[PIP-2] - Liquidity Optimizations and Use of Treasury Funds

PIP - 2 - A proposal for liquidity optimizations and use of treasury funds

Background

The Popcorn ecosystem is currently undergoing some challenges with respect to liquidity mining incentives and dex liquidity that are affecting price action. Liquidity mining incentives drive market sell orders from liquidity providers that are looking to take profit with Popcorn’s newest product, Butter. Meanwhile, the current levels of liquidity within Ethereum/Polygon markets create unfavorable slippage and price impact conditions for all buy and sell orders. Popcorn currently has liquidity on two exchanges: Uniswap V3 (Ethereum) and Sushiswap (Polygon). The slippage conditions on these markets discourage a more liquid market because both buyers and sellers get unfavorable swaps and the price impact of trades is typically quite high. Additionally, the impact that sell orders have on the price is magnified because of the lower levels of liquidity. This proposal seeks to address these issues in four parts:

  • Phase 1: Uniswap V3 Simulations
  • Phase 2: Shift, augment and concentrate liquidity
  • Phase 3: Ongoing buybacks via Anchor
  • Phase 4: Consolidate liquidity

Treasury snapshot

The current amount of USDC held by the Popcorn treasury not currently deployed to exchanges is 4.36M USDC.
2,030,443.889 USDC on Ethereum and 2,329,582.37 USDC on Polygon.

This proposal would allocate 700K (16%) of the USDC in the treasury to be used for adding additional liquidity on POP/USDC markets, and the rest would be used for token buy backs funded by stablecoin yield-farming gains.

Phase 1: Uniswap V3 Simulations

The first phase consists of running slippage and price impact simulations when the existing protocol owned liquidity is concentrated within a tighter range on Uniswap V3 (Ethereum). Using Gelato, we are able to create automated concentrated Uniswap V3 positions which may positively affect the current slippage conditions.

The purpose of Phase 1 is manifold. Firstly, the results of the slippage simulations with different configurations of concentrated liquidity will help to determine a more optimal allocation of capital with greater capital efficiency. This means that potentially less capital from the treasury would be required to mitigate the slippage and price impact conditions. Phase 1 would also prepare for Phase 2 and Phase 4 which would ultimately lead to consolidating liquidity into one market within a concentrated band.

Estimated completion time: Already completed

Phase 2: Shift, augment and concentrate liquidity

The second phase consists of augmenting the liquidity on both the Ethereum and Polygon markets. With respect to the Polygon Sushiswap market, this phase would additionally involve migrating liquidity to the recently deployed Uniswap V3 on Polygon. During this phase, approximately 700,000 USDC would be added across both exchanges via market orders, followed by the implementation of concentrated liquidity positions. The intended result is that slippage and price impact for both buy and sell orders would be reduced significantly by adding additional liquidity and concentrating it within a smaller range. At the same time, all token holders would benefit from the significant market orders.

Sushiswap (Polygon)

The additional liquidity to add to the Sushiswap pool via market orders will be 350k USDC. Because Sushiswap lacks the ability to concentrate liquidity within ranges, during this phase, the liquidity on Sushiswap will also be migrated to a Gelato Uniswap V3 position managed by the core team. A new staking contract will be deployed to incentivize liquidity on this new exchange, and existing liquidity mining rewards will be rerouted to this new staking contract. Users currently providing liquidity will have to withdraw their LP tokens and deposit them in the new exchange to continue to take advantage of liquidity mining rewards.

Estimated completion time: Within 2-3 weeks of proposal passing.

Uniswap (Ethereum)

The additional liquidity to add to the Uniswap V3 pool via market orders will be 350k USDC.
Furthermore, the ownership of the Ethereum Gelato Uniswap pool would be transferred to a multi-sig controlled by the core team. This would allow for automated administration of the Uniswap position to reallocate capital within new ranges as the price changes. This again would lead to greater capital efficiency with reduced slippage and price impact.

Estimated completion time: Within 2-3 weeks of proposal passing.

Phase 3: Ongoing buybacks via Anchor

The third phase of this proposal seeks to use the remaining treasury funds to fund a 6-month buy back program and a non-profit grants round. The program would consist of depositing 100% of remaining treasury funds (approx. 3.66M USDC) into Anchor protocol on the Terra blockchain. The current 19.5% APY would be used to fund market buy backs of POP. This would yield approximately 356,000 UST for POP market orders - of which 10% would be donated for use in the inaugural Popcorn grants round. This program would supplement the current liquidity mining program with capital to support profit taking as Popcorn products gain more traction.

For more information and analysis on UST read: UST analysis by @manny.

