OIP-86: Uniswap v3 Migration Proposal
This is a proposal to migrate the bulk of the OHM-DAI and OHM-ETH liquidity currently on Sushi to Uniswap v3. The migration deploys liquidity for both these OHM pairs across the full price range, and adjusts the liquidity depth in the same process. Additionally, the proposal outlines the implementation of a novel policy lever — concentrated liquidity bonds.
In symbiosis with the Inverse Bond Policy Lever, concentrated liquidity positions are a mechanism for Olympus to:
Increase liquidity per OHM in circulation
Reinforce the backing of OHM
Dampen volatility in specific price ranges
Meet the demand for additional liquidity on the downside, and upside alike.
In practical terms, this policy lever e.g. allows Olympus to set desired price impacts on trades in either direction, achieving a more efficient use of liquidity. With more detailed control of the liquidity profile, Olympus can also manage risk scenarios such as liquidation cascades triggered by third party lending markets.
Motivation
Uniswap v3 concentrated liquidity positions allow Olympus to iterate on the concept of Protocol-owned Liquidity, allowing the Olympus treasury to actively participate in $OHM markets. In contrast to constant product AMMs (like Sushi and Uniswap v2) where the treasury is passively expressing purchasing and selling power across the full price range, concentrated positions allow Olympus to leverage $OHM liquidity for specific goals.
The immediate aim is to remove a potential dampening effect on volatility to the upside, and achieve an overall increase in capital efficiency for Treasury assets.
To achieve this goal, the proposal is to lower the current liquidity to market cap ratio during the migration. This will will have the following benefits:
Enables deploying thicker capital below current price (to dampen volatility) and thinner liquidity above (to allow for increased upside volatility)
Improve capital efficiency
Maximize our ability to utilize our liquidity pools to earn revenue (specifically in stablecoins), which helps to increase backing per OHM
With continuous bonding below price, this can be a self reinforcing mechanism that will limit price swings and increase price stability over time. In a similar way, Olympus can add OHM liquidity in positions around or above the current price to dampen volatility on the upside if deemed necessary.
Addressing the liquidity/supply ratio depreciation
Liquidity/circulating supply is a form of market backing of the OHM token. The protocol owned liquidity ensures that there is always a market buyer of OHM. As a consequence of the protocol increasing circulating supply, the liquidity backing of each OHM has been decreasing over the last four months. While the liquidity to market cap ratio is at an all time high (and much higher than the rest of the Defi landscape), the liquidity per circulating supply is going down. More liquidity per circulating supply is a form of direct backing, and with the introduction of concentrated liquidity these two metrics can be uncoupled. It’s possible to increase liquidity/circulating supply ratio without dampening volatility (which is the case with full range liquidity positions).
Strategic positioning on AMM’s/DEX’s & Utility
Uniswap is by far the biggest decentralized exchange by volume. To capture as much swap fees as possible on the active capital, Olympus should provide liquidity where there are most potential users and natural volume. Additionally, Uniswap offers the benefit of an advanced routing system which would allow Olympus to better utilize its liquidity on pairs with lower liquidity such as OHM-FRAX and OHM-LUSD, automatically routing OHM trades through all available pools, benefitting end users, achieving higher capital efficiency for the treasury and lowering arbitrage costs. Finally, utilizing concentrated positions on Uniswap v3 frees some of the treasury assets to be deployed across the ecosystem, bringing utility to some strategic assets that Olympus has accumulated in the previous months.
Design principles
Risk aversion
On treasury operations, Olympus in general aims for general risk aversion and by only taking on risk after careful risk/benefit analysis. A move to Uniswap and introducing concentrated liquidity positions can be carefully managed and does not by default add capital risk.
Relative price stability
With the end-game goal being low volatility for the price of $OHM, Olympus aims to sustain treasury growth thanks to a speculative premium. Despite being fairly risk-averse, this liquidity policy lever aims to add volatility control around market prices while alleviating excess volatility on downturns.
Maintaining desired liquidity depth and price impact
Sustaining the everyday market demand for liquidity while addressing tail-end risk scenarios such as liquidation cascades.
Capital efficiency
Deploy treasury resources with higher precision, addressing market demand for liquidity and freeing some of the treasury assets to be deployed at a higher return.
Managing market correlation
From a liquidity perspective, the early days of Olympus were defined by OHM being paired with stable assets, such as DAI. That led to OHM being either decorrelated or inversely correlated to the general crypto market. With the addition of OHM-ETH, $OHM started expressing more correlation with the market. One of the design goals being relative price stability, Olympus can leverage Uniswap v3 to adjust its liquidity profile between volatile counterpairs such as $ETH, and stable assets such as $DAI or $FRAX.
Implementation
The following section will be an outline of the initial implementation. The initial liquidity deployment aims for simplicity, as the strategies and design goals change over time.
1. Full range position
The basic structure is 0.3% fee full range positions. This will ensure there is always OHM liquidity across the entire price range. It is important to ensure the price cannot dramatically change with a small market buy or sell, as price feeds from the pools are used in other products across the DeFi landscape – most importantly in primary and secondary lending markets.
The initial state of liquidity after the migration will be adjusted closer to the average historic Liquidity/Market cap ratio – from the current all-time-high range at ~0.4 down to 0.15. OHM-FRAX has already been migrated into the [$25, $1500] position defined in OIP-26, and adds near full range liquidity to the OHM-FRAX pair. Exact numbers will be adjusted when the migration is executed, based on current OHM market price.
2. Concentrated positions
Below is a schematic overview of the policy levers enabled with concentrated liquidity. These tools include setting and changing position ranges, and adding or removing liquidity to the full range or a concentrated range.
Fig. Simple scenario to the left, a potential future setup with several pools for a custom liquidity distribution to the right.
3. Bonding into concentrated pools
Liquidity can be added to one or several positions with liquidity bonds. The bonding process is very similar to the current bonding process, with the difference being that tokens are added to liquidity positions in different ratios depending on the position range and current price. This process would be closely monitored by the policy team in order to achieve the appropriate price depth at current prices while catering to liquidity distribution across the full range of price.
Summary of proposal and poll
Option 1:
Option 2: