This document outlines a strategic approach to Liquidity Mining on Neutron. It proposes a definition of the objectives and the parameters at the DAO’s disposal. It also includes a high level roadmap and a lightweight reporting framework.
The goal of this document is to lay the groundwork for a deep discussion on the topic of incentives and their use in accelerating the growth of the ecosystem while optimising the use of the DAO’s NTRN reserves.
To address the timing constraints posed by the upcoming launch of wstETH in Cosmos, a proposal to kickstart the Liquidity Mining efforts via an initial multisig is expected to be published on chain soon. A subsequent proposal is expected to deprecate this initial multisig in favour of a subDAO implementation.
This document invites the DAO to engage in a conversation to define the DAO’s long term vision on the topic of NTRN incentives.
Neutron’s launch event and Stride’s stATOM-ATOM contribution, have quickly propelled Neutron to being the #7 Cosmos chain by TVL with a stable baseline of liquidity, just weeks after launch.
However, the lack of incentives, market malaise and relatively early/sparse DeFi ecosystem deployed on the platform currently see the chain struggling to build on the early momentum and attract net new liquidity.
While numerous initiatives such as covenants with Cosmos Hub, Composable, Stargaze, Osmosis and others are being talked about and may further bootstrap baseline liquidity, it seems appropriate for the Neutron DAO to seek to diversify its user and holder base and strengthen the chain’s economy and governance.
Furthermore, key assets such as wstETH are expected to launch in the ecosystem soon, which will surely create competitive dynamics from projects looking to attract and retain liquidity. To ensure Neutron is able to secure its fair share of anchor assets, to continue to build out the network’s position on Liquid Staked Assets and as the cross-chain DeFi Hub, it seems appropriate to kickstart a Liquidity Mining (LM) program as soon as possible.
Therefore, we summarise the issue at hand as the combination of the following challenges:
- Key liquidity/assets adoption and retention failure risk
- Overspending and/or inefficient LM spending risk
- Timing risk
To address these issues, we propose to kickstart a Liquidity Mining Pilot on Neutron as soon as possible. This proposal first discusses scope, then implementation timelines and iterations of the program, ending with notes on methodology, performance and reporting requirements.
Liquidity Mining has been proven as an effective way to bootstrap initial liquidity (Avalanche Rush, Fantom Foundation, Osmosis’ early stages etc.). Yet it has also been widely criticised as attracting mainly mercenary capital which is likely to flee the ecosystem once the reward rate settles.
While that may be true, case studies show that Liquidity Mining programs can nevertheless produce a positive, statistically significant and long-lasting effect on the overall liquidity in a system.
Beyond forgetful Liquidity Providers (LP), the general flow explaining this observation was described by Gauntlet in its research on the Uniswap protocol as follows:
As noted by Gauntlet, this theory requires 2 things to hold true:
- Liquidity must increase as a result of liquidity mining incentives
- Trading Volume (fees) must increase as a result of the increase in liquidity.
While (1) is pretty straightforward and generally assumed, (2) likely often remain overlooked. To fulfil this condition, the liquidity mining program must either generate additional trading demand (e.g. net new users) or displace existing demand from competing exchanges, whether centralised or decentralised.
Looking primarily at competing DEXes, existing demand could either be displaced from within Cosmos (e.g. trading activity on Osmosis, Crescent, Kujira, etc.) or from outside Cosmos (e.g. from Ethereum mainnet and/or L2s, Polkadot, etc).
While empirical evidence suggests that, contrary to Ethereum, Cosmos traders are fairly insensitive to trade execution, our current hypothesis is that this is likely due to the historical lack of credible competition to Osmosis. This was likely reinforced by the additional friction and latency that IBC transfers induce, which made building efficient routers and aggregators early on more challenging in Cosmos than it was on Ethereum.
If this hypothesis is correct, then the elasticity of traders should increase over time as the Interchain’s infrastructure improves and as Osmosis’ dominance is reduced by the emergence of numerous competing platforms such as Sei, Berachain, Penumbra, etc. As such, seeking to displace trading activity within Cosmos may become an economically rational option.
Nevertheless, since Terra’s collapse, trading activity in Cosmos has been fairly limited, and in any case much lower than in other ecosystems such as Ethereum or Solana. Given Neutron’s mission of growing the Interchain’s economy, focusing on displacing traders from other ecosystems and onboarding them to Cosmos also seems more generally aligned with the project and its partners and surroundings.
