As we are discussing upcoming token transferability event, we also need to support the launch via liquidity on CEXs and DEXs. Morpho Association has expressed confidence that they can reach market makers on CEXs through their existing connections but a DEX strategy is less clear. This post discusses ideas for a DEX strategy and recommends a path forward.
Goals
Ensure ample liquidity depth in a DEX, with reliable, low-slippage price execution, on both Mainnet and Base
Set up an on-chain oracle with quantifiable economic manipulation costs
Enable a Morpho Market to use MORPHO as collateral
Ideal Scenario
If we could snap our fingers and magically solve all three of the goals above, it would probably look something like a deep pool on a DEX that is backstopped by the DAO’s liquidity and provides a built-in oracle that is (gradually) economically-impractical-to-manipulate.
Unfortunately, this is difficult to achieve today for various reasons:
For the DAO to create a deep, wide-range position in a DEX, it needs the “other” token: WETH or a stablecoin. How does it acquire that without an explicit sale?
Except in pools with extremely deep liquidity (like ETH-USDC-5bps), Uniswap v3 Oracles are economically manipulatable. Uniswap v4 with Hooks will provide a new platform to explore better oracle designs like a Truncated Oracle. However, v4 timing is still a few months out.
Lastly, MORPHO markets can’t be created unless there is a reliable oracle. Which requires a healthy market of trades for the token. Chicken and egg problem.
Given that the timeline for token transferability is sooner than than Uniswap v4 launch (not to mention additional time beyond the launch to battle test the new protocol), here’s a simpler proposal for DAO’s consideration.
Proposal
In lieu of Uniswap v4 and without an easy path to acquire the “other” token, we recommend a liquidity mining program on Uniswap v3.
Identify a single pool (ex: MORPHO-WETH-30bps) on Mainnet and Base
Set aside MORPHO tokens (amount TBD) over 6-12 months to incentivize in-range liquidity
Setup an off-chain script to calculate rewards and allow periodic claims (either through Morpho App, Merkl or another frontend)
FAQ
Q: Why do we need to use an off-chain script, instead of Uniswap v3 Staker?
Unfortunately, the Staker has been shown to be trivially gameable: OneTickDAO.eth and the Narrow Rangers | by Revert Finance | Medium via flash liquidity. With off-chain calculations, we can setup parameters like minimum range to discourage one tick wide liquidity positions or require positions to exist for more than X blocks to reward long term providers.
Q: How do we figure out how much rewards to give and for how long?
We request comments on the optimal reward allocation. Gauntlet has experience in this area, and others are also encouraged to give input.
Q: What happens after this program ends?
After 6-12 months, we believe Uniswap v4 will have launched and had a few months “bake-time” so we can explore other ideas mentioned above. In addition, projects like Doppler that are built on top of v4 can also be considered.
Q: Could we not use a Morpho Market to source the “other” token?
That would be amazing. We can imagine a setup where Morpho DAO locks up a portion of its token in a Morpho Market, borrows against them and adds it to the DEX in a wide-range position. It could use the LP fees to pay interest to Morpho Market or over time start accumulating the “other” token for its use. Unfortunately, this requires a price oracle - thus an already existing market for the token. Chicken and egg again.
–
Thank you and looking forward to feedback from the community.
PS: As it’s my first time posting, I was limited to two links in the post :). Happy to provide links out via replies.
Onchain products generally don’t have a great plan for supporting their onchain liquidity, so it’s great to see some discussion on this point ahead of time.
Currently this is not easy, but Uniswap v4 and forthcoming liquidity app improvements should make this easier! As a team who focuses on liquidity apps, we would agree that this is likely the best bang for your buck currently before Uniswap v4 has gotten time to “bake”.
We would love to continue this conversation over the next coming months to see where the existing points of difficulty for this exact feature set are!
Those sound like good ideas.
In general, for a protocol of the standing of Morpho, you need several liquidity sources, and ideally presence on several chains.
Due to its market dominance, it is quite impossible to avoid Uniswap, at least a v3 pool, probably using Merkl for reward distributions.
Besides that I would also advise having other sources of liquidity, to generate volume from arbitrage, and benefit from cheaper liquidity. Indeed, in the current state of the market, v2 or v3 pool on Pancakeswap (even on mainnet), or a crypto pool on Curve (could imagine a triMORPHO pool with MORPHO, ETH and USDC/T), both those platforms see between 2x and 3x vote incentive efficiency. That means that 1$ of incentives spent in vote incentives leads to 2-3$ of CAKE/CRV incentives going to the pool, so the same amount of rewards could bring 2/3x more liquidity than on Uniswap for example. I think this is something we cannot overlook.
There is also the new Cowswap pools deployed on Balancer with value extraction protection, which might be interesting. Would need to check out how they perform.
Finally, as to how rewards are allocated, I believe (as I said before in this post) that the most efficient way to allocate them is probably through votes using the veTKN gauge mechanism.
Hey guys, interesting discussion. I do feel the ideal scenario is not as far fetched as the OP believes.
Creating deep liquidity for projects is actually our speciality at Paladin. This is done through incentivization. It’s always a bit more tricky for unreleased token as demand isn’t quantifiable yet. However, MORPHO is likely one of the largest launches of the coming few months and large visibility is expected.
Uniswap v4’s launch is actually much closer in terms of launching than what OP believes. We’ve built a hook specifically to distribute incentives there if the Foundation and governance believes it is the best venue.
A MORPHO market is an interesting idea only once liquidity has sufficiently scaled (borrowing needs to be capped at most at 10% of total market liquidity), but I would like to see it operated by a Morpho aligned entity (Association, Labs or DAO) to re-roll profit into Protocol Owned Liquidity. This would enable Morpho to progressively move on from the need of incentivising liquidity.
In term of oracles, I recommend looking at Redstone. They offer solutions for projects meeting the minimum requirement of three pools each having 1M$ of liquidity depth, which is easily achievable for relatively low budgets.
Additionally if the Association has the right connections with market makers I recommend them to include in their contracts the spread management of DEX liquidity as well, which would enable to have very efficient pools despite their multi chain nature.
I wanted to contribute because I found several essential protocols, ideas, and concepts lacking in the current conversation.
First, let’s start with Base, as building and sustaining liquidity there will be much easier than on mainnet. On Base, Aerodrome is a necessary choice to explore for liquidity building, as it captured most of the TVL on the chain and now even matches Uniswap in volume while offering exciting solutions for projects looking to grow and sustain their liquidity. It can help address all three objectives targeted by this proposal.
The need for constant product liquidity
Yes, CL is excellent and efficient, but it has many limitations often overlooked: easier price manipulation, price void zones, more complex for LPs, more onerous and complicated LP incentivization, less composable LP tokens than constant product, etc.
Reading the objectives of this proposal, they highlighted to me a need for a constant product (v2 / x*y=k) pool; here’s why:
It allocates liquidity all along the price curve, making it much harder to manipulate the price and remarkably easier to compute the manipulation cost to a specific price based on the current pool TVL. Since the whole price curve is covered, it avoids situations where the liquidity allocated is slim or non-existent, which are the most dangerous if MORPHO is to be used as collateral.
Since constant product pools do not require liquidity providers to monitor and manage their position, their incentivization tends to be less costly and more sustainable.
CL can still be harnessed in another pool for maximal liquidity efficiency and pairs nicely with having a solid base of constant product liquidity.
How do we accrue the pairing asset? Option 1 - oToken
Currently, there are no/minimal ETH reserves and, thus, no potential pairing assets. However, the launch campaign could be designed to harness the option token model. The implementation would be straightforward:
Instead of being airdropped “raw” MORPHO, farmers receive oMORPHO - “Option Morpho.”
oMORPHO is an option to buy MORPHO at a discounted price, for instance, 50%.
As farmers redeem their oMORPHO into MORPHO, ETH is accrued, which can be paired with MORPHO to grow Protocol-Owned Liquidity.
The above would require a minimal initial baseline of liquidity for MORPHO/ETH that can be sourced through various means but then ensure that the liquidity can grow (assuming MORPHO tokens are granted to be paired with ETH obtained and supplied as liquidity).
How do we accrue the pairing asset? Option 2 - Genesis Event
Depending on the time available until MORPHO is made liquid, we can consider other options to ensure a smooth MORPHO launch with sufficient liquidity. For instance, Gearbox explored an exciting model with its Cider event.
However, this approach does not capture permanent liquidity but ensures that sufficient liquidity is present at launch
Alternative solutions to deepen permanent liquidity without needing the pairing asset
On Base, and thanks to the Aerodrome model, we can envision other pathways to permanent or sustainable liquidity.
Acquiring AERO to lock as veAERO and secure incentives to MORPHO/ETH on Base
The first and most obvious is for the protocol to secure a veAERO position, allowing it to direct AERO incentives to the MORPHO pools on Aerodrome and earn its share of the trading fees these pools generate.
Several pathways are possible here:
Morpho Relay Incentivization is a strategy where relays, which are veAERO voting strategies that anyone can easily join by delegating their veAERO to, are deployed for Morpho-related pools. Users who delegate their veAERO to these relays are incentivized with MORPHO tokens. This strategy gives the DAO voting power, enabling it to adjust its allocation weekly.
Deal(s) with veAERO Whales: The DAO can approach veAERO whales to strike a deal to secure a voting baseline allocated to MORPHO-related pools in exchange for MORPHO tokens. It’s similar to solution 1, although not public and with likely fewer parties involved.
Direct Acquisition: veAERO is NFTs and transferable. The DAO could look for a counterparty willing to exchange veAERO for MORPHO tokens. This is usually not an option for newly launched tokens, but it can be explored considering Morpho’s reputation and achievements.
Morpho Protocol Strategy to Accumulate AERO: considering that Morpho is a lending protocol, we could also envision AERO-related strategies designed to help the DAO accumulate AERO. For instance, AERO could be enabled as collateral on Morpho(considering it has >$150M liquidity onchain, it is safe) in a custom market, which would capture a share of the interest rate paid. MORPHO incentives can be considered to make up for the LP loss.
Similarly, the top-TVL Aerodrome liquidity pools could also be enabled as collateral, enabling LP to leverage their exposure, and similarly, the DAO to capture a share of the interest paid (would require custom development to support LP staking as collateral)
Building and sustaining liquidity on mainnet
Unfortunately, there is no Aerodrome on the mainnet. Alternatives exist, such as Curve or Balancer, but their model is much more convoluted, and their bribe efficiency is much lower; to put it simply, replicating a strategy similar to the one I suggest for Base on the mainnet would be much more costly, if even possible.
In terms of venue, on the mainnet, Uniswap (even “just v3”) remains the dominating and preferable option. Several ready-to-use options are available there to incentivize liquidity providers, such as Merkl, though they involve offchain computation and a service fee.
This is where the option model would prove interesting, as it ensures that the DAO can grow ETH reserves when oMORPHO tokens are redeemed, independent of the DEX used for liquidity. It enables an increase in the protocol-owned liquidity over time. Moreover, since this liquidity would be protocol-owned, it will be much easier to move it when needed, such as while migrating from UNIv3 to UNIv4. This adaptability of our strategies ensures the flexibility and resilience of the MORPHO protocol.
What the end-game could look like
Before wrapping up, I’d like to share a vision of the future if the right strategies are implemented now. This vision is based on the potential benefits of the proposed strategies, which could significantly enhance the liquidity and stability of the MORPHO protocol.
Assuming:
Implementation of the oMORPHO
Development of an Aerodrome strategy
UNIv4 will be released in a few months
On Base, the Morpho DAO controls a sizable veAERO position accumulated thanks to a protocol-level strategy. It supports a MORPHO/ETH constant product pool, ensuring a solid baseline of several million dollars worth of full-range liquidity, making the MORPHO price harder to manipulate. A secondary MORPHO/ETH or MORPHO/USDC CL pool is also supported to minimize slippage for traders.
Thanks to its voting and oToken model, the Morpho DAO earns most of the trading fees collected on both pools. These fees are compounded into MORPHO/ETH and MORPHO/USDC protocol-owned liquidity positions, securing a growing liquidity baseline while helping the DAO accrue AERO weekly and increasing its voting power.
On the mainnet, with the harnessing of the option token model during an exciting and anticipated launch, the DAO was able to secure a sizable amount of ETH early on, enabling it to supply a UNIv3 MORPHO/ETH (wide range) sizably.
With the launch of v4, the pool was migrated, and now, it harnesses a custom hook that collects its trading fees weekly and re-allocates them as liquidity mining for external liquidity providers. This model ensures an outstanding balance:
The DAO liquidity supply guarantees a baseline of wide-range liquidity.
When trading activity picks up, the fees collected increase, and thus, the liquidity mining incentives posted also increase, helping to attract more external liquidity.
