Temperature Check - How to Increase Liquidity for the HOP Token?

šŸ°Hop Ecosystem
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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 DEXā€™s, including Uniswap V3, Camelot, Velodrome, Quickswap and Sushi. Even whilst using a DEX aggregator, liquidity is still too thin to buy or sell without experiencing dangerously high slippage, significant price impact, and has even resulted in users commonly becoming sandwich attack victims.

Crypto protocols use several different tools to increase liquidity depth for their token holders, including: utilizing their own token emissions to reward on-chain liquidity providers, working with external HFT firms and centralized exchanges to ensure a listing of the asset, or ā€˜bribingā€™ governance token holders of prominent DEXs to vote their own emissions in the favor of the stated protocolā€™s token. It would be fairly easy to deepen liquidity if the HOP community were to choose a single chain in which the token was traded.

Key Assumptions
The Hop Protocol treasury currently holds 826K OP (~$1.9M) and 1.67M ARB (~$2M). If 10% of these treasury assets were redirected to HOP/WETH liquidity providers over the next 12 months, the annualized yield would be upwards of 45.8% at the current level of liquidity ($850k). While itā€™s difficult to estimate the precise impact on notional liquidity added from this rewards program, it would likely be material.

Proposal Summary
This proposal is aimed at allowing the HOP community to choose which networks and DEXā€™s should be targeted and prioritized for improving HOP liquidity conditions. Below are examples of four high-level approaches that could be implemented to accomplish these goals.

  1. Bribe existing DEXs with OP and/or ARB to incentivize the redirection of protocol emissions towards a particular HOP LP Pool (i.e. HOP / WETH on Velodrome). This solution requires the least amount of technical development and will only require bi-weekly multi-sig transfers of either HOP, ARB or OP.
  2. Build an LP staking contract and integrate it directly on Hopā€™s front end. HOP LPā€™s of a specific pool who stake their LP tokens in this contract will be rewarded with a predetermined percentage of the ARB and/or OP mentioned above. This may require allocating ~10% of each treasury asset to maintain liquidity on both Arbitrum and Optimism, which also allows the protocol to stick to its multi-chain ethos.
  3. Working with a third-party automated liquidity management provider such as Arrakis Finance to develop HOP / ETH vaults emitting liquidity incentives in the form of OP or ARB.
  4. Creating a Nitro Pool on Camelot Exchange (Arbitrum Only), which would allow a simple distribution of any chose incentive token (likely ARB) to HOP liquidity pool participants

Deepening liquidity for the HOP token will provide a better and safer experience for HOP ecosystem participants, while also attracting new community members. Improving HOPā€™s liquidity should be considered a foundational requirement before any material changes to tokenomics can be implemented.

Potential Risks
The largest risks associated with incentivizing liquidity will be related to fragmenting the core development teams time and efforts. Further, selecting a single chain or DEX may seem as if the protocol is picking favorites, especially after the Hop community received OP and ARB allocations.

The above issues could be mitigated to an extent by the provided solutions within this proposal.

Multiple Choice

  1. Bribe existing DEXs including Velodrome and other exchanges across Arbitrum
  2. Build a staking vault on Hopā€™s platform to directly distribute ARB & OP to LPā€™s
  3. Work with third party liquidity management providers
  4. Creating a Nitro Pool on Camelot
  5. No change / leave as is
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An anonymous whale whose name translates to ā€œpenis diarrheaā€ with $80K of HOP comes out of the blue with an unprecedented level of support from brand new accounts saying we have a liquidity problem and puts the full weight of 500K votes behind pool subsidies for more profitable tradingā€¦ for the protocol. Voted 5 but honestly believe this should not have gone to Snapshot in its current state.

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Agree with @max-andrew sentiment.

Also, there are no actual numbers this is actually an problem for the DAO or a community. Should not have gone for a vote. Would like to see clear reasoning to stating the problem in the first place ā€œis illiquidā€ ā†’ what does it mean in numbers and also why is it a problem in the first place.