We posit that Neutron’s core objectives could be summarised as reaching financial sustainability and establishing itself as the leading cross-chain DeFi hub.
To achieve the latter, it might be tempting to go all-out on incentives and focus on TVL, Volume, Users as Key Performance Indicators (KPI). Nevertheless, doing so comes into tension with Neutron’s other objective to reach financial sustainability, as any incentives distribution should be regarded as an expense.
Therefore, it seems appropriate to also take into account more fundamental KPI such as protocol revenue (defined as the sum of all transaction fees, blockspace auction bids, revenue share from dApps, etc.) and the value of Neutron’s governance (e.g. the importance of the powers bestowed upon Neutron’s governance, the sheer size and importance of the protocol, its market share and influence, its brand, etc).
While typically associated with decentralised exchanges, liquidity mining can be applied to a number of DeFi applications, as exemplified by the fact that the mechanism was initially popularised by lending/borrowing platform Compound. As a DeFi oriented ecosystem, Neutron is therefore likely to have significant flexibility as to what types of protocols the DAO deploys incentives to.
Decentralised Exchanges (DEXs): Swapping is the most fundamental action in any DeFi economy. DEX liquidity for an asset determines execution quality and slippage for traders, integration and liquidation viability for lending and borrowing, and influences both volume and the reliability of price feeds on the network.
Therefore, we recommend to focus initial incentives primarily on bootstrapping DEX liquidity for strategic assets, to attract trading volume and unlock integrations.
Lending and Borrowing (MM, Derivatives): Credit facilities are required to enable capital efficiency and allow markets to express themselves fully (for example via Short positions, which are unwieldy to set up via Spot markets). Lending and borrowing synergises with yield bearing assets particularly well, for example by enabling leveraged staking and yield farming.
Incentivizing credit facilities is more complex to optimise: lending (supply side) and borrowing (demand side) can both be incentivized, and, under certain circumstances, these mechanisms can be abused by looping positions to capture outsized rewards without meaningfully contributing to the network’s economy. To prevent such outcomes, we recommend focusing incentives on the demand side, and to cap the expenditures so as to not make borrowing itself profitable or free.
As the platform evolves, it might be necessary for the DAO to revisit these categories, for example to include NFTs and other DeFi elements that do not directly rely or build upon public liquidity and credit.
To approach incentives distribution strategically, the DAO should only consider deploying incentives to support assets and pools that are likely to synergise well with a number of DeFi primitives, generate new demand or displace existing demand, preferably from outside of Cosmos.
Net new demand is likely to be tied to net new assets, such as liquid staked assets, tokens launched by new dApps or DAOs, or assets that are not currently available in DeFi, such as Real World Assets (RWAs). Displacing demand from centralised exchanges should be the long term goal but is unlikely to be fully attained in the short term as crypto rails still have some catching up to do in terms of performance, user experience and privacy. Therefore, the most immediate target seems to be displacing liquidity from outside of the Cosmos ecosystem, for example by providing Ethereum based traders with better execution, faster confirmations and lower fees.
Therefore, the following categories of asset should prioritised:
- Liquid Staked Assets: LSTs are expected to play a crucial role in Neutron’s economy, and constitute an important schelling point that has contributed to attracting dApp developers to the network. LSTs in Cosmos are relatively nascent, and therefore present an opportunity to attract largely new demand. LSTs outside of Cosmos, such as Lido staked ETH, are much more established, and therefore harder to displace volume for, but also represent a much larger opportunity. As reward bearing assets, both have the potential to serve as fundamental assets to build use cases around.
- Stablecoins: Since Terra’s collapse, the ecosystem has relied mostly on USDC as a trusted denomination of value pegged to the US dollar. Nevertheless, in other ecosystems, USDT pairs tend to feature more volume, and inter-stable swaps generate consistent volume on Curve. As such, there may be opportunities in diversifying the stablecoin offer on Neutron with other centralised and decentralised solutions such as Tether, Frax or Maker’s.
- Other blue-chip assets: such as BTC or DOT, as long as they feature strong, displaceable on-chain demand and/or have valuable integration potential, for example as collateral.
