[RFC] Treasury Diversification & Protocol Owned Liquidity (multichain HOP/ETH LPs)

🐰Hop Ecosystem
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Goals and Motivation
In the interest of bolstering the financial health and autonomy of the Hop Protocol, this proposal presents an initiative to further diversify the Hop DAO treasury holdings while establishing the beginnings of significant protocol-owned liquidity (POL). This move aims to mitigate the current skew between HOP’s circulating market cap and its fully diluted value, which stands as an impediment to stable price discovery and large-scale, value-aligned investment in HOP from non-private parties.

HOP’s circulating to fully diluted supply is far too skewed (4M circulating mkt cap, 40M fully diluted value FDV). This skew makes it difficult for proper price discovery to occur and even more difficult for anyone to make a large, opinionated allocation to HOP at a stable valuation in the open market. Moreover, as the HOP token is playing an increasingly growing role in the protocol, POL increases accessibility for the token while generating fees for the DAO. This proposal brings idle HOP into the market, makes it productive, increases market liquidity, and retains DAO ownership.

Generally, the amounts are small and ensure a continued reserve of HOP in the treasury for future developmental use cases such as grants, incentives, and other value-creating opportunities.

Proposal Details
This proposal would seek to:

  1. Allocate 1,500,000 HOP ($57,000 @ $.038) and 57,000 USDC from the treasury for distribution to Mainnet, Optimism, and Arbitrum. The total value is ~$114,000 ($57,000 + $57,000).

  2. Sell 57,000 USDC for ETH

  3. Bridge HOP and ETH to each chain in the predetermined proportions (see calculations further down in proposal):

    • Mainnet: 49.33%
    • Optimism: 30.04%
    • Arbitrum: 20.75%

  4. Deposit HOP/ETH liquidity into DEXes

    • Mainnet: Uniswap v3 0.3% tier (full range?)
    • Optimism: Velodrome v2
    • Arbitrum: Camelot v2 (potentially v3?)

  5. Lastly, deposit veNFT into compounding Relay strategy created for us by Velodrome (including this in this proposal, because it’s DEX related and fairly low stakes)

Each chain/dex’s proportion of the 1,500,000 HOP is decided as a blended percentage of each DEX’s HOP liquidity & HOP 24 hr volume, and each chain’s percentage of Hop protocol’s bridging volumes (from volume.hop.exchange). Current HOP/ETH liquidity across chains is ~$350,000, so this proposal would increase the outstanding liquidity by ~33%. You can see the breakdown of current liquidity, volume, and bridge volume here in order to calculate the blended percentages:

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link to sheet

These 3 chains are lower hanging fruit because we already have multisig capabilities and they’re the top 3 by liquidity and bridging profiles by quite a large margin. In the future we can and should look into Base, Polygon, Gnosis and other chains that Hop Protocol supports.

Notably, this proposal requires zero expenditures or ongoing incentives from the DAO. It simply pairs idle HOP in the treasury with a small amount of idle USDC (to sell for ETH).

5 Likes
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Thanks for sharing this thoughtful proposal, fourpoops! I agree that slippage is an impediment for more people to join the DAO and some of the DAOs idle HOP should be activated for business experiments. It seems strategic to me because it will support greater volume while potentially making revenue for the DAO, depending on impermanent loss.

I also think your strategy of allocating more liquidity to the dexes with greater liquidity and volume is a good one. Depending on the results of this strategy things can be changed in the next iteration to optimize for yield.

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Openly admit, I don’t have much experience with providing DEX liquidity personally. But I think I understand the gist of the proposal… provide liquidity to DEXs that support HOP/ETH pairs. So we will get fees flowing into the DAO while maintaining control of the HOP.

If so, I think this is something worth exploring and would vote in favor of this. The value is low giving us essentially a trail run, and the logic behind which DEXes to support / how much to support makes sense. Getting some ETH helps with treasury diversification, and we can support the HOP token liquidity somewhat organically.

I’d say the only add would be, if passing, we should circle back to maybe 3 or 6 months down the road to see how successful it is. As it might be something worth expanding in the future.

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Yes, Hop DAO is simply providing its own HOP/ETH liquidity to the 3 chains and DEXs that already have the most liquidity and volume. At any time we can remove the liquidity, claim fees, add liquidity, etc. I agree that we should reassess about 6 months after initial liquidity is provided.

1 Like
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Thanks for proposing this @fourpoops - imo very exciting initiative and great to see you moving the DAO towards financial stability!

Agree on diversifying the Hop DAO treasury and improving POL being a smart move. This is particularly true considering the skew between HOP’s circulating market cap and its fully diluted value, which would play a big role once v2 is released.

Here are my 2 cents:

  1. Agree that it makes sense to use only Mainnet, Optimism, and Arbitrum. These choices are logical because they’re the most liquid and have extensive bridging profiles, which, as you said, represent low-hanging fruits.

