Apologies folks, but this is going to be another long one…
Ever since analysing the profitability of our pools here, I’ve been unable to shake the feeling that we’re doing something drastically wrong. That $500K/week figure has been rattling around my head all weekend. After digging a little deeper, I’m kicking myself for not doing this sooner.
We’ve had a string of good news (new strategies, audit, WETH rewards, marketing push etc.) but still seem unable to cross $150M in TVL on a sustained basis and the price of PICKLE continues to stay sub-30. After a lot of discussions in the Discord and a bunch of math (to follow), there’s a simple conclusion to be made:
We have misallocated our PICKLE rewards and they remain too heavily skewed to the Power Pool. As a result, we do not have enough rewards available to incentivize fresh TVL to come over to us. We launch a new strategy, people pile in, APY drops, and we stagnate.
Before pulling out the pitchforks, please remember that I’m heavily invested in the Power Pool myself, so I hope the LPs will hear me out
What is the function/purpose of Pool2?
At a protocol level, the basic and ONLY function of the power pool is to provide an exit ramp for users of the protocol. Basically, our customers (Jar depositors/TVL) should be able to sell their farmed PICKLEs for ETH with minimal slippage. So, let’s consider that for a minute.
Our current weekly emissions are 27458 PICKLEs/week or 3922/day.
Every day, 2475 PICKLEs are earned by Pool2, and just 1447 PICKLEs are shared between ALL the pJars.
This shows us that even the biggest whales in our Jars can’t be responsible for the large trades we’ve been seeing. For example, even having $18M in 3pool (a la Harvest) only yields 118 PICKLEs/day. That’s less than $3000 per day of selling volume, which is a bug on the windshield to our 23M of liquidity.
Consequently, the large trades (2000+ PICKLEs) have to be coming from one of two sources:
- Large traders who are using our liquidity to speculate, with no real interest in PICKLE. It’s just another token for them to trade, and our deep liquidity lets them move large size with minimal slippage.
- Large participants in our own power pool, who are accumulating and dumping because they have no incentive to stake, considering that the staking APY is half that of the LP.
With me so far? Before moving on to the numbers, here’s a brief primer on how Uniswap works for those who may not know.
Uniswap is really elegant in its simplicity. It works by pooling 2 assets 50:50 and maintaining a Constant Product between the quantities of each token in the pool. That sounds more complicated than it is. For the purposes of this discussion, it’s enough to know that the movement in price caused by a trade is directly related to the size of the trade relative to the size of the pool. You can read more here.
Basically, big trade make number move more
Now you’re wondering…all this to tell me something I already knew? Please bear with me…
Liquidity Analysis of the Power Pool
I used the Uniswap equation to model the levels of slippage (price movement) that would be expected at different levels of liquidity. For simplicity, I’ve ignored the Uniswap 0.3% swap fees, as that would be a constant (in relative terms) in all the scenarios. Here’s what I found:
As you can see, with our current $23M of liquidity, it is possible to buy or sell 10,000 PICKLEs ($250K) while incurring slippage of only 2%. Put another way, it takes 10,000 PICKLEs to move price 2%.
We often joke that PICKLE is our favourite stablecoin, and this is the reason why. It takes a LOT of buying/selling pressure to move the price.
We have suppressed our own price volatility by maintaining (and rewarding) far too much liquidity in relation to our needs. Not a single user of the PICKLE ecosystem has a requirement to trade these quantities.
Our TVL/Liquidity ratio is 123M/23M = 5.35. That’s way too low IMO.
Now, contrast this to Barnbridge, who currently have the opposite problem. Their rewards are skewed towards their stablecoin pool, and as a result there isn’t enough liquidity in their Pool2 to absorb all the selling from their weekly harvest. TVL/LIQ = 273M/5.4M = 55. Way too high, hence the weekly dumps.
Harvest seems to have found a good balance between offering higher yields to users, and enough liquidity to absorb average daily volume. TVL/LIQ = 400M/17M = 24
If we apply Harvest’s ratio to Pickle, we should only be looking to maintain $5M in liquidity.
Even at just $5M in liquidity, 5K PICKLEs can be traded with 5% slippage.
The vast majority of our users trade far less than that, and trades of up to 1000 PICKLEs will still only incur slippage of 1% or less.
By reducing our liquidity, we accomplish the following:
- Disincentivize large speculators from playing in our pool…if they want to trade big, they have to pay up. Buying 10K PICKLEs will move the price 10%, not 2% as it does now.
- Have PICKLE rewards to allocate to profitable strategies that earn fees. Currently, 70% of our dwindling PICKLEs are generating no fees. There are only roughly 300K PICKLEs left to be minted, and we’re currently directing 19K EVERY WEEK to maintain liquidity that we aren’t using. Our average daily volume is less than $2M, and having 10X the liquidity is an unnecessary waste of precious resources.
- Shake out opportunistic liquidity. The reduced number of participants in the Power Pool will enjoy a higher APY, whilst the additional fees generated by putting those PICKLEs to work will increase the funds available for stakers.
- The goal is to get LPs to move to staking, taking those PICKLEs out of circulation and creating a supply squeeze. The only way to do this is to maximise staking rewards, which is derived from the additional fees generated. We make it attractive to ‘Stake and Stack’ over ‘Farm and Dump’.
Here are some scenarios I worked out, diverting 5, 10 and 15% of PICKLE rewards to the pJars
Since we’re already discussing pDAI and REN, I used these pools as examples.
The numbers assume that our current APYs are our stagnation point, and so the projected TVL is what would be required to bring the new boosted APYs back down to current levels.
As you can see from the data, we can monetize our remaining PICKLEs in a big way by reducing liquidity.
More fees -> Higher staking yield -> Higher PICKLE valuation, which benefits all of us.
LP yields are already converging towards staking (103 vs 57), and after a few weeks of dropping emissions, a higher PICKLE price is the only thing that’s going to support the ecosystem.
I think $5M is too low since we want to keep a buffer for stability…but around $7.5M seems to be a sweet spot. That’s a 65% reduction from current levels. Just imagine what we could earn in fees with another 20-30% of PICKLE rewards being allocated to the pJars.
I started working up a plan for gradual reductions to try and minimize price disruptions but realized that this would be a very tough proposal to pass, so I’ll wait to see the reactions from the team and community
Thanks for reading! Feedback and criticism welcome!
Bring on the pitchforks!
Here’s the Excel file if anyone wants it :