Furthermore, to ensure the LM program contributes to the DAO’s core objectives (protocol revenue and governance value) and to minimise the risk of “incentives extraction”, we recommend that the DAO adopts a stance of “give and take” by focusing incentives on assets and protocols that:
- Match or amplify the DAO’s incentives,
- Deposit their liquidity into the shared ledger of the Duality dex module,
- Share tokens or revenue with the Neutron DAO,
- Provide other benefits or privilege to the Neutron DAO and network,
- And/or have a strong strategic value to the Neutron network.
We propose to earmark a total of 10,000,000 NTRN tokens (1% of the supply, ~$3.5M at the current 7D TWAP price of $0.35 per NTRN) to the Liquidity Mining Program, to be distributed over the course of two years. Unallocated tokens may be reclaimed by the Neutron DAO after 2 years or upon the dissolution of the relevant multisig, subDAO or governance module implementation.
Reward distribution for a given asset would most likely be time bound (in general, 3-6 months) and targeted at supporting the asset’s liquidity until it secures sufficient integrations and organic demand to sustain itself.
|% of commitment
|Value @ 0.35$
Most DeFi protocols today feature continuous delivery mechanisms: the longer the position is held, the more rewards are accrued, and rewards can be claimed at any time. Initially, the program would likely rely on these mechanisms to distribute rewards. Nevertheless, alternative models, such as deferred or locked rewards, should be trialled to identify the most efficient delivery methods and increase stickiness.
A working hypothesis to address retention risks during the initial stages of the program is to incentivize dApps which feature deferred rewards or lock mechanisms.
An example of this can be found in Apollo’s most recent vault design, which requires locking liquidity up in Astroport for a fixed period of time. An alternative could be vested rewards, similar to how GMX handles incentives. Vesting rewards could require remaining committed as an LP or as a native staker.
Deploying some of the incentives there instead of directly over the unlocked liquidity pool could lead to better retention, and/or allow the DAO to clawback excess incentives when liquidity leaves the system.
Before being generalised, this hypothesis should be tested and assessed, as it might turn out to be counterproductive, for example by increasing the perception of risk and decreasing the overall liquidity attracted by a given value of rewards.
Another hypothesis to maximise the value of the program to the network is to deploy earmarked but idle incentives in Neutron’s DeFi ecosystem.
For example, if a project was to commit token incentives to the Neutron network, these assets could be matched with idle incentives from the LM program and deployed as liquidity on Astroport.
The resulting LP tokens could be used as incentives in compatible protocols (for example to perform triple incentives (ASTRO, NTRN, XXXX) on Astroport), and the liquidity being deployed would create additional swap routes on Neutron while the incentives are being distributed.
In an ideal scenario, this liquidity would be sufficient to displace some amount of volume and generate net new activity from autocompounders and other protocols. The trading fees from these use cases might be sufficient to attract external liquidity, enabling the pool to sustain itself even as incentives are distributed.
A final consideration when enabling rewards for an asset or pool is the structure of the incentive expenditure, e.g. the flow of NTRN being distributed at various times throughout the program. Because the program is not intended to deploy incentives in perpetuity, we can identify three periods in a Liquidity Mining operation: the on-ramp, the plateau and the off-ramp.
For the sake of clarity, we can briefly describe each of these phases as follows:
The on-ramp corresponds to the start of a reward campaign, when additional rewards are provided to an asset or pool. This generally increases the reward rate and therefore is expected to lead to an increase in underlying liquidity or activity. There are two approaches to an on-ramp:
- Upfront: the full rate of reward is applied from the get go, before corresponding liquidity has had time to manifest. Existing LPs and first movers secure incredible APRs, which rapidly collapse as more liquidity is lured into the pool. This approach usually achieves significant mindshare, especially in the bull market, as the competition drives LPs to get to the opportunity as fast as possible. The injection of liquidity is front loaded, then plateaus around or trends towards the equilibrium rate of rewards. The overspending during these initial phases can be considerable.
- Stepped: the reward period is broken down into discrete chunks of time, and the amount of reward is adjusted from one period to the next. The shorter the chunks, the more granularly the rate can be controlled, but the more intense the program’s operation becomes, which can increase the risk of error and confuse users. This approach doesn’t not generate nearly as much hype, but can be used to sustain momentum longer. It should result in considerable savings, which can be deployed later on to extend the program.
