000 HOP as single sided liquidity in the HOP/ETH 0.30% Univ3 pool on Ethereum. This will increase HOP liquidity and market depth while providing a natural source of diversification for the DAO.

Motivation

As Hop prepares for the launch of v2 and hopefully the ensuing growth of the protocol, now is the time to improve HOP liquidity and position the DAO for increased demand. Hop has not engaged any market makers or incentivized liquidity for HOP to date. I believe that this is the correct approach, however HOP liquidity is extremely low. This makes it difficult to enter positions and leads to significant price volatility. As of this past week, ~$500k of total buy orders would basically exhaust the entire Univ3 pool. This is a relatively small amount of liquidity and could prove problematic if Hop v2 significantly increases demand. I understand that some might say, ā€œwow token shortage good, price go up bigā€, but that approach is not sustainable. The current TVL of the HOP pool is approximately $280k. This proposal would increase the TVL by $1.2m which would put HOP in line with similar assets. Much of the TVL will be well above the current spot price of HOP which should limit potential adverse effects. As a community, I believe that having well aligned HOP holders is in our long-term best interest. Increasing HOP liquidity will create avenues for more participants to get on board in a reasonable manner.

Recent efforts to increase HOP liquidity are positive but still leave a ways to go. Single sided liquidity lets us LP meaningful amounts of HOP solely to the ā€œupsideā€ of the price range. As the price of HOP increases, the DAO is gently selling HOP for ETH based on market demand. If the price of HOP decreases once this position is in range, there will be significantly more market depth to absorb selling. From my perspective, the biggest downside of this proposal is that it effectively creates resting sell orders for HOP that will need to be filled for the price to increase in the pool. I have tried to size the proposal appropriately to increase liquidity while not overburdening the market for HOP. The impact of additional HOP appears to be very reasonable. The next section explains the mechanics and practical implications for the position.

Mechanics of Execution

I will caveat this by saying that it is difficult to model Univ3 positions and that this should be generally accurate but may be slightly off ā€“ please keep in mind that everything is priced in ETH terms so that is an additional variable that makes precision challenging. If there is a great tool for modeling Univ3 positions, please let me know because this was all done manually.

This proposal would take 25,000,000 HOP held by the DAO and LP in a range from just above the current spot price to tick #6400 which equates to roughly a $6 HOP price. To provide context for the additional liquidity, this will add ~$250k of depth between the current spot price and $0.10 HOP. As the price of HOP increases, the dollar value of the depth increases as well (e.g. there is about 2x as much additional depth between $0.10 and $0.20, etc.). The current liquidity is fairly concentrated near the spot price; this proposal would greatly increase the longer tail of liquidity throughout this range. For the purpose of illustration, if the entire range were to be filled it would yield about $31m in ETH for the DAO. This proposal will not provide any liquidity for people to ā€œdumpā€ on at the current prices and only comes into range if the price of HOP increases. If we determine that the liquidity is having negative impacts on HOP or unintended consequences, we can pull the liquidity at any time (I assume this would require a subsequent vote).

I believe that this proposal is a positive step towards creating a more robust environment for HOP ahead of v2 while also providing a gentle means of diversification for the DAO. Please let me know if you have any comments, suggestions or concerns.

Voting Options

  • LP 25,000,000 HOP in specified range
  • No action
  • Abstain
6 Likes
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It might also be a good idea to split the LPs across the OP and ARB (potentially Base?) L2s as well.

2 Likes
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I believe this is a good experiment for the DAO to diversify/capture value in a high demand scenario. The timing makes sense because the upcoming launch of v2 could increase demand.

Hop token liquidity is low and the DAO is in a position to experiment to improve the tokenā€™s liquidity and increase sustainable cash flows.

While the 25 million could dramatically increase supply since the current circulating supply is roughly 75 million, the 25 million would only be sold if there is demand to buy Hop tokens from the DAO providing downside protection to the experiment. It seems worth testing out and can be increased or decreased later if the experiment isnā€™t bearing fruit.

2 Likes
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Thanks @Zilch496, I think thatā€™s a great idea for future liquidity. For now, I think it makes the most sense to concentrate this liquidity in a single pool to simplify the impact of the liquidity. If we spread it on different chains, it will have a less cumulative effect (itā€™s not easily aggregated based on my understanding). While itā€™s great to have a little bit everywhere, now feels like the right time to have a lot of liquidity in a single location. Otherwise weā€™ll basically have the same slippage, etc.

