[TIP-5] Spot Liquidity Pools Reward Weight Change

  • Summary

    This proposal rebalances the reward weights for Switcheo TradeHub's spot liquidity pools. The objective of this rebalancing is to reduce rewards for pools that have failed to attract LPs even with high APRs (thereby wasting rewards), or pools that link to markets with too low volumes (due to low volatility). On the other hand, the weights for pools which have sustained LP interest and trading volume are increased in terms of % share of the total weight. Please see the appendix for our statistics, noting that all calculations are based on pooled liquidity at the point of writing.


    The current reward weights at the time of writing can be found here: https://blog.switcheo.network/demex-adds-5-new-markets. These initial weights were chosen in an attempt to attract LPs for token holders that are likely to be familiar with the Switcheo ecosystem, and also tokens that many Switcheo / wider DeFi users will hold. We also evaluated pools based on their potential trading volume as that is the end goal that benefits the protocol.


    At the moment however, multiple pools / markets (CEL/USDC, NEX/USDC, and to a lesser extent nNEO/USDC) has failed to attract significant liquidity and volume, relatively speaking.

    The CEL/USDC and NEX/USDC have only attracted <$150k of liquidity despite earning 130%, 177% APR respectively. Furthermore, they have a share of 3.45% of the rewards but only share 1.71% and 0.88% of the past 72hr trading volume (see appendix).

    The low liquidity could be explained by the chosen quote pair (USDC), which may not be favorable to hold in a bullish BTC market. Furthermore, the "base tokens" themselves (CEL/ NEX) could be too unattractive for "mercenary farmer" LPs to buy-in. At the moment, these tokens are also showing low volatility, making matters worse on the trading front. As such, we are proposing reducing their share to 2.27% (1/44), by increasing the weights of all other pools. nNEO has performed commendably in terms of trading volume, and as such we propose a higher weightage of 2/44.


    We then propose to further increase the WBTC/ETH pool reward share from 6.90% to 18.18%. The initial updated weightage was in consideration of the low IL risk of LPs in this pool, and therefore the ease of attracting liquidity. This has mostly succeeded, attracting almost $2m in liquidity. However as it turns out, the volatility of ETHBTC is high enough such that with a sufficiently liquid market, arbitrage trades on this pair has accounted for more than a quarter of the total trading volume. As such, we feel it makes sense to retain, as well as further attract LPs to this pair by increasing the weightage to 8/44. This will give a reward share of 18.18% and APR of 81.63%, which we feel is highly competitive as compared to other L1 pools, potentially giving the protocol more eyes.


    We also rebalance the SWTH/ETH and SWTH/USDC pool rewards slightly. The SWTH/ETH has a lower IL risk due to correlation and therefore in theory, should require less rewards to incentivize liquidity. However, it turns out that even with a higher APR currently, it has attracted only half the liquidity as the SWTH/USDC pool. We are unsure of the reasoning behind this phenomenon, but we suggest reducing the SWTH/ETH reward ratio slightly, such that its APR matches SWTH/USDC and observe if the market again rebalances liquidity to favor SWTH/USDC. A lack of rebalancing could point to Switcheo token holders not having Ether exposure, and simply locking liquidity with a high commitment duration.


    Finally, we consider the ETH/USDC and WBTC/USDC pools. Their corresponding market's volumes have performed almost exactly as expected when compared to their pooled liquidity (the market's volume matches the linked pool's liquidity, by ratio). However, it remains an open question for us as to why 2x the amount liquidity has flowed into the ETH/USDC pairing compared to WBTC/USDC, despite having the same reward weights. One simple possibility is that the pool of LPs for Switcheo TradeHub is still limited, and ETH holders are in larger supply than WBTC, and all WBTC has been exhausted by being committed in the ETH/WBTC.

    The total liquidity of these two pools has also remained low as compared to the other pools (due to low reward weights), so rather than rebalancing weight ratios between the two pools, we propose keeping it constant, and only increasing their total relative weightage, such that both pools are more liquid, before making further adjustments. A reward share increase of about ~1.5x to 9.09% (4/44) will boost their respective APRs to 50.45% and 123.21%, potentially attracting further liquidity and therefore trading volume.

