CIP-9: Should CowDAO renew its COW liquidity incentive program

Because this requires additional staking which I’m not sure all LPs will participate with. But agree this could be debated…

Anyway as you’re knowledgeable about veBAL and opportunities around it, would appreciate to hear if you have any suggestions for next steps. If you think there’s a compelling argument for continuing with the bribes, def keen to hear!

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the compelling reason is this number

2022-10-10_07-33-34

You’re getting 75% more incentives by bribing than if you simply print COW on the pool. It is a very safe assumption that someone farming on Balancer knows about farming on Aura. From COW’s perspective all that should matter is the $1.75 per $1 of bribes. It’s not your responsibility to ensure every user knows how to optimize their farm positions.

In terms of deciding to bribe or print COW it’s clear the optimal choice is bribe. Now, the choice between continuing to incentivize liquidity in general or give up and return funds to the DAO - that’s a different story. Maybe COW liquidity is not a priority at these low prices and it’s better to conserve funds for when the market turns around. I don’t have all the context, this is something your community has to consider carefully.

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First of all, my perspective is that bribe is highly parasitic unless its POL. Even if that, the treasury would be effectively selling its own native token for a direct financial return, which seems like an action that should be voted on just as if doing a DAO-DAO token swap.

In addition, it’s been seen in all AMMs where bribe is available that vast majority of the bribe is sold right away, especially for the native tokens of the AMMs that can further enhance the bribe rewards for the venal.

The same can be said about using $COW directly as incentives to LPs. Although, there is a higher chance that those LPs might intentionally accumulate $COW as they see the potential of future value appreciation in it. Yet, it’s still a slippery slope in terms of spending native tokens getting mercenary LPs.

Then the question should be why $COW feels the need to incentivize LPs, especially after time and time again it has become crystal clear that most liquidity has been exit liquidity for $COW farmers and other holders. If we keep going down this route, it will likely become a vicious circle spiraling downwards.

Given the above, I’d say

  1. Put a full stop on the $COW incentive, and let the market find its own way and price the token accordingly. As a small cap token, it’s natural to have less liquidity compared with the mid and large cap because the trading volume / demand does not require as much. It is what we see in Curve/Balancer, where most of the liquidity just idles, and the incentives go to waste. Once the demand picks up, the volatility is the price that the traders have to pay for the potential lucrative upside.

  2. At the same time, deploy unincentivized liquidity on Uni V3 and use concentrated liquidity feature to offset the negative impact from limited liquidity sources.

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Thanks for your perspective.

I tend to agree that you can’t make assumptions on whether voters / LPs will keep their rewards or not.
It is hard to know if those are mercenaries / farmers. I believe that this level of rewards is not enough to attract farmers, especially with current volatility.

I tend to disagree with you about the importance of liquidity. I think it is the life blood of the token economy and what ultimately allows also large investors to get larger positions.
Low liquidity might cause even lower trading volumes and thus make LPs less profitable.

Another way to maintain some liquidity is for CoW DAO to deploy some COW and GNO as liquidity owned by the DAO. This way the DAO takes the volatility risk (and earns fees). But then there’s less COW emissions towards liquidity providers

Thanks :pray:

A couple of points here:

Actually, we can simply check on-chain where those rewards go after being harvested. I haven’t personally done deeper research, but just by simply looking at some routined sells on $COW and also observing what’s happening on other ve- model DEXs, it’s not hard to assume that bulk of the LPs are farming and selling for $BAL. For LPs with high capitals, given the current market condition, they’ll take whatever is on the table.

I would agree with you on this if we were in the bull market or there had been consistent demand on $COW. As it is now, I have to disagree with what you said. Liquidity is always important, true. But do we need to incentivize liquidity that’s not even used because the overall volume just doesn’t need that much liquidity?
Also, why should large investors get the “free lunch” here by being able to buy a large position of a low cap token with no volatility risk? We certainly wouldn’t do this for penny stocks.
One unique temptation about token economy is the huge upside, given that the entire market is just so small compared with other markets. Capturing that asymmetric upside potential accordingly requires asymmetric risk taking. There is no reason for protocols themselves to constantly hedge that risk for the traders or large investors. If anything, it’d only create more risk for the protocol, because then you made it too easy for those large investors to make a profit since you incentivized the liquidity for them to both enter and exit.
Organic liquidity shouldn’t require protocols to pay for it. Investors see the value, take the risk, trade the token, then it grows from there.
Rather than spending so much resources trying to keep the token liquid (most of that has been exit liquidity anyways), I’d say CoW should just focus on building a great product that creates tangible value for token holders so that more and more investors would like to buy and hold, then more liquidity would just follow since the demand is up, hence organic growth.

Again, the focus should never be how to make more profit for LPs. Unless the protocol is the LP, otherwise, the incentive between LPs and the protocol is not aligned. If there is enough trading volume because of the huge demand of the token, then LPs can simply be incentivized by the lucrative trading fees earned, especially when they use concentrated liquidity. But if there is no volume whatsoever, the only way the get external liquidity is to incentivize them with your own token, but then what do you need that liquidity for if the amount of trading volume doesn’t even need it?

The only liquidity incentive that may make sense is for pegged assets, as maintaining the peg is the one single most important thing for them and they can’t afford not to proactively appeal to LPs. For a long tail asset like $COW, it’s just a huge waste of resource.

The ultimate goal for the protocol on liquidity is to have enough depth to accommodate the ongoing trading volume, NOT to make money for LPs. With concentrated liquidity available, and a proper strategy (we at Arrakis have been developing and are about to release especially for this purpose - liquidity bootstrapping), protocols will only have to provide the initial liquidity as some grease to the wheel, and then let the strategy and market do the rest.

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Due to the complexity of making sure bribes really provide an ROI for the DAO, and thanks to Karpatkey being responsible for COW liquidity for a while now - a tx was executed to return all (260k) remaining COW tokens from this proposal to the CoW DAO

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