  2. I would also suggest using the Uniswap v2 liquidity pool or providing full range on v3. Given the current liquidity, the complexity and potential efficiency gains of v3 active liquidity management (or even Gamma strategies or other POLs) might not justify their implementation at this stage. However, it’s definitely something to consider in the future as the protocol grows.

I just have one clarification question: Could you shed some light on the specific choice of 1.500.000 HOP allocation? Is this number based on a particular strategy or calculation? I assume the idea was to improve the liquidity by 33%, but I would love to hear your intuition behind it.

Looking forward to the snapshot vote!

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Thanks for the feedback.

Cool then I think I agree we should do the full range for uniswap v3 on mainnet. In the future, we can look into a concentrated range or more exotic autocompounding strategies.

It wasn’t an exact science, but a mix of a couple factors (one of which you name):

  • increasing the liquidity by 33% seems like a reasonable amount. it is enough that we can test what impact it has, without overdoing it
  • the overall dollar figure didn’t feel too aggressive and it is, I believe, fully covered from the surplus in sales price in the $ARB sale relative to its proposal price.

I’m hoping to put this up for vote soon. If there are any other comments that would be great to hear. One question is what should we do with the paired USDC relative to 1.5M HOP now that 1.5M HOP is worth slightly more than in the original proposal? Do we lower the HOP amount to match the dollar figure or increase the dollar figure to match the HOP amount?

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Just to chime in on this question:

If it is acknowledged that this initial proposal for implementing POL is experimental then maybe being risk-averse, and opting to lower the HOP amount, should be the right course of action.

Assuming some obvious risks are Impermanent Loss and smart contract risk.

1 Like
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I’ve now put this up for a temperature check on snapshot here: Snapshot

Following a snapshot vote, there will be an onchain vote to distribute the HOP to the multisig. The multisig will then need to coordinate all of the details for bridging and LP transactions.

The changes from the OP are:

  • amount of HOP down from 1.5M to 1.1M to reflect the HOP price increase (not as much HOP is needed for $57k). the total dollar amount of the proposal is still and always is intended to be $114,000 ($57k HOP + $57k ETH)
  • rounding proportions for cleaner/easier management:
    • Mainnet: 49.33% → 50%
    • Optimism: 30.04% → 30%
    • Arbitrum: 20.75% → 20%
  • specified using uniswap v3 full range on mainnet
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I am all for diversification but can’t speak on the specific strategy @fourpoops.

Are you guys sure it’s optimal? Going into ETH now for example assumes ETH will keep going up. Is that a safe assumption? In general other DAOs use managers such as karpatkey but for HOP maybe it’s too much?

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Ultimately these are very small amounts we’re talking about ($114,000). This isn’t a strategy to buy ETH low and sell ETH high. The only reason that ETH needs to be bought is because it’s the asset to be paired with HOP in the LPs. What matters more is the relative price between ETH and HOP, but it’s not a directional bet/strategy either way. It’s the DAO being in a position to take on fairly little price risk, use idle assets, and make them productive.

It’s hopefully the start of being able to dollar-cost-average into some long term protocol owned liquidity. For a larger treasury management effort, we can always look into professional managers like karpatkey.

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Aha I see. Thanks 4!

I will vote for this then.

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Thank you for the proposal @fourpoops ! I’m late to the party but would love to help increase liquidity for HOP. There is a real issue where interested parties that love the project and would like to get involved have a really difficult time because the liquidity is so tight. We are objective aligned in wanting to increase liquidity - the question is how to best accomplish it.

My concern with the proposed approach is that I’m not sure if we should be selling 57k of USDC given the current size of the DAO’s USDC treasury (or any stablecoin for that matter). It appears that the DAO has 429,000 of USDC between various wallets. It’s not the end of the world to spend 57k but I’m not sure it’s the most prudent move given that we have USD denominated liabilities that eventually need to be paid.

There may be a simpler solution given that ~95% of the DAO’s portfolio is in HOP - what if we provide single side liquidity for HOP in Univ3? We could potentially go big (25,000,000 or 50,000,000 HOP wouldn’t be crazy) and dramatically increase liquidity. If the price of HOP increases over time, it effectively let’s the DAO gently diversify without dumping on the market. It could help with both the long term funding of development and the distribution of HOP to people that want it and will be incentivized to contribute to the success of the protocol.

I understand that it may be a little bit late to suggest this but I think it could be a good solution to better achieve the same goal on a larger scale without using precious stables. I’d love to hear feedback.

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The HOP/ETH LP position will still be quite liquid and this is a small enough amount that it’s fully covered by the unexpected premium in the ARB sale price for USDC relative to that proposal. This is also fee generating.

I think single sided liquidity is also a great idea. The two sets of liquidity can coexist. However, there are a lot of very tricky problems with one-sided liquidity, like at what price do you set the floor? It’s likely not a good idea for us to try to set the valuation without a better auction or market mechanism. It seems like there is interest for the Hop team to do private fundraising as well. Solutions like Bond Protocol can likely get better value for a “sale” of HOP than us deciding on a price for one-sided liquidity (but I do still think we should look into it)

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Thanks for putting this together @fourpoops.

I’m voting for this experimental POL. I believe this will be a net positive for HOP through:

  • diversifying the treasure
  • benefiting from fees
  • increasing liquidity for a more stable price discovery
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The below response reflects the views of L2BEAT’s governance team, composed of @kaereste and @Sinkas, and it’s based on the combined research, fact-checking and ideation of the two.

We are voting FOR this proposal, however, we have some concerns outlined below.

We’re generally in favour of protocol owned liquidity and the concept of putting idle tokens to work by generating LP fees for the DAO while also increasing the liquidity of the HOP token.

The only thing that we’re trying to wrap our minds around is whether this additional liquidity opens up the DAO to a potential governance attack - or at least makes it a bit easier for a bad actor to carry it out.

Here’s our understanding of the situation, and the thought process behind the idea of potential governance attack:

As it is, the HOP currently available in different liquidity pools is as follows:

Uniswap’s V3 WETH/HOP Pool on Mainnet: 889k

Velodrome 's V2 WETH/HOP Pool on Optimism: 1,3M

Camelot’s WETH/HOP Pool on Arbitrum: 442k

Uniswap’s V3 WETH/HOP Pool on Base: 301k

Quickswap’s V3 WETH/HOP Pool on Polygon: 209k

Total of ~ 3,14M

With the injection of an additional 1,5M HOP across the different liquidity pools through this proposal, the total amount of HOP in the market would be approximately 4,6M HOP. Even assuming that a bad entity starts at 0 HOP, then they’d be able to accumulate just shy of 30% of the delegated supply by draining the pools of their HOP.

Seeing that the threshhold for submitting an on-chain proposal is set at 1M, quorum is set at 3M, delegated supply is ~15M and average participation over the last 10 votes has been approximately 8,36M votes, we can envision an entity spending a little less than 100 ETH (~$225,000 at current prices) to drain all the pools of their HOP, and use it to submit a proposal to drain the treasury.

The treasury having $1,85M in non-native assets makes it for an attractive target that’s worth the cost to carry out the attack, should it be successful.

While the circulating HOP supply is at 72M -which is significant compared to the just 4,5M tokens an attacker could accrue through DEXes- we just want to point out that with the lack of participation in HOP governance, with the voting period being just 1 week long, and with the lack of a security council that could help revert a malicious vote, the risk of a governance attack is an important factor to consider.

4 Likes
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Hello, just to be sure that I understand your concerns, you’re basically stating that right now it is too cheap to create a governance attack that can lead to Hop DAO’s treasury being drained?

Based on your figures on HOP liquidity, and the current HOP market price, this makes sense.

The obvious and simplest (although, not claiming this would be the best) solution would be to (as you’ve suggested) increase the voting period and/or required HOP for submitting on-chain proposals. In otherwards, amending DAO governance params.

Incentivizing governance participation seems a bit unsustainable in the long run (and is basically already implemented).

Adding a security council also adds human error, so if this route is chosen then careful implementation is probably required and maintenance could be costly.

Perhaps further research on the matter is required. This is an important point to bring up, thanks @Sinkas.

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I think the best solution would be an initiative to get more of the circulating supply delegated and therefore participating in governance. Increasing the required HOP for submitting on-chain proposals and/or increasing quorum might make it harder for governance to move forward since participation is relatively low as it is.

Would love to have insights on this from people more familiar with HOP’s governance and the tokenomics around HOP.

1 Like
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Thanks for this, Sinkas. I was just starting to realize something similar and do the math after I went to find someone with 1M HOP delegated and realized that not a single known delegate is able to post this proposal for an onchain vote. Nobody has a 1M HOP delegation anymore, which is almost equally as serious of a problem.

One additional detail is that the majority of the non-native assets are held in multisigs and not the timelock, so are theoretically safer from an onchain governance attack and would make it less desirable in the first place. Also, with slippage it would cost significantly more than this. Likely by at least an order of magnitude (even with the increased liquidity from this proposal).

All in all, I agree with @takeabreath. This is a pretty important point that we need to think through more carefully about for the near term. It should likely be taken up in a separate RFC where we can sort out optimal governance parameters (snapshot/onchain thresholds, quorums, etc).

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This proposal is live on Tally. It is important to note that the amount of Hop has been increased from 1.1 million to 1.5 million because the price of HOP dropped since the snapshot proposal passed. This increase was made to balance the amount of stablecoins and HOP tokens.

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The below response reflects the views of L2BEAT’s governance team, composed of @kaereste and @Sinkas, and it’s based on the combined research, fact-checking and ideation of the two.

We’ll be voting in favour of the proposal as we find both diversifying the treasury and creating protocol-owned liquidity to be important.

During the temp-check, we voted in favour of the proposal while raising our concern about the increased liquidity potentially enabling a governance attack. While the threat of a governance attack isn’t as immediate as we originally calculated it to be, as pointed out by @fourpoops, we believe the governance parameters might be something worth looking into and discussing as a DAO.

1 Like