Risk Labs (the Foundation supporting UMA ecosystem growth), with community input, has launched the $UMA Liquidity Mining pilot.
This liquidity mining pilot bears resemblance to the now-popular “yield farming” schemes operating across the DeFi space. However, there are some key differences in this program’s motivations and breadth.
This is a tightly scoped experiment
Risk Labs will offer liquidity rewards on one specific pool for a fixed period of time. The goal of doing so is to understand how effective liquidity mining is in achieving these two goals:
- Bootstrapping synth liquidity. In order to do this effectively, the Risk Labs needs to understand how the market will respond to incentives.
- Distributing $UMA tokens to people who will contribute to governance. Some token movement is healthy but ideally the majority of tokens go into the right hands the first time.
The Details of the Pilot
Risk Labs will grant $UMA rewards to farmers who contribute yUSD to the yUSD/USDC pool on Balancer.
- The pilot is ~6 weeks, with a distribution of 25k $UMA per week.
- One specific pool is whitelisted for rewards: a Balancer 50/50 yUSD-SEP20/USDC pool with a 0.01% fee
- Rewards will be distributed weekly via airdrop without lockups or restrictions (this will likely change in future iterations.)
- Rewards will be distributed on a pro-rata basis, proportional to the amount of liquidity provided.
- Rewards tallying began at 23:00 UTC on July 27. The first week of rewards are summed after 23:00 UTC on Aug 3, and continue at that weekly cadence on Mondays.
- The address holding the Balancer Pool Token (BPT) for this pool will receive the rewards.
- Liquidity providers will earn BAL tokens if Balancer, as Balancer has whitelisted this pool for liquidity mining rewards.
There are no bounds to the effective APY of earning the $UMA tokens; it will be automatic based on the amount of liquidity the market provides. This will allow Risk Labs to determine a baseline “price for liquidity,” especially because this program is launching on a stable yield dollar token paired with a stablecoin to prevent impermanent loss. This program was designed to minimize (though not eliminate) any price risk for the participants.
You can understand more about the yUSD “Yield Dollar” token from this post.
During this time, Risk Labs will monitor the effectiveness of the program. It will do so through the lens of these questions:
- How do farmers acquire yUSD to start mining? Do they mint directly, or do they buy it on a secondary market?
- How much $UMA is required to incentivize each dollar of on-chain liquidity?
- What % of farmers sell rewards immediately?
- What % of farmers vote with their rewards?
- Do we believe that the program could scale linearly with the size of rewards?
- How broad is distribution?
- Do end users demand a second yUSD/ETH pool, or are they happy with a single yUSD/USDC pool?
- Do end users demand a Uniswap pool, or are they happy with a Balancer pool?
This program will be “Off Protocol”
For the avoidance of doubt, this pilot program is being handled manually and at the discretion of the Risk Labs Foundation. It is not written into the protocol such as with Balancer or Compound.
Risk Labs may modify the terms and eligibility of the program at any time particularly if it observes behavior that is incompatible with the pilot objectives.
Liquidity Mining Rewards and Voting Rewards are distinct
UMA now has two types of rewards: rewards from participation in governance and liquidity mining rewards.
Liquidity Mining rewards are part of the original 100 million $UMA that were minted, and have been slated for this purpose. These tokens are currently custodied by Risk Labs and will be distributed over several years.
Voting rewards are freshly minted each time a vote takes place. These rewards are in-protocol, written into the UMA smart contracts. The governance contracts mint and distribute these rewards to participating voters.
These rewards compound. E.g., if you earn rewards from LM, you will be able to vote with those tokens and earn inflationary voting rewards as a result.
How to Participate
Please note: Some people have rushed in to buy yUSD without considering the price, either by purchasing outright or by adding only USDC to the Balancer pool (which auto-purchases yUSD on your behalf.)
Don’t do this. The price of yUSD matters a lot for your returns, and if you purchase yUSD over $1.00 (and certainly over $1.10) you should be very mindful about why you are doing it. Read the yUSD “Yield Dollar” explainer here.
Farmers can acquire yUSD by either purchasing it or minting it. In order to choose how to get yUSD, you may wish to consider your portfolio goals. “Natural ETH holders” might prefer to mint fresh yUSD through the minting interface and then provide USDC to match. “Natural stablecoin holders” might prefer to purchase yUSD from the Balancer trading pool.
In all cases of minting and buying, you should take care to consider the current price of yUSD. yUSD is a “yield dollar” token and on September 1st, 2020, will be redeemable for $1 of wETH. If you purchase yUSD for more than $1.00, this means it will decline in value. However, you might prefer to do so if you believe the rewards from liquidity mining will exceed that negative interest rate.
The Next Phase
The bootstrapping goal of the program is to support new synthetic assets created with UMA to go “from 0 to 1” in liquidity terms. This initial pilot is as much an attempt to achieve that goal specifically as it is a “lab experiment” to gather data. Expect more experiments in the near future.
The UMA community will have a say in what the next phase looks like, and you can join in here: https://discord.umaproject.org/