WLEO DeFi Liquidity Pool Incentives | The Geyser Erupts
The first ever WLEO-ETH Geyser Liquidity Pool Incentives have just been distributed.
In case you missed it, our WLEO-ETH pool on Uniswap has reached all-time highs: crossing over $500k USD and on its way to $600k in just 1 month of (re)opening.
Liquidity providers earn a % of all trading fees incurred by the pool. These account for a percentage of the total APY earned by becoming a liquidity povider.
The real rewards come from the Geyser distribution system we built. We started building this back in September and planned to release it after the initial 90d period. Due to some unforseen circumstances, we pushed back the development and then released it on the day we (re)launched the WLEO-ETH pool on Uniswap.
What is a Geyser Distribution Model?
I'm glad you asked. Geysers have become a common tool for distributing liquidity pool incentives to liquidity providers on AMM (Automated Market Maker) protocols on the Ethereum blockchain.
The Geyser we built for WLEO follows similar mechanics:
- Provide liquidity to an AMM pool (like WLEO-ETH on Uniswap)
- Earn LP incentives based on the length of time your liquidity has been staked in the pool
- Rewards are competitively weighted against other LPs: the longer you're in the pool relative to other providers, the higher your % claim on the total rewards pool
While a simpler model would be to simply release a set % APY to all liquidity providers, the Geyser model introduces a greater incentive for being a long-term liquidity provider.
To be successful (earn the highest return), LPs are incentivized to provide liquidity to the pool for as long as possible. As other LPs remove their liquidity or add liquidity after you, your LP incentives will carry an even higher weight over the total rewards pool.
In short, the Geyser distributes monthly rewards to all liquidity providers BUT it gives the highest return to the LPs who have been in the pool for the longest length of time.
It's a very complex model but the benefit it provides is enormous. You can see this just by viewing the amount and stability of liquidity provided to the WLEO-ETH pool today. We spent countless hours and resources developing and refining our distribution system and I think we did an incredible job in the end.
Some kinks had to be worked out (which is why this distribution is 1 day later than intended) but in the end, I'm proud of the model we built. It's one of the most unique Geysers in the entire DeFi realm - primarly due to the cross-chain link between ETH and Hive that we built.
Curation / LP Dynamics and Game Theory
One of the fascinating concepts that I am paying close attention to is the game theory behind being an LP or being a curator (or choosing how you mix the two).
With curation, you earn a dynamic yield. This yield is deterministically based on how much total LEO is staked and being used to actively curate. The more LEO that is staked, the lower the % APY for curation (since there is more competition over the fixed rewards pool).
As less LEO is staked, the opposite is true - a higher % APY for remaining stake since there is less competition.
The WLEO-ETH liquidity pool on Uniswap alongside this Geyser distribution model that we've developed works similarly. The more liquidity there is in the pool, the higher the competition and the lower the APY %.
The geyser is a bit more complicated to keep track of. With LEO staked (curation), you can do rough calculations very easily on the whole system. The geyser, however, ranks particular LPs higher than other LPs based on how long they've been a liquidity provider.
You'll notice from the numbers displayed here for the first 30d of Geyser payouts that some LPs are earning a much higher APY % than other LPs. Many of the LPs are also earning an identical APY. This is because they all pooled on day #1 and didn't modify their position in any way.
Curation Vs. LP
Where these nuances become gamified is when you look at curators vs. LPs.
Many have already asked "what's better? Staking LEO to curate or becoming a liquidity provider?"
The short answer is: it depends.
The ecosystem is dynamically balanced. When more LEO is unstaked, wrapped into WLEO and then provided as liquidity, the % APY for being a liquidity provider goes down.
When more WLEO leaves the liquidity pool, gets unwrapped into LEO and staked for curation, the % APY for being a curator goes down.
As these two APY %s fluctuate, some stakeholders will do the math and see the opportunity either to stake or become an LP. They may decide to move their stake around accordingly and this will cause a rebalancing of the APY dynamics.
LP Yields and Profitability
I think all of us have been blown away by both the number of Liquidity Providers and the amount of WLEO/ETH they are providing to the pool. This increase in liquidity has lowered the overall geyser yield a bit (since there is more competition) but it has added this dramatically heightened price stability as we see WLEO sitting at $0.25+ without much volatility.
The world of DeFi is fascinating. With the newly added Geyser dynamic to the LEO/WLEO token economy, we now resemble other projects that operate in the DeFi arena where economic incentives rule over the economy and create a dynamic ecosystem.