Parting Words
Liquidity management and incentivization are complicated and intricate topics that should not be overlooked. Liquidity-related decisions can make or break protocols. The recurring mistake we see projects making over and over again is to treat liquidity building as a cost, while in our perspective, it is an investment. Expenses are unavoidable early on, that is certain; however, with the right strategies implemented and a willingness to invest resources in the endeavor, especially early on, the costs of liquidity building can be progressively lowered, and overall, the activity can even turn into a profitable one.
A DAO/governance forum is not the ideal location for it to take place since, as you can see already, builders of various liquidity-driving-related tools quickly show up to suggest their solutions, with often minimal consideration for what is ideal for the DAO over the long term. I work at the DeFi Collective precisely to address this concern, helping maximally decentralized projects handle tricky topics such as this one. The DAO should bring knowledgeable profiles to handle such matters, as the ideal solution will likely not be devised through back-and-forth governance forum conversations.
Good luck, Morpho community, with the MORPHO genesis event and liquidity strategy; please tread carefully there. I would hate seeing Morpho becoming another “amazing protocol, useless/wasteful token” project.
Great to see chads of the DEX liquidity space like TokenBrice and Figue sharing their recommendations on the topic!
The structure of TokenBrice’s post in particular gives a good framework to continue this discussion.
Imho it might be helpful to structure the approach in considering each phase/sub-topic separately (even if they’re obviously interconnected / feeding each other):
The seeding of DEX liquidity (aka genesis / initial stage)
The discussion above already gives us a good list of questions to address:
DEX liquidity on what chains: on Ethereum and/or Base?
since MORPHO rewards are claimable on Ethereum and on Base, a DEX strategy for both chains seems sensible.
And with TokenBrice input above, the DAO would already have a (very) good basis for its DEX liquidity strategy on Base…
(1) Regarding items for the seeding / genesis:
what pools at launch on which protocols?
full-range and/or CL?..
when/how do these pools get created?..
how to attract the pairing asset?
the oToken approach is smart in that regard. Contango has just announced they’re using it. But it seems to be a better match for airdrops (like after a points campaign), whereas in the case of Morpho, the protocol has been distributing MORPHO tokens already…
there are a variety of liquidity bootstrapping events (the Cider one of Gearbox was smart but maybe too complex), quite a few innovations happening in that regard…
Link to veToken discussion:
Hubert has been advocating for a veToken approach.
This ties (too) well into this DEX liquidity discussion, since eg. Balancer enables this with their ve8020 tech (used by Aave among others…), with its pros & cons of course
(2) Items for the “maintenance” part of DEX liquidity:
Investment / Acquisition of voting power in relevant protocols
on Base: acquiring AERO (as suggested by TokenBrice above)?
on mainnet: acquiring CRV (CVX & others)? BAL (AURA & others)?…
Incentivizing DEX liquidity post-genesis:
currently the Merkl app is a proven 3rd-party tool that would allow the devs to focus on the protocol
uni v4 is likely to change the landscape considerably (and sooner than we think)
Also as duly noted by TokenBrice, some of these items are quite complex and strategic.
I’d be surprised if the team hadn’t formed advanced thoughts around one or the other (cf. Figue’s note on market makers)
Maybe it makes sense to focus the support of the community on 1 particular aspect?
i.e. something that can easily be voted on by the DAO and implemented in a trustless way?…
Thanks everyone for your comments so far. A few thoughts:
While I imagine there will be interest in an oracle for MORPHO, this is likely something risk curators can tackle independently without input from the DAO.
Uniswap v4 is an exciting protocol, but given that transferability discussion for MORPHO is currently underway and it is not yet released, it may be best for any Uniswap incentives to start on v3 with migration to v4 considered in the future.
Overall, it seems like a good approach to set up a pilot program with incentives on both Uniswap v3 (concentrated range using a solution like Merkl) and on Aerodrome (full range, easier for a wider group of users to participate, and with a “multiplier” effect on incentives spend).
I’ve reached out to request data to assist the community in deciding on an appropriate budget for this program (including per DEX, and mainnet vs Base), which I anticipate will be shared here this week.
Kudos to those who have already pointed out that we can expect Uniswap v4 to launch within the next few weeks, not months. Bunni v2, built on Uniswap v4, offers a far more efficient and sustainable path forward for MORPHO’s DEX liquidity needs on Mainnet.