Given the market conditions, and to sustain the incentives program long enough to secure integrations, the stepped approach appears preferable. Given the complexity of the ops required to manage the program, it would be appropriate to consider weekly reward periods or longer.
The plateau corresponds to the period between the on-ramp and the off-ramp, when the flow of incentives remains stable. During the plateau, and adjusting for general market events and trends, the liquidity and volume is expected to remain somewhat stable.
When designing the reward campaign, the main parameter to be considered with regards to the plateau is its duration: the more complex and numerous the strategically desirable integrations are, and the more difficult displacing volume is, the longer the plateau should be.
The off-ramp corresponds to the end of an incentives campaign. It can either be abrupt (e.g. no incentives are distributed after the last reward period of the plateau) or smoothed (e.g. the reward flow gradually tapers off from one period to the next).
Abrupt off-ramps save tokens, but they also tend to shock the market and can lead to a rapid exodus of liquidity. This is particularly true in the case of programs in which market participants know the program’s duration ahead of time, as they can essentially plan to withdraw their liquidity then.
To alleviate these issues, a smoothed approach should be adopted, whereby the flow of rewards trends toward zero. This allows the program to maintain some degree of flexibility: while the liquidity is expected to decrease as the rewards taper off, it should not collapse entirely.
If it does, that may be an indication that the program has been unsuccessful at generating integrations and organic demand to sustain the asset or pool, in which case whether to extend the campaign or deprecate it should be re-assessed.
Lido’s wrapped staked ETH is set to reach Cosmos this month. According to the criteria discussed in the Target Asset section, wstETH is a strategically significant asset to the DAO: it is a large cap, high profile, reward bearing token widely used in Ethereum DeFi as liquidity and collateral. It would seem safe to assume that competitive dynamics might emerge between projects looking to secure larger shares of liquidity inflow from Ethereum.
Therefore, it would be wise for the DAO to kickstart Liquidity Mining sooner rather than later. Given the time constraints, the first iteration of the program would have to be fairly primitive.
Initially, a simple multisig with a trusted roster could be used, as long as it is duly deprecated in favour of a better implementation. To improve accountability to the DAO, an implementation leveraging Neutron’s DAO/SubDAO architecture should be deployed.
Long term, further R&D should be applied to refining incentives mechanisms and potentially automating them.
To address the timing risk, we propose to bootstrap the pilot with a limited transfer of funds to an operational multisig dedicated to executing on the liquidity mining program. The proposed multisig can be found here. It employs a 3/4 scheme composed of the following signers:
This multisig would be tasked with running the incentives program on behalf of the DAO for up to three months, or until the DAO votes to terminate it and/or establish a dedicated subDAO, whichever happens first.
In order to cover liquidity mining operations for up to three months (e.g. up to 1/4th of the program’s first year), the multisig would be funded with 25% of the program’s proposed yearly allocation (see above), e.g. 1,625,000 NTRN worth approximately $570k at the current 7D TWAP ($0.35 per NTRN).
Any tokens remaining in the multisig upon the establishment of the LiquidDAO and/or termination of the initial multisig would be returned to the LiquidDAO treasury or, by default, the main Neutron treasury.
To improve the transparency and accountability of the program, the initial multisig should be deprecated in favour of a proper subDAO system as soon as practicable.
The proposed subDAO would rely on a cw4 voting module with members and weights similar to how multisig functions. Proposals approved by the committee would be time locked for three days. During this period, the proposal’s message couldn’t be executed, and an overrule proposal would become available in the Agora. If more than 1% of the voting power were to veto the proposal, its execution would be prevented.
To bootstrap LiquidDAO, it would be required to:
- Assemble a strong roster to execute and optimise the program long-term. Beyond reliability, this roster should ideally have experience with managing incentives, some understanding/competency in economics, analytics and/or technical skills, and ideally include grassroot community members who feature these characteristics.
- Refine the incentivization strategy and policy. This should include specific KPI and spending limits, an eligibility checklist and a dashboarding policy to enable real time reporting. Drawing from the experience of experience committee members from other notable incentive programs such as Lido’s LOL/reWARDS or other established DAOs on Ethereum would be recommended.
- Deploy the required contracts and extensively test them to ensure correctness.
- Prepare the executable message (to transfer the NTRN earmarked to the program from Neutron’s treasury to LiquidDAO’s), and transfer any remaining token from the initial multisig.