One of the most fundamental concepts to build a growing tokenized economy is to give new/existing stakeholders a reason to buy and hold stake in the token. With the existing model for curation and now the WLEO Geyser model, we've given existing and potential stakeholders a reason to not only buy LEO/WLEO but to actually stake it either as LEO POWER in their leofinance.io wallet or as WLEO liquidity in the Uniswap pool.
Introducing Trading Incentives
This is a fun idea that I got from several members of the community. With the goal of encouraging more active trading in the WLEO-ETH pool, we're introducing a monthly bounty program. We'll test this out by running it for the rest of December, announce a winner on January 1st and then move to set up another monthly bounty at that time based on the results.
More trading volume = more fee APY for liquidity providers and also more visibility and "attractiveness" for our WLEO-ETH pool. Attracting and retaining LPs has as much to do with trading volume (fee APY) as it does Geyser LP incentives.
For the rest of this month, we're going to give away 1,000 LEO/WLEO to 1 lucky trader in the WLEO-ETH pool.
How Do You Enter?
One winner will determined via a random drawing. Every user that places a trade through the WLEO-ETH pool will get entered into the monthly contest. When a user trades in the pool, they will earn 1 contest entry per $100 they trade.
So if a user swaps $400 ETH for WLEO, they'll get 4 entries for that 1 trade (and vice versa for WLEO to ETH).
Every trade is counted for the monthly drawing BUT if your total volume is <$100, you will not gain any entries into the monthly drawing. You could trade 30 separate occasions in/out of the WLEO-ETH pool and each one will be counted based on the total $ figure of your trades. So if you contribute $10,000 in trading volume for the month of December by trading 40 different occurrences, then you'll get 100 entries into the monthly prize pool.
This is something that we've been seeing other projects do on Uniswap. It's similar to having LP incentives but incentivizes another key component for AMM (automated market maker) protocols: trading volume. If these monthly drawings go well, we may scale them up and offer varying rewards. Let's see how this impacts our trading volume for the rest of December.
If you traded any time from Dec. 1st to today, your trades will also be counted for the month of December
Why Does My APY % Go Down if I Add Liquidity?
It does and it doesn't. In terms of the total APY % on your total pooled position, yes the total APY % looks lower on paper. This is because your total liquidity position is being displayed rather than being broken into separate parts. In the geyser backend, you actually have multiple liquidity pool positions coexisting to form a weighted position.
If you sit down and dive deeply into the mechanics and implications of how these weighted positions work, you could spend countless hours sifting through the data and playing with various scenarios (trust me from first-hand experience as I designed and simulated these mechanics). Here, I'll just give a brief overview from a bird's eye perspective so the total APY % figure makes sense.
For example, if you pooled some liquidity on day 1 and then added more liquidity on day 3, then you now have two positions. Day 1 liquidity and day 3 liquidity. The APY % for day 1 will be identical to that of someone who pooled on day 1. The day 3 position will have a slightly lower APY % because it's been an LP for a shorter duration relative to other LPs.
The math behind this gets pretty complex but the simplest way to understand is to think of an investment that you make. Let's say you buy $100 worth of BTC on January 1st. 1 week later, you buy another $100 worth of BTC to add to your original $100. However, the price of BTC is now 25% higher than it was when you originally bought. This means that you now own $225 worth of BTC. If you took the total % return on all $200 you invested, the % return would be 12.5% since you diluted the total position from $100 to $200.
In reality, you earned the same $25. On paper, it looks like your % return is lower. The geyser works similarly: if you add liquidity later, it may make your total APY % seem lower on paper, but in reality you are earning a greater return and the APY % on the original position is not impacted whatsoever by the liquidity you added later on.
Is it Too Late to Become a Liquidity Provider?
No. As outlined above, I find the game theory behind becoming a liquidity provider to be fascinating. As the yield fluctuates and other life circumstances happen, it is likely that other LPs may drop out of the pool. As these LPs leave the pool with some or all of their liquidity, the remaining LPs earn a greater yield (since there is less competition).
Due to the time weighting of positions, you can imagine that a long-standing LP (someone who was in the pool on day 1, for example) leaving the pool would reduce competition to a large degree. Imagine if that LP also had a relatively large position size. The APY % could increase by several % overnight.
Even if another LP (or group of LPs) then decided to add more liquidity after that person left, they would then be fighting against time to some degree. It would take a while for their time weighted position to catch up relative to the total staking time of the pool.
Again, there could be hundreds of posts made about the dynamics of becoming a liquidity provider under the context of this geyser model. I plan on making a lot of posts and will continue to share the mechanics and economics behind the geyser model so that others can make posts and openly discuss the fluctuations and other dynamics. This is an incredibly fun system to watch play out in real-time.
To answer this question (again), if you want to be an LP then waiting is a bad option. You want to pool as early as you can because the geyser is a competitive system based on how early you enter the pool and how long you remain a liquidity provider.
One of my favorite quotes:
"The best time to plant a tree was 20 years ago. The second best time is now.”
The best time to pool was 30 days ago. The second best time is now.
What Are the Long-Term Implications of the Geyser?
Geyser V1 has a lot of long-term implications for the LEO/WLEO token economy. Throughout 2020, it's become clear that DeFi-based AMM (automated market maker) protocols are not going anywhere any time soon. In fact, they're likely to continue their meteoric climb as they eat up market share from centralized exchanges.
Having WLEO listed on the #1 AMM protocol in the world (Uniswap, currently) AND having a deep liquidity pool (currently over $500k USD in depth) brings an incredibly positive effect to our community. We've already seen what it has done in terms of the "tradability" of the LEO/WLEO token and we're now seeing the longer-term dynamics take hold in terms of being priced against ETH as opposed to HIVE.
Since WLEO has the largest depth of liquidity on Uniswap (compared to our native exchange on Hive - https://leodex.io) and is paired against ETH, the LEO/WLEO price is largely determined by Uniswap. When our price on Uniswap rises, the LeoDex price of LEO rises to meet it or vice versa.
There is now a direct arbitrage between LEO/WLEO. There are a handful of savvy traders who have already figured this out and are continually arbitraging the LEO/WLEO prices by purchasing WLEO on Uniswap, unwrapping it to LeoDex and selling it or vice versa - selling on Uniswap and buying on LeoDex.
Early in 2021, we're going to launch one of our first major CEX listings. This will add a 3rd dynamic to this price relationship and open up even more arbitraging opportunities (which also does an important job of bringing in traders and daily trade volume).
The Geyser is the key to this entire system. I (Khal) wrote a post from my personal account a few weeks back talking about Liquidity Black Hole Theory.
The concept is simple: by having a form of liquidity incentives (like the WLEO geyser), you attract early liquidity providers to the pool. These LPs are necessary in order to have pool depth and trading volume. As trading volume comes in, it becomes even more profitable to become a liquidity provider. As more people become LPs, the trading volume increases due to their actions and also traders who see a deeper pool to trade in/out of. So goes the virtuous cycle of liquidity and trading volume.
The geyser is the centerpiece to that ecosystem.
What is the Average Return for Being a WLEO-ETH Liquidity Provider?
There are 3 ways that LPs make money:
- Net asset values increase
- Trading Fee Rewards
- Geyser Rewards
You can see the above images for the overall view of different LPs and their average gains. The average return amongst LPs over the past 30 days has been ~29% in net market gains (from the appreciation in value of ETH and WLEO). This means that the average pool position is 29% more valuable today as compared to 30d ago when the pool launched.
In terms of yield, the average APY for LPs was 17.18% (when you take the last 30d and annualize the ROI). This is an impressive - and importantly, sustainable - yield.
As mentioned above, the dynamics between curation and liquidity providing is going to be fascinating to watch over the coming months. The average time in the pool for our LPs is currently 27.804 days. This means that the majority of liquidity providers have been in the pool since day 1 and have not removed their liquidity.
Since this is essentially a competition to see who leaves their liquidity in the pool for the longest period of time, if any LPs remove their liquidity, then the overall competition will decrease greatly. The Geyser ecosystem we've built has some fun game theory built in - essentially a game of chicken.
The longer you hold your position, the higher your rewards. As other "players" (LPs) drop out of the game, your ROI increases. This is the entire point of a Geyser: incentivize long-term Liquidity Providers with the highest % returns.
Wen Geyser UI
A few people noticed the domain we acquired for the new Geyser UI. We'll launch this UI in ~Q1 2021 and it will introduce an interface for viewing and managing Liquidity Pool positions and the projected Geyser yield from them. This is a crucial step for getting new LPs outside of the Hive ecosystem (since it will clearly explain the yield model to those unfamiliar with our project).
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