Here’s why Bunni v2 is a great fit:
Uniswap v4 Readiness : With Uniswap v4 coming soon, Bunni is fully prepared to take advantage of its new infrastructure. Bunni v2 is built to harness these features right out of the gate, making it the ideal platform for MORPHO liquidity.
Rehypothecation for Extra Yield : One of Bunni v2’s key advantages is its hook to deploy idle liquidity outside the current tick to generate additional yield from platforms like Morpho. This creates a natural source of extra yield for LPs, even before any incentives are applied. It would make sense to send idle ETH from the pair to Morpho adding to Morpho TVL.
Dynamic & Programmable Liquidity : Bunni v2 offers liquidity shaping and shifting, which allows LPs to programmatically manage their positions without needing to reallocate manually. This is more customizable and efficient than what the market currently offers.
am-AMM for Optimized Fees : Bunni v2’s optional am-AMM feature lets LPs earn rent in exchange for swap fees and the right to set pool fees x.com. This helps reduce losses from arbitrage and increases LP profits.
Truncated Oracle Solution : There was some concern raised about oracle manipulation on Uniswap v3. Bunni v2 already addresses this with our Truncated Oracle, which is the TWAP oracle used in Bunni v2 pools. By limiting the number of ticks a new oracle observation can deviate from the last one, and controlling the minimum interval between observations, we provide a more secure and reliable oracle that minimizes the risk of economic manipulation.
By focusing on Uniswap v4 and Bunni v2, Morpho can ensure deep liquidity, low slippage, and better capital efficiency without needing to use incentives long-term. This approach is not only more sustainable but also positions MORPHO to be one of the first projects to take full advantage of Uniswap v4’s upcoming launch.
A ve8020 could be a good idea indeed! Didn’t thought about that, but it ensures deep liquidity for sure, as well as being even further from anything like a security.
Personally I don’t belive the oToken model would suit a blue chip protocol like Morpho: need something more vanilla imo.
I agree breaking this into subtopics would make things more manageable. The proposal has a lot of good things to work on, but it might be a lot for one thread.
Hey everyone, Methodic here - contributor @ Aerodrome.
Building a liquidity program on Aerodrome rather than Uniswap is a no brainer.
A liquidity program is simply much more impactful on Aerodrome than Uniswap. For every $1 in voter rewards (fees and incentives), LPs typically receive $1.50-2 worth of rewards. That means for the same amount of fees generated or incentives deposited on Uniswap, Aerodrome would produce 1.5-2X deeper TVL or 1.5-2X higher APRs for LPs.
The sheer amount of volume that has shifted from Uniswap v3 to Aerodrome’s concentrated liquidity implementation, “Slipstream” from the past 6 months also supports this. Aerodrome’s share of concentrated liquidity volume grew from 20% vs Uniswap v3 to now around 90%. Aerodrome also hosts 5X more liquidity than Uniswap and more than 50% of all TVL on Base - see here.
Aerodrome also offers protocols a unique opportunity to become active participants in its model. As @TokenBrice mentioned above, Morpho can acquire a veAERO voting position through various pathways to vote on its MORPHO pool and direct AERO rewards to it. veAERO voters receive 100% of fees and incentives for pools voted on, proportional to their votepower. Morpho could then deposit its veAERO position into a Relay vault which automates the entire process of weekly claiming of rewards and compounding into more veAERO, which means more AERO rewards for LPs and deeper liquidity, whilst growing Morpho’s share of voter rewards received every week. Aerodrome runs a monthly program called “Flight School” which incentivizes veAERO locking and reduces the net cost for protocols to acquire/grow their votepower.
Finally, Aerodrome offers protocols strategy and marketing support which Uniswap does not, a much more LP-friendly UI, and optionality for LPs i.e. stake and earn AERO or unstake and earn fees.
The entire Aerodrome community is looking forward to supporting MORPHO liquidity on Base.
We believe integrating Balancer’s 8020 model utilized by DAOs such as Balancer, AAVE, Radiant, Alchemix, and others could be a great option for Morpho - particularly in achieving your liquidity goals while navigating some of the constraints mentioned.
In this post, we’ll focus on the goals mentioned by the OP:
Ensure ample liquidity depth in a DEX, with reliable, low-slippage price execution, on both Mainnet and Base
Set up an on-chain oracle with quantifiable economic manipulation costs
Enable a Morpho Market to use MORPHO as collateral
For #1, 80/20 pools have a variety of advantages which include but are not limited to:
Deep Liquidity: While single staking reduces a token’s available swap liquidity, ve8020 directly increases it, as all locked governance positions can simultaneously facilitate trades within the 80/20 pool which makes it more predictable.
