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.