[Temperature Check] - Revised HOP Liquidity Incentive - Continued Discussion

🐰Hop Ecosystem
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Introduction

This temperature check follows on the back of two other RFC posts from recent months, both of which may be found here and here (most recent). This topic has gained relatively strong attention from the community with feedback of many types. I encourage all voters to read discussions in both the governance forums and within the Hop Community Discord. The most recent RFC has important and detailed information regarding this proposal’s:

  1. Problem Statement

  2. Logic & Benefits

  3. Key Assumptions

  4. Risks & Mitigation

The below sections aim to use community feedback to provide multiple paths forward to increasing liquidity for the HOP token. I would love to gain any last minute feedback before moving a vote to Snapshot in the next several days if there are any recommendations to provide additional details, make small changes or better follow the governance process.

Community Feedback From the RFC

Given our strong relationship with the Rocketpool community, @dybsy communicated that it would be possible to get an allocation of 200 RPL ($9,000) to incentivize an rETH / HOP pool on Arbitrum or Optimism. While liquid staking tokens have yet to gain significant traction on L2 networks, the adoption of rETH on Arbitrum and Optimism is nearly inevitable. There was some soft support for moving forward on a HOP / rETH partnership with co-incentives in RPL & ARB / OP.

@david-mihal suggested that 1.) This proposal focuses on Protocol Owned Liquidity (PoL) via Bond Protocol, formerly Olympus Pro. This would allow the Hop treasury to acquire permanent HOP LP liquidity at a slight premium using ARB and OP acquired via airdrop. 2.) Instead of increasing liquidity, we could use Bond Protocol to garner Protocol Owned Bridge liquidity, allowing the protocol to pull back on HOP incentives that are currently being issued to incentivize stablecoin & ETH LPs.

#2 may be slightly out of the scope for the current proposal, but I believe it is a very good idea and should be explored in another governance discussion.

Potential Next Steps

  1. Partner with Bond Protocol to gain HOP / USDC PoL on the Arbitrum Network

  2. Partner with RocketPool to co-incentivize HOP / rETH liquidity on Arbitrum & Optimism

  3. Partner with both Bond Protocol & RocketPool to gain HOP / rETH PoL on the Arbitrum Network

  4. Remain Unchanged

Detailed Requirements for Each Outcome

  1. Partner with Bond Protocol to gain HOP / ETH PoL on the Arbitrum Network
  • As noted by @bigfishjoe , Bond Protocol is ERC-20 token agnostic, so any token or LP may be used on their contracts & all that would be needed is a “Market Verification Pull Request” so that their team will have the Payout & Quote token addresses and price sources. As Camelot’s HOP / ETH V2 pairing has previous activity and their LP token is an ERC-20 as Bond requires, I recommend that we move forward with this asset as the Quote token.

I am happy to discuss using USDC as the pairing or using Uniswap V3 as the chosen exchange if anyone is familiar with using Timeless Finance / Bunni.

  • Camelot V2 HOP / ETH Contract Address: 0xb6f8E925DF16Db713c4c235AbbEBA8B24e59B81C

  • A 15,000 ARB, 2 week trial period was recommended to gauge the demand before allocating more capital to this effort. If selected, the Hop community multi-signers on Arbitrum would be required to allocate 15,000 ARB tokens as the payout asset on Bond Protocol & monitor demand before allocating any more capital.

  • ARB Contract Address: 0x912CE59144191C1204E64559FE8253a0e49E6548

  • If successful (bonds sell at a <= 10% discount), another 2 week, 30,000 ARB market will be launched and governance can reconvene after to decide a path forward.

  1. As noted in early proposals, Camelot allows for permissionless incentivization on their liquidity pools. If voted on:
  • Dybsy and others could work with the Rocketpool community to obtain the 200 RPL allocation to the HOP / rETH pool on Arbitrum
  • The team & community would need to initialize a spNFT position for the HOP / rETH pairing on Camelot
  • The community multi-signers would allocate 10% of the treasury’s ARB allocation (167k ARB) to co-incentivizing the pool.