Asymmetric upside and reduced impermanent loss (IL): 8020 weighting ensures LPs harness asymmetric exposure to a protocol’s underlying native token while earning additional swap fees. While tight CL ranges are more efficient for swaps, they are susceptible to going out of range hurting LPs during volatile times.
Efficient incentive programs: ve8020 unlocks offers governance holders additional swap fees and integration into Balancer incentivisation programs. Furthermore, protocols can solely incentivize the 8020 positions, rather than multiple LPs, to increase liquidity and governance participation simultaneously.
Token Hedging: 80/20 pools allow LPs to hedge their position with an underlying denominator.
Further, because the 20% of the pool is not MORPHO (e.g. WETH or USDC), you’re able to solve the OP’s concern about how to get the “other token” in the pool. Also, see Tokenbrices’ mention of why a constant product solution, like 8020, is an effective fit here.
For #2 & 3: There are several oracles which can execute on this request. Balancer cannot, but Chainlink, Redstone, and others would likely be up to the task. Balancer, like Morpho, is oracle agnostic. Once you have a decision here, using MORPHO as collateral should be relatively straightforward.
It looks like I’m unable to share links due to this being my first time posting, but we have additional resources we can share if there’s interest (dune dashboard, ve8020 informational material, etc.).
For what it’s worth, on the topic of how Morpho could accumulate the “other token” we used both ve8020 and were leaders in oTOKEN. We are moving away from ve8020 as it’s not as efficient. We have found oTOKEN to be very profitable; I strongly recommend you consider oTOKEN.
Glad my post stirred some discussion, I’m quite busy but I just wanted to add a quick precision:
80/20 is one of the poorest forms of constant product liquidity. Compared to a 50/50, it is more efficient when users buy the tokens but less efficient when they sell them.
Considering MORPHO has been widely distributed as a farming token, optimizing the constant product for the buyer side seems a suboptimal decision: the liquidity structure chosen must be balanced.
This solution tends to get adopted here and there because holders suggest it. It is optimized for holder farmers but absolutely horrendous at pretty much anything else.
Case in point with AAVE:
On UNIv3, $8.2M of AAVE/wETH liquidity is processing $4.43M of volume today (54% utilization)
On Balancer, $175M of AAVE/wstETH liquidity is processing $3.34M of volume today, mostly on the buying side. (1.9% utilization)
The Morpho community would be much better off with a single-sided staking for MORPHO and liquidity pools that are actual liquidity pools, processing volume, not farms in the shape of LPs.
Calling 8020 one of the poorest forms of constant product liquidity is quite dramatic. It is simply an iteration of x*y=k and is fungible. An 8020 is a form of asymmetric and full range liquidity which provides far more predictability around being a backstop for depth. Hence it being part of Aave’s Safety Module since 2021. CL would not fit a safety module use case very well. To some degree, asymmetry is akin to directional fees, when showing favoritism to buying or selling of a particular asset. This is more a feature than a bug, and can be executed with flexibility (60/40, 30/70, etc.). A ve5050 would not be out of the realm of possibilities as with all industries, nothing is a one size fits all solution. Hence Balancer working with Cowswap to introduce CowAMMs to capture LVR surplus, another long tail asset solution, which can be an alternative for Morpho to consider. To be fair if the primary goal is focused on low slippage then range managed CL is indeed a good choice, it would be intellectually dishonest to say otherwise. Morpho can weigh their options, Balancer is just happy to help present them.
I saw @Zen_Dragon responded below but fwiw don’t believe your comment about most of the volume being on the buy side is accurate. I can’t post links or embed a screenshot (rip) but it’s more like ~50%.
Thanks, @aseem, for putting this proposal together.
The initial post proposes a traditional liquidity mining (LM) program to bootstrap DEX liquidity to support three goals: low-slippage price execution, an onchain oracle, and a Morpho Market with MORPHO as collateral.
The proposal outlines a MORPHO budget over 6-12 months. However, our estimations show that the program does not account for the initial volatility following launch. Gauntlet recommends transitioning to an LM program after one month to allocate incentives efficiently.
