1IP-XX: Deploy X% of the 1inch treasury to the Uniswap V3 1inch/USDC Pool

Authors: @Kene_StableNode , @Bobbay_stablenode

Simple Summary

1IP-XX aims to deploy a 1inch/USDC pool on Uniswap V3.

Abstract

1IP-XX will utilize idle assets in the treasury and deploy them into 1inch/USDC pool on Uniswap V3. This creates another stream of revenue for the protocol through swap fees as well as the generating significant liquidity for the 1inch token through active trading.

Motivation

1IP-XX aims to bootstrap more liquidity for the 1inch token through LP’ing 1INCH/USDC on Uniswap V3. At the time of writing this, the 1inch token currently has a daily trading volume of $72,231,447, a weekly volume of $706,183,047 and a total volume of $224,931,623,636.


21/11/22: 1INCH total, weekly and daily volume @k06a

By leveraging the innovative features on Uniswap V3, 1INCH DAO would bring more liquidity to the token, through the use of concentrated liquidity.

Specification

Uniswap V3

Uniswap V3 features such as concentrated liquidity enables liquidity providers to determine the various price ranges where their capital will be allocated. With concentrated liquidity, LPs can focus their assets within selected price ranges, offering more liquidity at preferred prices. LPs can construct personal price curves this way. There are a number of improvements that Uniswap V3 made to V2.

On Uniswap V2, LPs could only receive fees on a small fraction of their investment, which hardly made up for the impermanent loss. Another feature, Multiple Fee Tiers, allows LP’s to adequately adjust their risk appetite in accordance with how they wish to be compensated.

For example, in a single pool, LPs can combine any number of different focused positions. In the ETH/DAI pool, for instance, an LP could decide to contribute $100 to the price range $1,000–2,000 and an extra $50 to the ranges of $1,500–1,750.

The shape of any automated market maker or current order book can then be roughly determined by an LP.

1INCH/USDC Deposit

We are proposing to seed the 1inch/USDC liquidity pool with ⅓ of the 1inch Treasury, which would specifically be $5,432,239; we are proposing that the pool is seeded with the following split of 1inch/USDC.

The Treasury contains $16,251,080 worth of assets; from that pool of assets, the liquidity pool can also be seeded with any of the following alternative options:

  • 10% of the treasury - $1,625,108
  • 20% of the treasury - $3,250,216
  • 33% of the treasury - $5,432,239

0 voters

Please vote on the poll to show your preference. As mentioned, we are opting for using 33% of the treasury.

Depending on how much the 1inch/USDC Pool is seeded with and how the pool is actively managed, the pool could become a top 10 Uniswap pool, this would put the pool on track to earning between $40,000 - $125,000 in 24h Daily fees.

Considering the nature of the 1inch/USDC pair, the incentivization of users to actively trade this pair would drive significant swap fees to the LPs.

Fee Tier

Uniswap V3 currently offers three fee tiers per pair - 0.05%, 0.30%, and 1.00%.

For example, one of the DAI/USDC pools has a 0.05% fee, while on of the USDC/ETH pools has a 0.30% fee, on the other hand, one of the USDC/ETH pools has a 1% fee. These fee tiers allows the LP to tailor their fees according to the risk they take on, for example, an LP is likely to take on more risk in a pool containing uncorrelated assets such as wBTC/DAI, unlike a correlated pair like UDSC/DAI.

Stablecoin pairs like USDC/DAI are a good example of how like-kind asset pairs tend to cluster around the 0.05% fee tier, while pairs like ETH/DAI, which are different asset types, maintain a higher fee tier due to the higher risk involved in trading unlike assets. Fee tiers such as these would typically go for the 0.30% fee tier, while exotic assets might find 1.00% swap fees as suiting the risk involved.

In relation to the 1inch/USDC pool we recommend an initial 0.30% considering the fact that 1inch/USDC are not correlated, these price tiers may be adjusted over time.

Rationale

Not only does this turn idle assets into yield-earning assets, but this pool would actively support 1INCH trading by ensuring constant liquidity for the token. In addition to these benefits, seeding this pool with a significant portion of the treasury is a low to medium-risk approach to concentrating liquidity and utilizing these funds.

Considerations

  • Impemanent loss: This a significant risk with Liquidity Providing; depending on how the pool is managed, the impact that impermanent loss will have on the capital may be subsidized, it is, however not completely avoidable.
  • Active management: Through active management of the funds, the pool can create significant value for the LP’s, however, this would involve a hands-on approach from the managers. We would propose experienced hands steward this investment.
  • Large amount of funds: Considering the large amount of funds, this requires diligence and experience to reach profitability and sustainability on behalf of 1inch.
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