This selection would require waiting until Hop launches rETH bridging support.

  1. The next steps in number 1 will remain the same, however HOP / rETH will be the quote asset and the 2 week trial period could be incentivized using RPL. A co-marketing effort with Bond, Hop & RocketPool could begin once the Bond market is live.

This selection would require waiting until Hop launches rETH bridging support

  1. No Changes
5 Likes
2

Thanks for posting this @RichardShart

For potential next steps here, all are certainly possible, and we’d look forward to hearing the HOP community’s thoughts on Bonds for POL.

In prev gov posts (and if we can make a suggestion) - Bonds are usually presented as go/no-go (max 2 bond options) to keep surface area of the vote concise…so we could reconsider:

  1. HOP/ETH POL Bonds (paying ARB, or HOP) - in Partnership with Hop, Bond Protocol, selected incentivized LP position (e.g. Camelot)
  2. HOP/rETH POL Bonds (paying ARB, or HOP) - in Partnership with Hop, Rocket Pool, Bond Protocol
  3. No changes

Looking forward to hearing everyone’s thoughts.

1 Like
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Hey @bigfishjoe, thanks for weighing in - great to have your expertise. I think this is a very reasonable change and also helps narrow the scope a bit to simplify any changes if it does pass. Would love to hear any last comments from @thegreg.eth @dybsy @david-mihal @fourpoops if they had any. Thanks again

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I voted FOR this and specifically for trying out with HOP/ETH as I think we should go with the lowest common denominator which is ETH and don’t think we should favor any specific LST over it.

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@RichardShart appreciate your willingness to work through this like you have, it looks like both incentivization options now have quite a bit of support. I’m inclined to vote more for HOP/ETH as well, neutral with a better liquidity profile on its own. All in, this seems like an interesting, low-stakes experiment worth doing that now has the potential to add value back from the bonding and POL.

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I voted for HOP/ETH here as ETH is the more pervasive token and will likely provide better insights for the POL experiment.

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Thank you for your help and advice over the process! I think the stance from you, Lefteris and Thegreg makes a lot of sense.

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i am going to vote abstain on this proposal. i am against this proposal and the efforts to leverage HOP in DeFi rather than focusing on the core competencies of the bridge; however, the community sentiment from the current votes illustrates most want this. i could swing the vote to no change with my delegation but believe that would not be in the best interests of the DAO given this sentiment.

2 Likes
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There were rightfully a lot of questions about MAGIC asking for 12k HOP/month, or $720. This proposal is asking for $30,000 of ARB in one month and an undefined amount of HOP. There should be 42x the amount of scrutiny for this proposal, but there seems to be very little.

What this substantial cost theoretically gets us is more people creating HOP liquidity pools. The problem with that is we can create our own with treasury HOP and be the ones to benefit from trading fees. In other words, we’re paying $30,000 for something we already have and foregoing revenue we could be making on it.

Regardless, a massive driver of slippage is HOP being a low cap, high-growth token. Buying necessarily moves the price. The reason a token like UNI doesn’t have as much slippage is because focused investment in the core protocol led to more people investing in it, a higher market cap, and more demand and holders created more organic opportunities to provide liquidity.

The path to reducing slippage and appreciating long-term token price isn’t temporarily paying people to create liquidity pools, it’s by making strategic investments in our bridging protocol. A great long-term investment which also keeps our treasury diversified is simply holding this ARB and keeping it delegated to the ambassador program to continue advocating for Hop and looking for partnerships within a hugely important partner protocol.

2 Likes
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This is well stated and making me consider my decision further. I would like to see more debate around this point in the next day if possible. Since it is just a temperature check and not an actual proposal I might just vote No Change until we see more discussion.

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Hi @dybsy, I think continuing the conversation is very valuable. However, I think its important to note that @max-andrew might be misunderstanding exactly how protocol owned liquidity works. The HOP treasury would essentially be using a small portion of its ARB holdings to “exchange” in return for owning the HOP/ETH liquidity pool - where the treasury would directly benefit from the trading fees that take place on that pool. We would not be forgoing any revenue & this would only be utilizing a small portion of the treasury. I agree with the sentiment that we should maintain at least a large portion of the airdrop in order to align ourselves with the layer 2 ecosystems, unless something materially changes.