If this liquidity proves to be successful, we should think about doing single sided liquidity on other chains as you suggested.

2 Likes
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HOP tokens are currently trading far below competitors and are at an all time low in both ETH and USD terms. It makes no sense to offer a substantial amount of DAO owned HOP tokens on the Sell side at fire sale prices.

If v2 has any merit, the market will do its thing. At that point DAO owned single sided sell side liquidity can be considered again.

I will be voting against this proposal.

1 Like
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HOP tokens are basically already being ā€œsoldā€ at current token prices (via LP rewards) with the inactive low volume pools, e.g. MAGIC@ArbitrumNova. Iā€™m actually quite surprised that the only LP offering rewards on Nova is MAGIC, meanwhile the ETH LP has nothing. What was the rationale behind the MAGIC pool in the first place?

From what Iā€™ve seen so far, the HOP incentivised USDT (and previously USDC) LPs have provided little benefit to the protocol overall, and has only contributed to selling pressure of the HOP token at market price.

IMO the best approach moving forward would be to focus primarily on encouraging ETH LPs (including liquid/reskating), instead of just further fragmenting what little liquidity Hop LPs provide while also encouraging mercenary LPers to continue dumping their HOP rewards into a market that already has little liquidity to begin with.

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The MAGIC Nova pool is only incentivized with 214 HOP/DAY = $8.35 at current val. Volume is nonexistent too. Yeah, rewards should probably be discontinued, unless the HOP incentives are matched with MAGIC.

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Hi @pulpmachina - I appreciate where youā€™re coming from. One thing to keep in mind is that the liquidity is spread from just above the current spot price to about $6.00 HOP. If the price of HOP were to appreciate from the current price to $0.20 (which is near competitor comps from a valuation perspective), about 7.8M HOP would be sold at an average price around $0.1045 for approx. $800k of ETH. Itā€™s not a huge amount of HOP at these prices and reserves the majority of the HOP for the rest of the range. The USD terms of the liquidity constantly change because of price fluctuations in ETH but if the entire position were realized, it would be at an average price around $1.14 per HOP.

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Thanks for sharing your ELI5 on concentrated liquidity. However, I disagree with both your motivation and method. Your argument that Hop would somehow benefit from a more liquid SELL side makes no sense in the first place. Thereā€™s no benefit to the DAO setting a SELL order close to ATL (All Time Low) just before a major release.

If you must test the hypothesis (that lack of SELL side size is holding Hop back) it would be more sensible to start the concentrated range at a comparable-to-competitors valuation instead of ATL. You could also just set a limit order there.

For example, COW replenished their treasury in recent months, shortly after hitting ATL, by setting limit orders at a desired valuation that was a lot higher than ATL. They did not however start a sell side concentrated liquidity pool with the range starting at the worst possible price as you are proposing here.

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Iā€™m not opposed to setting a higher lower limit or different approach. The big picture thing here is that HOP has bad liquidity. Whatever we do I think it makes sense to do it sooner rather than later - Iā€™d rather be proactive rather than reactive. Do you have a proposed adjustment or alternative approach that achieves these goals?

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What kind of negative impacts or unintended consequences are you imagining? While we surely canā€™t think of every possible side effect, it probably makes sense to talk through the ones we can foresee. The biggest negative I can see is that setting a single sided liquidity range does necessarily set a valuation on HOP by the DAO and I think valuations are better priced by the market.

Moreover, single sided liquidity acts as a limit sell-order. With a price band, it acts as a cascade of limit sell-orders over time. In that sense, it is the DAO who is ā€œdumpingā€ at all of the prices in the concentrated band. Rather than having perpetual sell-side liquidity dragging on the market, we can do one-time transactions at the same valuation either in private markets or via Bond Protocol.

Lastly, the range is kind of arbitrarily picked, but if that range is ultimately defining a valuation for HOPā€™s market cap I believe we need to be confident in choosing it.

Relative to what? Market cap? Volume? I think we need to put a few more numbers around a proposal like this. @0xLev1 had a great suggestion elsewhere to motivate reframing this problem: ā€œit would make sense to implement it if we decide on the target liquidity level for HOP. I would suggest calculating it from the liquidity range perspective, where we could take a percentage of the market cap tradable with less than 2% slippage.ā€ Iā€™m not sure a DAO should be in the business of using its POL to act as a central bank on its DEX liquidity, but itā€™s pretty interesting.