Gauntlet’s research shows that the elasticity multiplier, or the amount of TVL growth divided by the amount of spending, tends to be larger for higher market cap tokens ($100M —$1B) than for lower market cap tokens (< $100M). This is because LPs need higher yields to offset the expected LVR from small volatile pools (the same costs one aims to protect against with POL). As such, pools with larger market caps demonstrate outsized performance than low-cap pools.
For example, if we expect MOPRHO’s initial circulating market cap to be <$100M, we can generally expect each $1M in monthly incentives to result in a TVL increase of $2-4M that month or an elasticity multiplier of 2-4x. In contrast, a larger market cap pool could expect a significantly larger multiplier, anywhere from 35-75X. Therefore, delaying incentives until the price has normalized across some baseline liquidity and reached a MORPHO market cap above $100M would likely result in more capital-efficient incentives.
A combined approach, where POL is used to seed DEX Liquidity (aka genesis / initial stage) and then expanded to LM programs once price discovery has occurred, allows the DAO to expect larger multipliers on incentive spending while scaling and maintaining Dex Liquidity.
As discussed in this thread, there are many potential approaches to securing an initial POL allocation, and we’re excited to explore how alternative solutions (i.e., UniV4) open the design space for incentive experiments. At this time, we believe POL with traditional LM incentives could be an effective method for bootstrapping MORPHO liquidity on Mainnet and Base.
Excited to see this discourse and I am hoping that I can contribute some value. There are some very interesting ideas being discussed here. However, I do believe that MORPHO should be taking a different approach.
First and foremost, the CEX strategy should directly tie in with the DEX strategy. Unfortunately, many protocols view these to be at odds with each other, when they end up being far more coupled than one would expect. I am sure that a protocol of MORPHOs stature is likely to see a surge in demand on CEXs. Those orderbooks will likely dictate most of the volume for the MORPHO token on AMM pools as they will attract CEFI-DEFI arbitrage volume. As the venue of true price discovery, the AMM liquidity depth will serve as the “lag” venue.
Before you think about undertaking specific liquidity mining initiatives for AMM pools, my recommendation would be to undertake an exercise in demand sampling. As I am sure Morpho markets themselves will be widely available across multiple chains, it would be valuable to make sure that MORPHO token itself is widely available across multiple chains too.
To counter the chicken and egg problem, I would instead make MORPHO available via RFQ/OFAs like 0x, Bebop, Hashflow and others to begin with. Given that at least on Eth L1, the majority of front-ends aggregate over multiple liquidity sources (both on and offchain), users will be able to access the token at their convenience. This strategy can be adaptive and dynamic. As you gauge the initial demand for the 1 month period as described by gauntlet, you will have a far better understanding of the liquidity needed to support every iota of marginal demand that is non toxic.
The unfortunate reality with liquidity mining programs on AMMs is that ultimately, a lot of that liquidity will be out of range. So even if the TVL is in the 10s/100s of millions, the effective liquidity would be far lower. It is unclear that LPs update their price preference over time, and even less clear that the gas costs associated with constantly updating price is even profitable for LPs to do so. This is why in auctions like CowSwap and Uniswap X, more than 60% of the volume is facilitate through market maker inventory, not AMM pools. While there are exciting Uniswap hooks in the offing that will at least bid back arb value to LPs, the orderflow landscape has drastically evolved (see orderflow.art). So why not evolve how POL as allocated?
Here are my concrete suggestions
Allocate POL to makers in the aforementioned RFQ systems. It is very likely that your CEX market makers can support this. If not, we are happy to step in and assist. I am strongly of the opinion that on ETH L1, this is a far more compelling approach.
Assess demand across multiple chains through these RFQ systems. It is entirely possible that certain front-ends may have a greater hold over some users that the protocol feels they have not reached. I believe arriving at this insight is net good, as it helps better inform the liquidity mining program. Should it become clear that AMMs like Camelot on Arbitrum or Velodrome on Base bring unique users, the desired liquidity mining strategy can be more targeted.
My objective is not to undermine the AMM primitive. I am a huge believer in 24x7 365 permissionless markets. However, if your liquidity strategy also involves an orderbook, you will disadvantage the AMM LP and ultimately overpay them to keep providing it. Lets treat the networks resources as precious and take an adaptive approach to MORPHOs liquidity.
Feel free to reach out to me on twitter or telegram at hrojantorse or on my email- vishwa@aneralabs.xyz