Phase 4: Consolidate and Concentrate Liquidity

The fourth and final phase of this proposal will consist of consolidating all protocol owned liquidity into a Uniswap v3 pool on Polygon using Gelato’s Uniswap manager. Moving all liquidity to one market would lead to even greater capital efficiency. This phase is tentatively suggested and would be voted on separately in Q3 2022 after observing the impact Phase 2 has on the existing markets. If the resulting impact of phase 2 is satisfactory, the benefits of Phase 3 may not outweigh the benefits of having multiple liquid markets, and for that reason, it is proposed that Phase 3 be considered in a later vote with more details to be provided at that time.

Conclusion

Through adding additional liquidity and identifying more optimal Uniswap V3 capital allocation strategies, Popcorn will have a less volatile market with reduced slippage and price impact for trade sizes of varying magnitudes. The total amount to be added in liquidity will not exceed 700k USDC and would represent roughly 16% of the USDC in the treasury. The token buy back program funded through the treasury yield-farming strategy puts the treasury capital to work for the benefit of all token holders while advancing Popcorn’s philanthropic goals.

Next steps

Signal approval to escalate to snapshot for voting and subsequent execution.

  • Approve PIP-2
  • Disapprove PIP-2

0 voters

4 Likes

Some good ideas imho :slight_smile: I agree with step 1 and 2, however I’m not such a big fan of the Gelato contract since it behaved quite buggy in the past if you try to add liquidity a seconds or third time (amount approval bug). Regarding shifting liquidity from (polygon) Sushi to Uni: POPCorn can move the staked liquidity to the new Uni LP directly, right?

Regarding step 3 - Anchor: I have the feeling that Anchor is quite risky. Why not use an existing strategy of an existing blockchain (ETH Long Positions on StakeDao for example)? Or even better: Deploy a “chilli hot caramel” strategy on our own which takes higher risks? Could we exclude the step 3 proposal from the vote?

1 Like

Hello,

Not qualified to comment on the merits of the DeFi magic being proposed but trust in core team to define optimal path forward in this regard.

Question I have is in the Phase 3 it’s suggesting that 35,600 UST will be allocated to the first Grant Round, is this the total for the Grant Round or will this just be part of the 100,000 previously identified?

I’m not such a big fan of the Gelato contract since it behaved quite buggy in the past if you try to add liquidity a seconds or third time - @ToBe

Unfortunately, the POP token requires the approval be zeroed out before adding another approval. We can see if they would make a change to allow infinite approval so the issue is avoided.

Regarding shifting liquidity from (polygon) Sushi to Uni: POPCorn can move the staked liquidity to the new Uni LP directly, right? - @ToBe

Popcorn can move the liquidity that’s owned by the multi-sig, but it can’t move the liquidity that’s in the staking contracts. That liquidity will have to be unstaked and redeposited into a new contract.

Regarding step 3 - Anchor: I have the feeling that Anchor is quite risky. Why not use an existing strategy of an existing blockchain (ETH Long Positions on StakeDao for example)? Or even better: Deploy a “chilli hot caramel” strategy on our own which takes higher risks? Could we exclude the step 3 proposal from the vote? - @ToBe

The analysis on UST and Anchor has been posted above, to help guide the decision-making process. I did also read up on the RFC regarding the use of treasury funds that you posted which had a very interesting discussion and it turns out, of the few strategies discussed, the anchor strategy one was the highest ranked. We wouldn’t exclude Step 3 from this proposal since it’s a core part of it.

Question I have is in the Phase 3 it’s suggesting that 35,600 UST will be allocated to the first Grant Round, is this the total for the Grant Round or will this just be part of the 100,000 previously identified? - @Scorpio

This program would boost the grant round total to ~135,000.

2 Likes

Don’t get me wrong I like all the ideas but can’t phase 1, 2 and 4 be executed without 3? (we could even swap 3 and 4, right?) Also the Anchor idea (phase 3) isn’t bad per se but I have a bad feeling putting all eggs in one basket. Why not split that huge amount (3,66MM is huge for POP at this stage I think?) across different yield generating projects/chains/protocols/strategies?

1 Like

Phase 3 of the proposal stood out to me as a potentially risky maneuver. 19.5% APY sounds amazing, but I’m not familiar with Anchor or Terra and it seems to me like we’d sort of be hitching POP’s horse to their wagon. I took a look at the “Risk Observations” section of the UST Analysis and it seemed fairly rosy (also their https://www.terra.money/about page 404s), but we are in crypto after all so perhaps we signed up for these sorts of “go big or go home” plays :slight_smile:

That said, I think the basic premise of using POP treasury funds to support the token’s liquidity (like a share buyback) is worth pusuing. Maybe we could present a comparison of Terra/Anchor to a few alternative funding strategies (@ToBe mentioned ETH Long Positions on StakeDao) to show we’ve done our homework?

3 Likes

The UST analysis gives a solid background.

Thanks @a11n that’s GREAT news! Had already voted YES on this one and this makes it sound even better! :rocket:

Anchor Rates decreased to less than 18%. Still good. But just to be correct.