- Edited
Summary
Migrate our Uniswap v2 OHM-FRAX pool to Uniswap v3 to make use of the added capital efficiency as well as the additional levers. When FRAX bridge over their liquidity to Arbitrum, we would migrate up to 50% of our OHM-FRAX pool to Arbitrum as well.
Proposal
Move OHM-FRAX pool to Uniswap v3
Leveraging v3’s concentrated liquidity positions, we would provide liquidity in a range from RFV per OHM (approximately 27 today, but we will use 25) to $1500; for reference, standard xyk (e.g., v2) pools implicitly range from 0 to infinity
This pool migration would be executed in several steps to ensure a smooth transition
The RFV of our OHM-FRAX LP position will go from $891,851 in v2 to $127,030 in v3. Overall this is a 1.9% decrease of our total Treasury RFV.
When FRAX move their liquidity to Arbitrum, we would deploy 50% of the OHM-FRAX pool to Arbitrum
Important Notes
- We would end OHM-FRAX bonds due to the complexity for users and inability of our Treasury to take in v3 LP tokens
Motivation
One of the main selling points of Olympus are our bonds and locked liquidity. Our Sushiswap and Uniswap pools have been growing at an unprecedented pace, with the OHM-DAI pool having $82,849,405 of liquidity, and the OHM-FRAX pool having $18,426,25. Furthermore, both pools are entirely (99.5%) owned by us. This allows for predictability from the protocol side, as well as confidence from the investor’s perspective.
Given the essential role liquidity plays in the OHM ecosystem, it is imperative for us to continuously improve its implementation and utilization. We believe Uniswap v3’s concentrated liquidity positions represent such an improvement. Regular liquidity pools are inefficient, due to spreading the liquidity equally over the whole range. Below is a picture of a OHM-ETH pool with just $1.39m in liquidity, earning more fees than we do right now on our OHM-FRAX pool which has more than 13x the liquidity.
With concentrated liquidity, we can squeeze out more capital efficiency and more fees out of what we already have. This benefits everyone, by having lower slippage on trades, as well as earning more revenue through fees.
TL;DR - Uniswap v3 offers advanced control over your liquidity, and for a protocol amassing large amounts of it, such as ourselves, this is extremely valuable.
Proposal
- Move OHM-FRAX pool to Uniswap v3
- Leveraging v3’s concentrated liquidity positions, we would provide liquidity in a range from RFV per OHM (approximately 27 today, but we will use 25) to $1500; for reference, standard xyk (e.g., v2) pools implicitly range from 0 to infinity
- This pool migration would be executed in several steps to ensure a smooth transition
- The RFV of our OHM-FRAX LP position will go from $891,851 in v2 to $127,030 in v3. Overall this is a 1.9% decrease of our total Treasury RFV.
- When FRAX move their liquidity to Arbitrum, we would deploy 50% of the OHM-FRAX pool to Arbitrum
- We would end OHM-FRAX bonds due to the complexity for users and inability of our Treasury to take in v3 LP tokens
Since we already have a pool on Uniswap v2, it would make sense to just move it to Uniswap v3. FRAX have already moved their main FRAX-USDC pool to v3 as well.
Now, because we have actual backing in the form of RFV, we can use that value (27 RFV per circulating OHM, but we will use $25) as the bottom of the range on v3. The top of the range would be initially set at $1500, at our previous ATH. Both of these can be easily adjusted, and due to the technical know-how required and its time-sensitive nature, the Policy team would manage this liquidity position. We would do so with the following objectives in mind:
maximizing capital efficiency (utility of the pool + fee generation)
bottom end of range should always approximate the dollar value of backing
top end of range should be adjusted to avoid creating artificial price ceilings (initially set at ATH)
Arbitrum
Since Arbitrum doesn’t have much liquidity right now, especially in the form of stables, once FRAX moves their liquidity to Arbitrum, we propose that we do the same with up to 50% of the OHM-FRAX pool for starters. This should allow us to capture a chunk of that volume (and the corresponding fees) through our OHM-FRAX and OHM-ETH (proposed in OIP-25) pools. Along with that, it would of course be a significant boost to our Arbitrum liquidity so improving user experience there.
New RFV Calculation
Our Uniswap v2 pools have an RFV that is calculated based on the v2 constant product formula 2*sqrt(ConstantProduct). This formula assumes that our liquidity is spread over a price ranging from 0 to infinity. Of course, in v3 that is no longer the case, so a new formula must be derived to calculate the RFV of a v3 position. You can find a more detailed explanation in our Notion:
https://olympusdao.notion.site/Uniswap-v3-RFV-Deep-Dive-24ecf98997a04baf9743f4924255ab6e
We will provide a specific example of the current FRAX LP position below to show the effect on RFV and capital efficiency of moving from v2 to v3:
V2 Position: Current FRAX LP position in the v2 pool has 9,265,189 FRAX and 21,462 OHM.
Using the RFV calculation for v2, we get an RFV of $891,851.
V3 Position: FRAX LP position from current RFV/OHM of ~$25 to $1500.
We move our 9,265,189 FRAX and 21,462 OHM into a Uniswap v3 position with a range of $25 to $1500, assuming a price of ~$431. Using the RFV calculation for v3, we get an RFV of $127,030. Overall this is a 1.9% decrease of our total treasury RFV.
Capital Efficiency
In this example, the efficiency of the position more than doubles, but the RFV of the position goes down compared to the same deposit in v2 liquidity.
In a v2 position, the protocol will continue to spend its FRAX until OHM hits $1; it will accumulate quite a bit of OHM between $25 and $1. By contrast, it will have spent all its FRAX on OHM in its v3 position by $25. This is the cost of dramatically increasing capital efficiency.
While the calculated RFV of the position goes down, the capital efficiency of the position increases dramatically. In practice, increasing capital efficiency means that traders have to sell (or buy) more to bring the price down (or up) by the same amount as in a v2 position. Consequently, slippage goes down by 50% per trade every time capital efficiency doubles. A further benefit is that the protocol captures twice as many fees per $1 of volatility every time capital efficiency doubles.
Overall, the tradeoff of RFV for capital efficiency is a balance that must be struck between risk and reward; we believe that implementing a v3 pool between our current RFV per OHM and ATH price of OHM represents a solid balance of risk and reward.
Vote
(1) For: Move the OHM-FRAX pool to Uniswap v3 with the proposed parameters AND move up to 50% of this pool to Arbitrum when FRAX moves their liquidity
(2) For: Move the OHM-FRAX pool to Uniswap v3 with the proposed parameters, BUT DON’T move up to 50% of this pool to Arbitrum when FRAX moves their liquidity
(3) Against: Don’t move OHM-FRAX pool to Uniswap v3 with the proposed parameters AND DON’T move 50% of this pool to Arbitrum