The HOP token is extremely illiquid in its current state, with liquidity fragmented across Optimism, Arbitrum, Polygon and Ethereum mainnet. To make matters worse, this liquidity is scattered across several different DEX’s, including Uniswap V3, Camelot, Velodrome, Quickswap and Sushi. Even whilst using a DEX aggregator, liquidity is still too thin to buy or sell without experiencing dangerously high slippage, significant price impact, and has even resulted in users commonly becoming sandwich attack victims.
Crypto protocols use several different tools to increase liquidity depth for their token holders, including: utilizing their own token emissions to reward on-chain liquidity providers, working with external HFT firms and centralized exchanges to ensure a listing of the asset, or ‘bribing’ governance token holders of prominent DEXs to vote their own emissions in the favor of the stated protocol’s token. It would be fairly easy to deepen liquidity if the HOP community were to choose a single chain in which the token was traded.
The Hop Protocol treasury currently holds 826K OP ($1.9M) and 1.67M ARB ($2M). If 10% of these treasury assets were redirected to HOP/WETH liquidity providers over the next 12 months, the annualized yield would be upwards of 45.8% at the current level of liquidity ($850k). While it's difficult to estimate the precise impact on notional liquidity added from this rewards program, it would likely be material.
This proposal is aimed at allowing the HOP community to choose which networks and DEX’s should be targeted and prioritized for improving HOP liquidity conditions. Below are examples of four high-level approaches that could be implemented to accomplish these goals.
- Bribe existing DEXs with OP and/or ARB to incentivize the redirection of protocol emissions towards a particular HOP LP Pool (i.e. HOP / WETH on Velodrome). This solution requires the least amount of technical development and will only require bi-weekly multi-sig transfers of either HOP, ARB or OP.
- Build an LP staking contract and integrate it directly on Hop’s front end. HOP LP’s of a specific pool who stake their LP tokens in this contract will be rewarded with a predetermined percentage of the ARB and/or OP mentioned above. This may require allocating ~10% of each treasury asset to maintain liquidity on both Arbitrum and Optimism, which also allows the protocol to stick to its multi-chain ethos.
- Working with a third-party automated liquidity management provider such as Arrakis Finance to develop HOP / ETH vaults emitting liquidity incentives in the form of OP or ARB.
- Creating a Nitro Pool on Camelot Exchange (Arbitrum Only), which would allow a simple distribution of any chose incentive token (likely ARB) to HOP liquidity pool participants
Deepening liquidity for the HOP token will provide a better and safer experience for HOP ecosystem participants, while also attracting new community members. Improving HOP’s liquidity should be considered a foundational requirement before any material changes to tokenomics can be implemented.
The largest risks associated with incentivizing liquidity will be related to fragmenting the core development teams time and efforts. Further, selecting a single chain or DEX may seem as if the protocol is picking favorites, especially after the Hop community received OP and ARB allocations.
The above issues could be mitigated to an extent by the provided solutions within this proposal.