LiquidDAO and its smart-contracts would be subject to a dedicated proposal and would only be funded if approved by the DAO which, as the admin, would retain ultimate control over the newly created subDAO.
This proposal attempts to describe in some level of detail what is believed to be the optimal approach to a punctual Liquidity Mining program for the benefit of the entire network, at its current stage of development.
Long term, whether or not Liquidity Mining is the most efficient use of the DAO’s treasury should be measured and used to determine whether or not the DAO should continue to commit resources to such initiatives beyond the bootstrapping phase.
Further research is also required to compare the efficiency of trustless, market-led programs (such as Curve’s veTokenomic model), to the performance of expert committees. Assuming they are roughly equivalent, it could make sense for the DAO to develop dedicated modules to efficiently handle such operations.
For the sake of discussion, one such model is presented below. This high level model should be further refined and won’t be ready for deployment for the foreseeable future. We invite contributors to participate in the ideation and review process.
Using DAODAO’s framework and some economic engineering, it may be possible to partially automate Liquidity Mining. The proposed system would resemble the veTokenomic model but function as a module to the DAO, mitigating economic risk and ensuring the program can always be deprecated. It could include the following component:
- Liquidity Pair Voting Vaults: These vaults would allow LPs to obtain voting power in the Neutron DAO by depositing receipt tokens received from depositing liquidity into the system.
- Lock Module for Voting Vaults: This module would enable token holders to lock voting vaults (whether NTRN-only or LP vaults) for a variable duration, in exchange for additional voting power (the longer the lock, the more voting power).
- Gauges for Liquidity Pools: Gauges would allow DAO members to direct the allocation of incentives through voting in gauges regularly.
A very high level description of a potential design was presented at Gateway. The model would be expected to increase the utility of the NTRN token, empower DAO participants and lock-in liquidity long-term to stabilise the system.
To maintain the highest degree of accountability and transparency to the Neutron DAO, while at the same time minimising operational overhead, a three-pronged reporting framework is proposed.
This lightweight framework aims to strike a balance between comprehensive oversight and operational efficiency, allowing the Neutron DAO to confidently back the liquidity mining program while ensuring responsible use of its treasury.
This framework relies on automated reporting, dashboarding and manual exception reporting. It requires fairly advanced data management which may require some engineering as data solutions in Cosmos have not yet reached the same maturity as on Ethereum.
To support their development, the initial multisig and/or LiquidDAO may allocate a limited portion of its tokens to sponsoring the development of business intelligence suites, dashboards and other data management tools to improve transparency and guide incentives allocations.
Monthly automated reports consolidate all on-chain actions taken by the multisig/subDAO and outputs them into an easily understandable summary. These reports might be complemented with notes and writing from the multisig/subDAO.
These reports would capture metrics such as Total Value Locked (TVL), changes in liquidity and volume of the target assets/pools, rewards disbursed, etc.
The summaries would then be published to the Neutron Forum and would be time stamped for record-keeping. DAO members could comment and ask questions directly on the forum.
Secondly, to complement these monthly reports, a real-time dashboard accessible to all DAO members should be established. This dashboard would display key performance indicators (KPIs) in real-time, such as current TVL, volumes, distribution rates, and overall token circulation. The real-time nature of this tool would provide immediate insights into the liquidity program’s performance, allowing for agile governance decisions.
Lastly, to account for any anomalies or unexpected events like drastic liquidity changes or security incidents, an exception reporting rule should be adopted. The multisig/subDAO should be required to document drastic changes in the liquidity or incentives in the form of post-mortem to be published to the forums. Dedicated AMAs could be organised upon community request.
This proposal describes strategic and tactical considerations surrounding a potential Liquidity Mining Program on Neutron. Due to the time constraints described in the Implementation section, a proposal to fund an initial multisig is expected to be published on-chain shortly.
This proposal does not quantify reward expenditure and expected value to the network and DAO. Further preparations should be made in order to ensure that a well constructed model is available to guide token allocations once the Liquidity Mining program starts.
Additionally, given the scope of the proposed budget, it may be wise for the DAO to engage a firm such as Gauntlet, which specialises in quantitative and statistical modelling and has helped the Uniswap Foundation to design its incentives program, to help set up and refine Neutron’s.