    Risks / Mitigations

    The benefits of the proposal has been mostly described in the above sections. In this section, we consider some potential risks not yet discussed, and possible mitigating factors.

    • Risk 1: ETH/WBTC, ETH/USDC, WBTC/USDC pools are targets for "farm-and-dumpers", due to their relatively safe underlying tokens, potentially impacting the price of $SWTH by increasing their rewards.
      • Mitigation 1: The increase in rewards for this pool primarily come from CEL,NEX,nNEO/USDC pools. The SWTH pools still have a 54.5% (from 69.0%) share of the rewards, only a 21% decrease. Therefore, we expect that the price impact on $SWTH to increase no more than that. Using the USD price change over the last 30 days of $SWTH (-10%) as an estimate, it gives us a ballpark figure of only 2.1% as the additional impact, assuming all selling is due to rewards distribution.
      • Mitigation 2: Most of the weight increase goes to the ETH/WBTC, part of the initial 3 pools. The average commitment duration of liquidity for the initial pools were 73.4 days out of max of 83 days (88%). Most of the liquidity was also contributed by existing wallets (before LP launch). This points to the fact that most contributors for this pool are Switcheo token holders / supporters / community members, decreasing the likelihood of price impact.
      • Mitigation 3: We could potentially add a pure "pool 2" (e.g. SWTH-90%-WBTC-10%), allowing such LPs to further extend their earned rewards, increasing their incentive to hold the earned rewards and join the protocol.
    • Risk 2: Reducing rewards for CEL,NEX/USDC could be premature.
      • Mitigation 1: The reward share for these pools are intentionally still higher than their volume share, to give more time for LPs to learn about the pool and join them. The resultant APRs are still attractive for these pools.
      • Mitigation 2: We could still incentivize these token holders to join as LPs by introducing WBTC pairings, which could be a more attractive counter token.
    • Risk 3: The reduction of CEL,NEX/USDC could be too little.
      • Mitigation 1: Should liquidity and volumes still remain low, the addition of new pools without weight adjustments for existing pools can automatically dilute these pools further.

    Supplementary Material

    Please see the following table for the proposed new weights, reward share, as well as current liquidity (and share), corresponding APR, and trading volume in the last 72 hours:

    Screen Shot 2020-12-29 at 2.48.41 PM.png

    On-chain proposal at: https://switcheo.org/governance/proposal/9?net=main

  • @ravenxce I fully support this initiative, it is clear that we need to incentivize only active pools and trading pairs, that is what LPs are meant for initially. Clear explanation, thank you.

  • I support this, but I think the reason CEL/NEX is not only that USD pairs is very risky right now (I took part in Cel/usd, and my rewards have actually matched my Impermanent loss almost exactly so far, meaning no current profit at all), but also because CEL is currently "easier" to trade on switcheo exchange, where it's a matter of habit for people.

    CEL is also a token that most people are planning on withdrawing to their CEL wallet, to stake there fore additional gains, so I'd expect CEL to be a harder "sell" on a Layer 2 platform, especially tied to USD.

  • On-chain proposal submitted for voting at: https://switcheo.org/governance/proposal/9?net=main

  • Maybe I did not understood right:


    "The total liquidity of these two pools has also remained low as compared to the other pools (due to low reward weights), so rather than rebalancing weight ratios between the two pools, we propose keeping it constant, and only increasing their total relative weightage, such that both pools are more liquid, before making further adjustments. "

    Shouldn't the AMM place bigger orders now? Because $6-$10 per offer is very low with ~ $1 mio. in LP.

    PS: It is USDC/ETH (USDC per ETH and not ETH/USDC) same goes for all other.

  • We are working on using the full liquidity of the LP in the next upgrade, right now only ~30 quotes are generated, which results in a thinner liquidity than expected due to the small tick sizes.

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