12

$30,000 doesn’t seem like a small number to me and I have no idea what it gets us that couldn’t be accomplished with a single-sided Uniswap LP. Could you clarify that point?

Not only that, listing straight to Uniswap would at least put liquidity where we know people are trading. I don’t know anyone who springs for Camelot as a first choice.

13

i’ve been thinking a lot about this. here is where i stand:

if i was acting on the Board of Directors for a company, i would not be voting to allocate $30,000 a month in funds to a speculative financial mechanism based on an arbitrary forum post from anonymous people whose intentions and incentives are unknown.

without a solicited report by a financial expert who can speak to potential profits, methodologies, alternatives, reasons why one alternative might be better than another, costs, risks, etc., i am not inclined to support ANY sort of liquidity incentives beyond a simple protocol-owned Uniswap pool where the DAO market dumps into a HOP/ETH or HOP/USDC pool.

i have heard arguments for and against, and i have heard tempered reasoning about the pros of increased liquidity versus the relative cons of this process, and generally speaking this might be a case of “no great mischief”. on the other hand, it might not. we are speaking about tens of thousands of dollars. the amounts in question are non-trivial, and allocating funds in manners like this calls for much more than randos in a DAO opining on a forum.

if something like this is going to occur, at least where i have a say, it will need to be justified and scrutinized in a way far beyond what we have been doing.

14

Conceptually, I am in favor of experimentation towards making the HOP token more accessible to a greater number of people, but in my opinion the budget should be reduced since the end goal isn’t clear. The proposed amount isn’t trivial for a two-week incentive program and needs to be discussed further.

What are some objective hurdles that can be used to measure the success rate of this proposal if it were to be implemented?

Slippage is an issue currently but HOP is a low cap token with a lot of potential but limited resources which should always prioritize enhancing the core competencies of the bridge.

1 Like
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@max-andrew the Camelot choice I think makes a lot of sense, considering it is a top 3 dex on Arbitrum that also allows permissionless, incentivized pool creation. UniV3 is the only version of Uniswap deployed on L2 & those LP positions are NFT, so they are not compatible with Bond protocol.

@dybsy I’m not sure that there are many “financial experts” that would be willing to create a model for PoL or DEX liquidity, but I will tell you that this is not a $30k spend - this is effectively a trade that allows the Hop Protocol to own its own liquidity. I believe this is valuable in lowering the barrier to entry of Hop governance, while also strengthening HOP’s role as an incentivize for the bridge liquidity.

THIS IS a simple protocol owned liquidity pool, that uses Camelot instead of Uniswap – because of the reasons mentioned above.

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hey @francom, thanks for weighing in. I want to note that the 10% discount is a metric for success occasionally used by the Bond Protocol & if the discount is any larger than this, only a single 2 week trial period will take place.

A successful trial period will secure permanent liquidity for the DAO, who will then be able to earn trading fees and increase their ETH holdings if HOP appreciates in value. The end goal is to strengthen HOP’s use as an incentive token, a role it currently plays as it is paid out to liquidity providers to the bridge.

17

I have been following this discussion for the last few days and after consideration decided to vote “No Change”.

There is a Velodrome pool with 200,000 USD liquidity in Optimism, yielding 50% APR in $VELO right now. For a 6 ETH HOP buy (10,000 USD) there is around 8% slippage, which is quite high.

Olympus Pro was created so that teams can sell their native tokens without the optics of “the team is dumping”. They sell them at a discount to people who then sell them in open market for a small profit or best case scenario (for token price) decide to hold them. I don’t think it’s a good fit to use in this case, where the tokens sold are not protocol native and the DAO does not “need” to lose that 10% discount.

Leaving aside the consideration of using or not using 30K ARB for this sort of proposal, I don’t see any reason why we should sell the ARB tokens at a discount. If what we need is protocol-owned liquidity, and we intend to bootstrap it by selling part of Hop’s ARB airdrop, then there are much better ways to do it that are more profitable for the DAO.

For a comparative example, HOP DAO could sell 15,000 ARB for 8.5 ETH (instead of 30,000 ARB for ETH/HOP LP) and then use those 8.5 ETH along with 250,000 HOP from its own treasury to create a pool in Uniswap v3 + Bunny, or even add it to the Velodrome one. This still is a 30,000 USD investment but the amount of liquidity that the DAO has at the end is greater because the Olympus Pro / Bond Protocol ARB sell at a 10% discount did not happen. There even is a lot of ARB liquidity not only in DeFi but also in centralized exchanges, so places to perform an operation like this are vast.

Regarding using or not using funds for this proposal is something that I also agree needs to be scrutinized. There is a normalization in DAOs where people just throw money everywhere and to everyone without thinking much, just because they can. I echo dybsy’s thinking: I’ve seen companies with a much larger market cap than Hop’s current one that have 20x the amount of scrutiny for a 10,000 USD investment from their money.

We also need to put the amount into perspective and not only analyze it nominally: HOP received 1.6M ARB, and 30,000 of this is short of 2%. If we add in the other tokens in HOP’s treasury, like OP, the relative % is even lower. This does not necessarily mean this proposal is reasonable, but I think that adding more objective information is helpful to decide.

Lastly, there is clearly an interest for some parties that the HOP token has more liquidity. If we were to know more about the people proposing this I think it would greatly benefit transparency.

For all of the above, I have voted “No Change” on the proposal.

3 Likes
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Since the payment token is ARB instead of HOP, why are we willing to sell at a 10% discount when we can sell at a ~0% discount in the open market and then create the HOP/ETH pool manually? Bond Protocol should likely only be used if HOP was the payment token, no?

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I think this is a valuable line of thought, but I was operating under the assumption that the discount would not necessarily reach 10%. My understanding was that we were against selling ARB on the open market after the airdrop so this was a way of essentially making an OTC trade. I would be very supportive of manually creating a HOP/ETH pool or HOP/ARB for that matter, but I received feedback saying that the latter would be too volatile. Would be happy to discuss selling a small portion of ARB or OP for ETH / stables if the delegates thought that was a better route.

As for @olimpio’s comment - I think some teams likely did abuse Olympus Pro, but the way they were using it would essentially be a token sale or an OTC deal to diversify their treasury, not necessarily a way to dump on the community. I think that Olympus itself showed that bonding was a unique way to give the community exposure to a token (OHM) in return for creating a strong and diversified treasury.

I also agree that $30k is a meaningful sum of money, but since this is effectively treasury diversification it would not be an upfront spend. The idea that a company would scrutinize a proposal like this is true, but I think it should also be scrutinized that our current plan is to hold 50% of our market cap in OP & ARB just so @max-andrew can play around with governance. I see value in having our say in L2 governance, but the delegates have not stated any long run plan if that is the most effective way to use half of our treasury.

Finally, I will mention again that I do not have any conflict of interest beyond owning the HOP token - which is the case for 99% of governance participants. I have been a long term user of the protocol and I decided to become more active within the community - @dybsy & @max-andrew have tried to paint it as a negative that I am anonymous, but isnt that one of the largest benefits of crypto? There are many reasons why deep liquidity and PoL could be beneficial, including:

  1. Permanent Liquidity for the HOP token
    a. Less price volatility
    b. Lower barrier to entry for new participants (less sandwich attacking & slippage)
    c. The protocol now earns trading fees, so buys & sells are both good for the protocol
    d. HOP is used as an incentive token for the Bridge pool’s, so the economic alignment is stronger if the liquidity is deeper
    e. In the event that liquidity & volume for the HOP token grow, DEXs & CEXs will fight to gain a piece of the market share. This is essentially free marketing for the protocol and could potentially come alongside third party liquidity incentives which are good for the community.