Liquidity mining is a simple and fast method to get ready for liquidity startup, and probably the most used in the ecosystem in the last 2 years; but a lot of resources are lost along the way; from program updates with their respective debates, to a lot of capital (dilution) of the DAO.
There are more efficient startup methods, at the capital level, and less damaging to the token; which, if well designed at moment 0, should not require so much intervention/debate later.
To date, we have seen tools like Palm from Arraquis; it has a liquidity startup mechanism that has worked well; but I think it can be done better.
Let’s look at the whole picture, let’s define a comprehensive and long-term plan of action. The way forward is:
1) Price discovery
2) Liquidity start-up
3) Genuine depth
4) Staking: Single Token vs LP
5) MORPHO CDP
We need mechanisms that can sustain themselves (and remain), that are organic and genuine, and that also avoid the dumping that these instances bring.
Implementing hook technology is now an almost natural way forward. Univ4 will allow the implementation of logic on concentrated liquidity pools; this can allow us to design mechanisms that solve each of the previous points.
Let’s design them:
1) Price discovery
It is possible to exit 100% MORPHO, without a secondary token (undoubtedly WETH); under a price configuration (pre-established by the DAO) where we add liquidity immediately after this tick. Apply a Dutch auction mechanism: A type of auction where the price falls over time until a bid is made.
Another alternative, which has many advantages, is the introduction of launch options; after setting an initial FDV, “options” can be set for both the initial sale and future incentives.
- If the price falls below the set price, the options will not be exercised, so the first sale and incentives will not be dumped at an early stage.
- If the price exceeds the established price, some users will execute the option, this generates MORPHO purchases, which can continue with an upward effect, depending on how much is then poured into the sale.
- Execution will generate volume (fees) in the pool.
- Execution will add WETH to the pool, therefore to the POL
- The option allows the user to send less capital than the equivalent if he sent MORPHO.
- In the case of options with a strike, the user earns everything above the preset price, i.e. the liquidity pool receives the price set for each option that the user executes.
- Some variants eliminate the strike and replace it with a discount on the market price, let’s go a little deeper here:
- Timeless developed a perpetual option mechanism that replaces the strike with a 50% discount on the market price.
- Contango takes this mechanism and modifies the 50% discount with a variable discount that takes the base seed valuation and then looks at the market price, as long as the market price is above the seed valuation, a discount is applied which, unlike OLIT, is variable based on a curve designed by Contango. An important point here is that no user exercising the option will sell below the seed valuation.
The two methods are not mutually exclusive. MORPHO has already been distributed; implementing oMORPHO as a reward asset and starting the liquidity pool with the auction mechanism is considered the best implementation today.
2) Liquidity start-up & 3) Genuine depth
Continuing with the implementation; points 2 and 3 need a boost. We will achieve this with 2 mechanisms that generate incentive + liquidity strategy.
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We incentivize the WETH side with an oMORPHO** distribution only to the active range. This should be adjusted in an increasing manner at the time of pool deployment and will start to decrease once the required tvl* is reached.
These mechanisms allow the target to be reached in a more organic way and without too much loss of resources. This can be achieved with a hook or by using Merkl. -
We have implemented a keeper that adds/removes MORPHO from the treasury.
This mechanism will bring a dynamic and controlled depth of MORPHO, maintaining a rebalancing pre-configured by the Dao; this will improve buy operations and reduce slippage. It will help to maintain a healthy liquidity on both sides constantly, which will help the POL to obtain WETH from the demand for MORPHO.
The complementarity of both hooks will bring
Supply of active WETH to (1)ETHBoost, which will activate (2)TickKeepers, sending MORPHO to the Treasury.
A growing TVL of active WETH represents:
- A wall against dumping
- Tick-Keeper sends more MORPHO
These combined mechanisms find boost efficiency, without losing capital efficiency; achieving one without losing the other has always been the Achilles heel of on-chain liquidity.
A key detail, which we will not go into as it is not the subject of this thread, is that both mechanisms allow the Dao to start getting WETH in its treasury, thus starting the solution to the second major problem that Daos present.
*The required TVL is linked to the liquidity needed to make MORPHO a CDP eligible asset, this point will be defined by the risk analysts.