Side note: as we do more POL transactions such as this, it would be great to keep everything multichain, in the spirit of Hop. It would be quite cool if someone could build an app on Hop V2 that can start with a multisig and disperse assets to various liquidity pools on different chains. Maybe a good future grant program.

1 Like
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Hey @fourpoops - apologies on the slow response. To address some of the points / questions that you raised:

Here are some potential downsides I see from this proposal:

  • It is could create a sell wall that keeps the price of HOP below what it otherwise might be with less sell side liquidity.

  • Depending on the starting valuation, is the DAO selling HOP at too low a valuation (which is sort of in conflict with the above downside)

  • Is the DAO going to be crowding out other liquidity?

To address the first downside, the amount of liquidity and range are set to not be too burdensome. We can quantify things and try to extensively study them but ultimately they should also pass the ā€œeyeā€ test of what looks and sounds reasonable given the tradeoffs at play. ~$250k of additional sell side liquidity between the current spot price and $0.10 (which is approximately 3x the current price) feels pretty reasonable and shouldnā€™t be overly burdensome. Here is a question that I donā€™t think can be definitively answered but is at the root of this debate - all things being equal, more sell pressure on an asset results in a lower price for that asset. Are there circumstances where increased liquidity (sell pressure if youā€™re looking at an increased price) actually leads to a higher price? I do believe there are circumstances where low liquidity reduces demand because buyers want to avoid extreme volatility and massive slippage from the current spot price. If you do take that risk as a buyer and drive the price up dramatically, the new price youā€™ve just set is extremely flimsy which doesnā€™t provide a margin of safety.

Whether or not this valuation is right - Iā€™d be much more concerned about this if we were executing a large sale of HOP at a single fixed price. Letā€™s say the price is too low for some portion of liquidity - that would mean that it was snapped up by buyers. Excellent, we just put HOP in the hands of new owners while diversifying the DAOā€™s treasury. It would be a minuscule amount of HOP relative to the DAOā€™s total holdings. The market is setting a price for HOP and the DAO would be choosing to offer HOP above the current market price all the way up to about a $6bn HOP fully diluted valuation. We can start the range at approximately $.06 per HOP (open to other suggestions if people feel strongly about it).

In line with similar assets in an absolute sense. The prices have all diverged a little since this was originally written but itā€™s names you might expect (Across, Celer, Synapse, etc.). Iā€™ve left out some of the multi billion dollar projects that weā€™re hopefully going to start comping Hop to soon. Itā€™s a good point that things donā€™t look as bad when we look at them on a relative basis, however I think there are minimum absolute levels of liquidity that are relevant. Having more liquidity relative to HOPā€™s market cap should be a positive at these levels.

I appreciate @0xLev1 's suggestion - I think that can be an interesting metric as part of a holistic view. I assume 2% is used because that is the most widely available metric? One thing I keep in mind is that 2% across exchanges or assets only tells us so much about the overall liquidity picture given that most of the AMM curves are different (obviously CEX order books are as well).

I agree with you re questioning the wisdom of being a central bank for the token - my goal with this proposal is that we gently add some liquidity while erring on the side of doing too little rather than trying to control the market and set targets which create a lot more room for error (central planning seems like a terrible idea). I see a tradeoff between simplicity and complexity when it comes to evaluating the success of this proposal. In a perfect world, we could have bi-weekly or monthly analysis of relevant data to help determine the appropriate adjustments, etc. We havenā€™t done similar stuff for other AMM liquidity and itā€™s probably premature for us to put this level of effort to something non-core to the functioning of the protocol. I suggest that we just limit the size of the liquidity (as Iā€™ve attempted to do) to keep things simple. Perhaps we can create a dune dashboard that tracks relevant metrics (which also be helpful for previous liquidity weā€™ve deployed).

Regarding your last point - we should totally make this multichain. Iā€™d propose that we see how this goes on mainnet Univ3 - if this appears successful, letā€™s do future deployments on other chains.

I appreciate your engagement on the proposal and welcome any other thoughts or concerns to get the best outcome for Hop!

1 Like