This proposal outlines a path forward for rETH liquidity on Uniswap V3. This is both a governance proposal and a partnership proposal. We are putting forward our capital markets platform, xToken Terminal, as the service provider for rETH liquidity incentivization. Terminal allows projects to deploy a highly configurable Uni V3 LM program in a matter of minutes, no dev work or technical expertise required. Terminal is permissionless and rigorously tested, providing an out-of-the-box solution that saves projects time and money.
Back to rETH. Currently, rETH liquidity on Curve is fairly strong with 22k rETH paired against 6.5k wstETH, facilitated by Convex-routed incentives. Balancer liquidity is solid as well, with 3.2k rETH paired against 3.5k ETH. (All values as of May 9th.)
While there is a nontrivial amount of rETH liquidity on Uniswap (1.3k rETH paired against 550 ETH), there is room for improvement. In order for rETH to compete against other ETH liquid staking providers, we should maintain a substantial amount of liquidity on Uniswap V3, the highest volume and most capital efficient DEX.
Designing an LM Program
While Uniswap V3 offers major advantages for traders and LPs, it comes with give and takes that are important to understand in designing the best liquidity incentivization strategy for rETH. Additionally, there are considerations that come with any liquidity mining program that are worth discussing.
In designing an LM program, we first need to understand what we’re optimizing for. After a few weeks gauging community sentiment, we believe these are the community’s top priorities:
- #1: Maximizing capital efficiency
- #2: Limiting opportunity cost
- #3: Minimizing gas costs
With these priorities in mind, we can establish the key decision points for the program:
- #1: Asset pair
- #2: Range concentration
- #3: Rebalance/migration frequency
Interestingly enough, the decision on point #1 drives the logic on points #2 and #3.
So, what asset should rETH be paired with? The Curve pool is paired with wstETH - a wrapper for Lido’s liquid staking asset - and the Balancer pool is paired with vanilla WETH. These are likely our two best options for the Uni pool.
The arguments for vanilla WETH are:
- Highly liquid and accessible with negligible smart contract risk
- Doesn’t force LPs to have exposure to a competitor’s asset
The arguments for wstETH are:
- No opportunity cost as both sides of pair are earning staking returns
- No rebalance or pool migration requirements as wstETH and rETH should not diverge materially in price ratio
No matter if we choose WETH or wstETH, the price range we choose on the rETH pair will be highly concentrated. However, due to the fact that wstETH and rETH are unlikely to deviate in price, we can comfortably set a more concentrated range than on a WETH pair.
In the case of the WETH pair, rETH slowly gains in price on WETH, meaning that our price range will likely want to consider some slack to the upside. But because rebalancing liquidity requires some technical expertise, the initial version of Terminal does not allow pool sponsors to “reposition” their price range (more on this later!), as this can be complex and inadvisable depending on liquidity conditions. This means that LPs would need to migrate their liquidity to a new pool with a new price every so often, depending on the concentration of the range. LPs may not be happy about needing to spend gas to migrate liquidity every so often.
As mentioned above, a wstETH pairing would be unlikely to require any rebalances or pool migrations, because wstETH and rETH should move roughly in line with each other.
On a WETH pair, the frequency of pool migrations would depend on how concentrated the price range is. The more concentrated the range, the more frequent the requirement for migration.
This is a bit of a quagmire, because we don’t want to require that LPs manually migrate their liquidity every so often. Additionally, we want liquidity to be as concentrated as reasonably possible.
This challenge is exactly why we have begun development on the Rebalance CLI - a new feature that we’re announcing here publicly for the first time. We realized that for xToken Terminal to reach its full potential, we needed to empower projects with the ability to reposition liquidity without requiring their LPs to manually migrate. The CLI is best-suited for pools with concentrated price ranges on asset pairs with sufficient external liquidity (outside of Uniswap). A rETH<>WETH pool fits the use case perfectly.
For reference, management of Terminal pools is entirely non-custodial. We (xToken) do not have any control or influence over deployed pools. We’ve implemented a number of careful safeguards into the CLI in order to ensure an effective rebalance. However, this feature would need to be operated by the Rocket Pool team and/or community.
Incentives Program Proposal
In light of this analysis, we’re proposing a highly concentrated rETH<>WETH pool (0.05% fee tier), with the benefit of the Rebalance CLI for seamless liquidity repositioning. For the initial trial period, we’d like to propose 400 RPL in rewards over 10 weeks. This should provide an opportunity for the community to get comfortable with the program as well as attract sufficient liquidity to effectively demonstrate the Rebalance CLI. Towards the end of the program, we will do an analysis of the program and open a discussion on whether to extend it. If the community is in favor, Terminal allows sponsors to renew rewards on a pool in just a few clicks.
Those who are familiar with the previous version of our project know that at our peak we managed over $100m in assets, specializing in native staking strategies and later getting into liquidity strategies. In fact, for several months after Uniswap V3 launch, we were the largest provider of Uni V3 managed liquidity (peaking at $25m). Those who are familiar with our project also know that we had security incidents in spring/summer 2021, related to our deprecated asset management product line. Since then, we’ve bolstered our security practices and have developed a rigorous and intentional process. Additionally, the Terminal liquidity mining contracts have been audited by ABDK, have been the subject of an Immunefi bounty program for several months and have undergone several months of internal review.
Appendix: Some Basic Math on Uniswap V3
It’s well understood that incentivizing a rETH pool on Uniswap V3 would be much more capital efficient than a similar incentive on Uniswap V2. But how much more?
Let’s start with some assumptions:
- Rocket Pool pays out $1000 in incentives per week on a rETH<>WETH pool
- LPs demand an APR of 10%
- There is no other liquidity in the Uniswap pool besides for the incentivized liquidity
- For simplicity, 1 rETH = 1 WETH = $2500
- Our Uni V3 range will allow for 0.25% price deviation in either direction (tick range of [-30, 20])
Under these assumptions, both a Uni V2 and a Uni V3 pool would accumulate slightly more than $500k in TVL (~104 rETH + 104 WETH).
Now to test the gains in capital efficiency from V3. Say you wanted to exchange 40 WETH for rETH:
- On V2, you’d receive 28.83 rETH
- On V3, you’d receive 39.96 rETH
Even on a small scale, you can see the massive gains that come with concentrated liquidity. V3 yielded 39% more rETH in this case!