** During the life of the pool, the sending oMORPHO can be replaced by another incentive:
- Pool fees
- Dao fees
- Bribes
4) Staking: Single Token vs LP
This is perhaps the most complex point to define and perhaps deserves its own article. But I will try to be brief, as it is necessary to cover it in order to have a complete overview that will lead us to a clear and focused field of action.
Personally, I believe that the best stake is the one that does not eliminate on-chain liquidity, the depth of a token defines its quality; at the same time, the stake ratio (genuine trust of the holders) defines the quality of the token. So we see that if a token is “successful”, it should have a high stake ratio and at the same time deep liquidity; and this is where the path seems to fork, or perhaps define itself.
If we look back a little bit, I think the best example is:
CRV: a success story in terms of stakes, today 44% of the CRV in circulation is staked.
So we can say that only 56% of the circulating CRV defines the volatility of the CRV; this is equivalent to an asset with half its value, which means we have a much more volatile asset; also less liquid (44% of the supply blocked), which ends up defining it as less quality than it really is.
This can be seen more clearly by people much smarter than me who use this data to define the risk parameters of an asset for the lending market or a minter.
So single token or LP? I will assess the pros and cons of each alternative:
Single Token:
Pros:
- Exposed to MORPHO spot volatility
Cons:
- Higher volatility
- Higher stake means less liquidity, higher liquidity means lower stake
LP Token:
Pros:
- Less volatility
- Swap fees
- Staking success linked to liquidity depth and vice versa
- Staking incentives would concentrate everything the DAO needs to incentivise in a single asset. This requires efficiency of both economic and human resources:
- VP (to achieve governance growth)
- Liquidity
Which is not only and directly linked to MORPHO issues and DAO fees, functionalities such as “borrowing power” and “swap fees” are incentives the DAO does not have to pay for or maintain; and here is a great case of real incentive.
Cons:
- (although I don’t know here) for a long time, taking on debt with Lps has been avoided (if someone can establish context/clarity on this point)**
- The price behaviour of the LP token will not be exactly the same as that of MORPHO.
** As a counterpoint to this point, the characteristics of the LP token lead us to what appears to be a “financially safer” (higher quality) token, as it is less volatile; part of its composition is WETH and also the MORPHO part of the token would have greater liquidity than the other scenario. Here the “technically safer” should be taken ONLY in terms of the defined aspects, since as noted in the previous point, LPs have seen problems when using it as collateral.
Another alternative:
Through hooks, the VP of the single token can be held in a liquidity pool.
Even without the Lindy effect, a hook can allow the VP of the MORPHO that is in a pool to be held. In this way, on-chain liquidity is maintained, and the VP can come from the individual asset or from the asset within the pool; what I am still not sure about here is how the rest of the staking functions would work.
5) MORPHO CDP
I am 100% in favour of the DAO borrowing from MORPHO in POL. These can come from 1) treasury stock, 2) tokens recovered by the keeper or 3) farmed (obtained from the DAO’s participation in the pool).
Surely interesting strategies could be designed with the combination of debt and these 3 ways of obtaining the token.
The CDP will also be made available to users.
Before defining the MORPHO CDP, we need to define what we will use as the stake token, as it would make sense to use it for the CDP.
The MORPHO CDP will have:
- Borrowing power
- Voting power
- DAO fees
- (In case of LP token) Swap fees
- (In case of Single Token) Rehypothecation for Extra Yield Hooks that allow inactive liquidity in the pool to be sent to the MORPHO vault
- (Potential) MORPHO issuance
- (Potential) Bribes (we’ll leave that for another post)
The use of the stake token (LP or individual assets) to incur debt, both for the users and for the DAO, is the happy ending and the main indicator that everything else has been successful. Getting to that point would be a great milestone for the token and therefore the DAO.
One final thought:
The endgame: MORPHOwars
These could be the first wars based on “cdp integration”.
Tl;dr: Incentivise vault managers to maximise the CDP; can use oMORPHO and logic that incentivises managers to earn TVL towards the MORPHO CDP.
Clarifications:
If cross-chain (Ethereum and Base) is introduced, it would also be interesting to define how it will be introduced, as this may impact some of the proposed liquidity strategies.
This has been a comprehensive review of all efficient liquidity mechanisms and their links; I am happy to receive feedback and continue the relevant research.
Linking one of the most interesting protocols in the ecosystem with a tokenomics that is up to par is the only way to take Morpho to the next level.