In May, work began on forking Uniswap v2, turning on the governance capabilities and putting control of the new protocol under DXdao. DXswap development has been spearheaded by @AugustoL and is now in testing and auditing phase. He has presented several updates to the community on development, with the latest on Kovan deployment.
Given that DXdao will govern the protocol, there are several parameters that need to be decided by the community before launch. Over the last few weeks, there has been an weekly open call devoted to DXswap launch and strategy. Meeting notes and forum discussion from the last couple of weeks.
Below, I want to lay out the current strategy these discussions have yielded and open them up to the broader community for comment. Feedback and consensus are crucial to move forward with a formal proposal for launch.
There are three main areas for the community to consider:
- DXdao provided liquidity from the treasury
- DXD liquidity mining rewards
Recent liquidity mining schemes show how quickly liquidity can move, but what makes Uniswap an attractive product to fork are the fees it generates. Over the last 30 days, it has seen total trading volume of over $9bn, paying out $27m to liquidity providers (LPs). Uniswap has no protocol fee, but even just a 0.01% protocol fee would yield $30,000 a day of on-chain revenue.
Of course, traders hate fees. DXswap will need to be competitive to attract volume (more on that below), but the current plan is to have a small protocol fee and demonstrate DXdao’s ability to generate on-chain revenue, the proceeds of which will be sent to the curve and support the price of DXD. The current design allows for the protocol fee to be charged as a fraction of the LP fee. Consensus has landed on setting the protocol fee at 1/10 of the LP fee.
Example: Trader pays a “Swap Fee” of 0.3%. LPs would effectively receive 0.27% of the swap fee, while DXdao would get 0.03% in the form of the LP token sent to DXdao treasury.
One of the distinguishing features of DXswap will the ability to adjust fees. All Uniswap pools have the same 0.3% and even Balancer has a set-it-and-forget fees. This is a key component of the strategy to make certain pairs more attractive on DXswap to aggregators and more sophisticated strategies. Providing and incentivizing liquidity (more below) will help buttress the lost fees for LP’s.
To be decided by the community:
- DXswap protocol fee - current consensus on 1/10th of LP fee
- Fees for targeted pools at launch - what should fees be for pools with DXdao sponsored liquidity or pools that have DXD rewards. More on this below.
- How can pools adjust fees? Currently, pool fee adjustment must be approved by DXdao on alchemy. Might a Snapshot like program allow LPs to signal their fee preference?
DXdao supplied liquidity
One of DXswap’s advantages over Uniswap (or SushiSwap) is the ability to deposit some of DXdao’s treasury into DXswap. This does not come without risk (including impermanent loss) and the community needs to decide on how much, what assets and how (technically) to deploy these.
As of writing, the treasury holds $8.5m in ETH, $3.9m in DMG and $2.9m DXD with an additional 2,700 DXD ($1m) released to the treasury every month.
I think it would be best to have two different liquidity injections, Stage 1 of $750k at launch and then Stage 2 of $1.25m of liquidity some time after launch (4-6 weeks?). I am proposing the following allocation to DXdao sponsored pools:
|DXdao Sponsored pools||Stage 1 allocation:||$750,000|
DXD and DMG would come from the treasury, while other assets would be converted from ETH. There remains some technical challenges and potential opportunity (Liquidity.eth) to getting ETH into DXswap pools. Stage 2 liquidity would presumably start with the same allocation with adjustments based upon trading and liquidity trends after launch.
To be decided by the community:
- How much of treasury to allocate to DXswap in total and to what pools
- How to get treasury funds into DXswap
DXD Liquidity Incentives
Yield farming has been….popular to say the least. APYs are increasing almost as fast as gas costs. Still, the past few months have proved that liquidity responds quickly to on-chain incentives. The challenge for DXswap will be to make that liquidity stick. In that regard, liquidity mining campaigns can be seen as achieving two objections, marketing for launch and long-term liquidity incentives.
I propose DXswap employ two different, concurrent liquidity mining strategies to achieve these objectives.
- Launch Rewards - DXD incentives for the first two weeks of launch. Awarded purely on deposit size in targeted pools, rewards can be claimed immediately.
- Ongoing Incentive Rewards - Weekly awards to liquidity providers based on trade volume in targeted pools. Vested to avoid farm & sell (3 months?)
Launch Rewards would produce a catchy APY, but ongoing incentive rewards should attract the long-term liquidity providers interested in contributing to the DXswap (and DXdao) ecosystem.
In terms of size, I landed on 1300 DXD ($500k) for Launch Rewards to be distributed over two weeks, with 300 DXD distributed on the first day, 250 DXD on day 2, 200 on day 3, etc. And for Ongoing Incentive Rewards, 50 DXD ($19,000) awarded daily, distributed weekly and vested.
Liquidity incentives should only be for specific pools to prevent gaming and abuse, but the reward program should be extended to projects and tokens close to DXdao community. At launch - in addition to the pools listed above for DXdao sponsored liquidity, GNO-ETH, PNK-ETH, GEN-ETH and LRC-ETH should be eligible for DXD rewards. Additional pools should be considered by the community for strategic or partnership reasons.
To be decided by the community:
- How much DXD to distribute?
- Vesting or immediately claimable?
- How to calculate rewards?
- Which pools to incentivize?
I used this spreadsheet model, where you can see some of the underlying projections and calculations for the whole excercise. Projecting liquidity and volume is difficult as is how the liquidity mining campaign will affect the price of DXD, especially with a bonding curve available.
DXswap’s launch is dependent on the community coming to consensus on the parameters laid out above and approving a formal proposal.
Please provide feedback below. We’ll be discussing these items on tomorrow’s DXswap strategy call, the Biz dev call on Monday and Thursday’s Weekly call too (and maybe on the dev and governance call??).