Voted no

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easy no from me.

full discussion in #governance here for all to read, and you should: Discord

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He also fails to mention that he holds $100K of HOP ($15K on Optimism waiting to be sold), bought in late March or more recently and that Arbitrum appears to be his chain on choice for his largest purchase which was recently bridged to mainnet for this vote.

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After reading the proposal and considering it a bit I haveto agree with the comments by @max-andrew and @dybsy.

This proposal makes no sense for HOP and may even be motivated by personal needs of the proposer. I am going to vote NO.

Whatā€™s more the proposal has not followed the governance procedure underlined in this forum and should not have moved to snapshot. The proposer unilaterally ignored the governance procedure and put it for voting at the same time as they made this post.

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I donā€™t think this should have been put up for a vote yet. If it remains up, I am voting no, mostly for that reason and particularly so given the strong reactions weā€™ve seen so far.

In an effort somewhat break the brigade and turn this into a productive discussion, I think itā€™s important to note that what @RichardShart is suggestingā€“there can be value creation from making treasury assets productiveā€“is a legitimate idea and itā€™s been tried a ton before and written about quite a lot. I think the first time it was discussed was in this Placeholder blog post: Stop Burning Tokens ā€“ Buyback and Make Instead ā€” Placeholder. Pickle Finance went on to implement something like this: Into the Brine Vol. 5 ā€” Smart Treasury and Basis PickleJar | by Pickle Finance | Medium Iā€™d be very curious to hear how it worked out for them and what they learned as a result.

In short, this proposal as itā€™s written needs to be discussed in a lot greater detail and consider some major revisions and plans based on community feedback. The way Iā€™m reading this, it feels more like pool2 incentivization which is likely not a good use of resources. A better program would consider some of the ideas from the links I posted above. Otherwise, itā€™s also just not time to vote on this.

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Voting 5 for the reasons previously discussed. No case has been made for why liquidity needs to be improved.

Hypothetically if the DAO did decide that HOP liquidity is important (which iā€™m not convinced it is), then I think treasury-owned liquidity is an option worth exploring.

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Hi @lefterisjp,

I appreciate your response. I will note that I attempted to follow the process as written out within the governance forum, but perhaps I was using an out of date write up. Happy to make any edits or start from scratch if there are any specific recommendations.

There was a RFC & a discussion on the community call over the last week, so this post was the Temperature check, which to my understanding was to be directly accompanied by a Snapshot. Apologies if I broke any of the norms / rules of Hop governance.

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Logic Behind Increasing Liquidity
As of April 12, buying 1 ETH worth of HOP via the DeFiLlama DEX Aggregator would result in 2.33% of price slippage. There are two main reasons I believe that this is an issue:

  1. Many crypto participants will be hesitant to join the Hop community, knowing that they would lose nearly 5% acquiring < $2,000 of the HOP token. Deepened liquidity would incentivize participation from a wider range of crypto native participants and allow many DAO members to have skin in the game. I do not believe that those looking to buy HOP should be punished by slippage or sandwich attacks.

  2. HOP is an incentive token for the protocolā€™s bridge pools, which is instrumental in acquiring deep bridge liquidity that is sufficient to handle an increase in volume and growth of the general protocol. Those participating in providing liquidity to the bridge pools will likely sell some or all of their HOP, as this is partially economic game theory. It would be in the best interest of the protocol for the HOP price to not be drastically affected by farm and dumpers, as a liquid and strong token will allow the DAO to continue incentivizing a larger and stronger bridging protocol.

To provide specific details, the ETH Arbitrum pool currently has a yield of 7.05%, 76.6% of which is HOP emissions. The same is true for Optimism to the tune of 83.3%. In my opinion, it is in everybodyā€™s best interests to make the HOP token more liquid so that protocol participants remain economically aligned with the DAO.

Next Steps & Further Detail
Below is a breakdown of the steps that would be required in the case that the community decides to move forward with one of the 4 decisions that require action:

  1. Bribe Existing Layer 2s - The community would have to push a portion of the Hop treasuryā€™s OP holdings (~10%) to be used for bribing a protocol like Velodrome. Bi-weekly bribes split across 12 months could take place on one or multiple chains.

