As a member of the Lido DAO and core contributor to Delta One, I am submitting a proposal to build an objective-based framework for bootstrapping liquidity on new venues, starting with DEXs on Optimism. Delta One looks to improve the liquidity of stETH by crafting a robust, tailor-made incentive engine that is founded upon data–driven research and a first principles analysis. This proposal stems from the research motivated by the Steakhouse Financial team (outlined in their most recent post), as well as a number of discussions with the Lido analytics + reWARDS committee over the past month.
Delta One is a liquidity management platform that offers data-driven and actionable insights for DAOs to cost-effectively source liquidity. Delta One is non-custodial, fully on-chain, and uses state-of-the-art analytics to keep the community informed.
Delta One aims to accomplish the following objectives:
- Cut liquidity mining costs by moving towards data-driven models for incentive distribution in contrast to subjective decision making.
- Improve stETH-ETH and stETH-USDC liquidity on Optimism in a cost-efficient and lasting manner to help the community make stETH the leading base asset across trading pairs.
- Reduce price impact on Optimism stETH pools to encourage more users to enter positions and participate in the network.
- Take a first principles approach to quantifying the amount of liquidity needed in stETH pools based on demand, and distill this information into comprehensible liquidity scores.
A Novel Liquidity Incentive Engine
The April rewards budget outlines an allocation of ~700k LDO, which is a substantial expenditure for the DAO. We are glad to see the reductions in expenditure across the past few months, but there is still significant room for growth on optimizing the incentive process. Rewards should be carefully used to bootstrap a network, but the underlying success of stETH should be measured by its velocity within the ecosystem; this velocity should make trading fees high enough for LPs to be profitable without additional rewards. One of the goals of this research is to identify when we have reached escape velocity, and which networks need to be seeded with more incentives.
The reWARDS committee has been granted a large quantity of rewards from Optimism, which will start to be distributed in April. Optimism is one of very few chains that is growing in TVL during this market, and we hope to make the most out of this opportunity for the expansion of stETH. If managed incorrectly, the Optimism deployment can become an expensive liability, as mercenary liquidity providers will abandon the network when rewards dry up––the new pools may never reach escape velocity, and future LPs will pay the price.
Delta One will conduct a deep-dive analysis on the current set of liquidity providers on stETH pools, creating a model for rating an LP based on a variety of factors (see specification below). The research and analysis (Phase 1) will motivate a variety of ways for the reWARDS committee to consume these actionable analytics, which we outline in Phase 2. We believe a tailor-made incentive engine can significantly cut costs by rewarding LPs through well-structured principles, rather than supporting ephemeral yield farmers.
While the community has built an impressive set of liquidity analytics compared to most DAOs, we believe mandating an external team such as ourselves can offer a novel perspective on a well-trodden problem. Delta One is committed to working with the pre-existing data frameworks, and iterating with the reWARDS committee to leverage insights from previous experiments.
Phase 1: Liquidity assessment and analytics
- Delta One prepares a dynamic and robust report with the following information
- Liquidity provider distribution of every stETH pool on Uniswap
- Number of total LPs per pool
- Create an incentive framework that encourages future LPs to behave well according to the following parameters:
- Current and historical holding of other liquid staking tokens
- Current and historical holding of LDO token
- Historical performance of stETH LP position
- Liquidity depth of position
- Price range supported
- Historical LP positions to detect volatility (i.e. JIT liquidity)
- Selling of OP and LDO rewards received from incentives
- Liquidity score that encapsulates the above information with a public leaderboard on LPs quality rank
- Pool-level data
- Current and historical sell volume
- Current and historical add/remove volume
- Comparative analysis to similar tokens (i.e. cbETH, rETH)
- First principles calculation of TVL target using data-driven modeling from the above information
- Liquidity per $1 LDO+OP/month
- Weekly incentive budget recommendations based on quantitative modeling pool data (built off any pre-existing work done by the analytics + finance team), broken down by how much each pool across various venues should be rewarded. For instance, if it’s more efficient to give LDO + OP on Uniswap’s wstETH-ETH compared to Balancer’s wstETH-ETH, then the report will recommend an increase in the former and reduction in the latter.
- Portal for existing LPs to receive rewards for answering survey questions about their position
Phase 2: Execute recommendations
- Delta One creates a set of actionable strategies, and works with the reWARDS committee to safely and seamlessly execute the liquidity recommendations
- Based on the analytics from Phase 1, Delta One will propose a governance vote to distribute rewards in a customized fashion, rather than using the AMM’s generic staking mechanism. The LP would not necessarily need to come to a frontend, as rewards can be airdropped to them based on the rubric above (time in range, time in pool, etc.); the implementation details will be finalized after polling community members on a variety of options presented by Delta One.
- If appropriate, Delta One will create an interface to disperse incentives on both a per-pool and per-LP basis. The interface may connect to an optional smart contract (haltable by the Lido DAO community through a vote) to make distribution of rewards more nuanced (locked rewards, variable per hour/day/week based on historical volume). This frontend, hosted and owned by Delta One, will also allow LPs to analyze their historical rewards performance, and receive general guidelines on how to be a better LP.
Phase 3: Continuous optimizations
- Delta One provides continuous incentive management support to maximize growth in a capital-efficient manner to create long-term, sustainable growth across new venues.
- Regular monitoring based on key metrics and market conditions, with consistently updated recommendations.
To cover the costs of leveraging 2-3 data scientists, 1 frontend engineer, 1 designer, and 1-2 quantitative analysts, Delta One requests a 25k LDO and 50k OP grant for a duration of 3 months.
About Delta One
Delta One is a decentralized market making protocol that specializes in set-and-forget liquidity provisioning strategies. We work with a number of leading institutions, trading firms, and protail DeFi users to keep crypto markets liquid and confident. Given our proximity with leading market making participants, Delta One’s network is immensely valuable to DAOs that are looking to take their liquidity management to the next level. One of the major contributors to the protocol is OpenBlock Labs, which is backed by notable figures in the crypto space, including: Foundation Capital, Electric Capital, Circle Ventures, AlleyCorp, and others.
Since its inception in 2021, Delta One has been working with a number of prominent DAOs and institutional players for liquidity management. It has also been audited by top-tier firms, including Halborn, OtterSec, and Neodyme.
The team has backgrounds from Stanford, a16z, Carnegie Mellon, Meta, Palantir, and other top-tier institutions; the highly technical background of our team makes us confident that Delta One is uniquely positioned to tackle a problem of this nature.
Delta One looks forward to assisting in the design of a sustainable liquidity model for stETH across Ethereum and Optimism. This grant will be a great first step towards solidifying a productive relationship for both communities. We look forward to hearing the community’s thoughts, and answering any questions. Thank you for your consideration.