  2. Build out an LP staking vault - The development team would have to build a staking contract that allows liquidity providers to lock their HOP/wETH or HOP/USDC LPs from a specific DEX. In return for locking the LP position, these service providers would earn a linear distribution of OP, ARB or both across either ecosystem. This could last for 12 months, which would hopefully be enough time for many of the HOP liquidity providers to select a small number of DEXs that are best for the community.

  3. Partner w/ a Liquidity management Dapp - This would require a community member to build a relationship with Arrakis Finance or a similar protocol that would help create an LP vault for the HOP token. This would likely require some developer resources from our end as well & we would likely need to subsidize the vault with HOP, OP or ARB rewards to allow it to gain traction.

  4. Create a Nitro Pool of Camelot - This was meant to be an example of a very easy solution that would require a small number of multi-sig transactions to fulfill. While I used Camelot as an example, I am sure there are other DEXs that allow you to easily stream rewards to liquidity providers.

Final Notes
While this topic has been slightly controversial, I wanted to provide a list of DeFi protocols that actively incentivize users to provide liquidity for their token: Synapse (SYN), Stargate (STG), Badger, Sperax (SPA), Alchemix (ALCX), Frax (FXS), Olympus DAO (OHM), Liquity (LQTY), Temple, Qi, Rocketpool (RPL), Lido (LDO), Ribbon (RBN) and tens of others.

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I voted for No Change as I didnā€™t think this was ready. I would also like to see solutions that can work over the long term.

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Hey @fourpoops, thank you for the response. The Buyback & Make article was a worthwhile read. I think my initial intention of keeping the proposal strictly to Pool2 incentives was to try and avoid any additional regulatory scrutiny associated with buybacks, single sided staking and other token focused decisions.

I would really appreciate your feedback on my most recent Logic / Detail post as its great to pick your brain. Also happy to scratch this governance proposal for now until we have a better detailed version to start with from Day 1 of the process. Appreciate it!

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I am voting 5 NO CHANGE because this temperature check post was moved to a Snapshot vote prematurely as there has not been enough time and discussion around the proposal.

Happy to debate ideas on how to make treasury assets more productive for the DAO but pool incentives are usually exploited by mercenary capital and I believe there are other solutions that should be discussed. In recent community calls, several DAO members (including myself) have discussed using some of the OP and ARB tokens within the DAO treasury for Hop Ambassadors to participate in governance on Optimism and Arbitrum. While slippage is an issue, it mainly affects traders and I believe the DAO treasury has other priorities such as strengthening Hopā€™s relationships with other DAOs and increasing participation with others who are aligned with Hop long term.

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I have voted ā€œNo Changeā€ on this temperature check. I am mostly in alignment with others that this proposal needs more time for discussion, with a focus on a solution that can not only help short term but long term as well.

As for the liquidity incentive topic itself, I do believe there is a discussion there that is worth having. Iā€™m not sure it is necessarily a super important issue, but I do think there are possible governance-specific issues that may be overlooked from the above discussion. Liquidity does not always have to be a trader specific issue, and I donā€™t think itā€™s something that can be completely ignored or viewed as a non-issue.

For example, I checked the slippage of buying 90,000 HOP on Uniswap about a few hours ago and again right now. Slippage was 7.42% and now 8.39%, with about a $.017 difference between the effective Uniswap price and what is listed on Coingecko. While I am aware that isnā€™t exactly a small purchase, that is the amount to meet the Delegate Compensation threshold, so I felt it was a relevant example. For perspective, $1000 is about 1% slippage right now, $5000 is about 3.75%.

As a newer delegate, I felt that was something worth mentioning as I had a similar experience when I was purchasing my HOP (off the top of my head, I had a similar slippage amountā€¦ I think I lost about $.01 or so with each purchase in totality). While it did not deter me from joining, the lack of liquidity has the effect of reducing the amount of voting power a newer members of the DAO would have otherwise (or a newer investor who delegates to a DAO delegator). While relatively small, this is a technical barrier to entry and a centralization issue. In a case like this, someone who wanted to buy 90,000 HOP would need to spend $16,200 with slippage, but without slippage could afford about 100,000 HOP with that same dollar amount. That 10,000 HOP difference is basically the entire 6 month incentivization trial worth of HOP.

Iā€™d also add, the slippage from lack of liquidity is effectively a reduction in earnings from LP side. If those who are receiving HOP for LP services are losing a certain % of their earnings to slippage, they may seek to provide liquidity to other pairs due to it no longer being as profitable. This may cause a circular issue where LPs start to leave due to the reduction in profit, which then turns into even less liquidity. Of course, this effective cut in rewards would also apply to anyone receiving HOP as compensation for a service.

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I think this is well thought out and reasonable @Bob-Rossi. Appreciate you sharing your experience and opinions. I think that a better mapped out proposal may be needed on my end, so apologies if I pushed this along too quickly.

Fully agree that a long term solution would be the most beneficial. I think that experimenting with a trial period of LP incentives may at the very least establish a couple DEXs as the focal point for HOP LPā€™ers, allowing trading volume to increase and eventually allowing HOP liquidity to exist without any incentives. I also think that deeper liquidity would make HOP a target for institutional market makers, exchanges and larger liquidity providers that help solve this issue without needing token incentives.

Would love to find a way forward that the community can really agree on!

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Hello,

I have voted No change to this proposal at this point and under its current form. I agree with previous discussions about the proposal needing additional revisions.

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In this case I think slippage is the impact your action has on the price, not how much you ā€œloseā€ as a result of your action. After a purchase with 2.3% slippage, the marginal price for the market is now 2.3% higher. That isnā€™t a bad thing or a good thing, itā€™s just a repricing based on the latest demand.

Spread this out a little over time and Iā€™m not sure this slippage is all that bad considering the circulating supply dynamics.

In many of the examples you listed, I would consider the incentivization programs of pool2s (e.g. native token/ETH) to be value destructive. In other examples, (correct me if Iā€™m wrong) I donā€™t agree that many of those successful incentivization programs are for providing liquidity for their native token, but rather for providing liquidity to other pools (e.g. stETH/ETH incentivized with native token LDO) where that additional liquidity is core to the value of the product. In Hopā€™s case, thatā€™s already happening with LP mining.

At this point a ā€œresetā€ would definitely be helpful. Since it seems like youā€™re willing to earnestly engage in something constructive, this temperature check could probably be restarted as an RFC with a much broader mandate to get some better discussion going on the topic of liquidity and whether it needs to be incentivized and or if treasury assets should be made productive in some way. After a longer period of time when it seems like thereā€™s consensus or steady-state conflict, we should put it back up for a vote.

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All great points. The reason I used ā€œloseā€, is because in my experience Iā€™ve seen this price impact require an increase in slippage tolerance which leads to sandwich attacks and being arbitraged by bots across chains right after your buy order goes through. I think you are absolutely right if you spread buys out over time, you are less likely to be affected by price impact - just a lot more effort which is not the worst thing.

You are also correct that some of these (Lido, Rocketpool) involve incentivizing liquidity for their staking tokens - but interestingly enough it looks like Rocketpool incentivizes liquidity on the RPL / rETH pairing. I think there is some value to be explored in LPing against a LSD, rather than native ETH, but that could add another layer of complexity. Would like to hear your opinion on a HOP / wstETH or HOP / rETH liquidity pool.

I think the advice to reset this proposal is helpful and ultimately makes sense. I am happy to start over with a more detailed RFC & I will try to engage with some of the top delegates in the community, along with the rest of the active participants. Thanks for working through this one with me.

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Fair point on the supply dynamics of what is a relatively low-cap token. Looking back at HIP-4 you would of had 1 month to accumulate the 90,000 HOP. Right now buying about 10,000 is about 1% slippage. So spacing that over 9 buying intervals youā€™d cut out a lot of the slippage loss. A 1% haircut still sucks, but to your point how much of that is attributed to organic price movement from the demand created anyway?