Secondary GEL markets have been rather illiquid since the public token sale on September 13th. The average daily volume based on data collected from Coingecko was around $1,962,629.64, which most likely significantly overstates the actual real volume.
Looking at the raw data in Uniswap v3, specifically the 1% GEL / ETH pool which is by far the largest, it can be seen that the daily volume was below $500k for most days during the same time period, only recently picking up some speed. The problem however remains, that liquidity, especially on decentralized exchanges such as Uniswap v3, is very low resulting in significant price slippage for people who want to buy or sell GEL. Even though the TVL of the GEL / ETH pool increased lately, most of it is actually not evenly distributed around the current price, but rather “range orders” set by larger holders, as you can see here:
This means, especially in the case that GEL drops in price against ETH, liquidity will be very thin and therefore price slippage and volatility will be very high. To counteract this and in order to provide a solid liquidity base for the GEL / ETH pair, I propose the following “Phase 1” liquidity bootstrapping strategy:
Creating Protocol Owned liquidity via Olympus Pro using G-UNI GEL / ETH LP tokens
Option 1: Liquidity Mining
Firstly, using liquidity mining rewards, which used to be the standard way of going about providing liquidity. The upside is that every current GEL holder will be able to participate in it and get some rewards for providing liquidity. The downsides here are that the largest holders of circulating GEL will be able to acquire the highest rewards (making the circulating supply even more concentrated) and that the collected liquidity is only “temporary” meaning that after the program is over, many participants simply dump the earned rewards and remove their liquidity entirely. An overview outlining these issues can be found here.
Option 2: Liquidity as a Service using Uniswap v2 LP tokens
The second option was a “Liquidity as a Service” or LaaS program, where Gelato would work together with projects such as Fei and Ondo to get a loan in e.g. FEI stablecoins, which would be used to provide liquidity on Uniswap v2 for a period of e.g. 3 months. This liquidity would definitely have been sticky for this period, however afterwards it would disappear again as the loan has to be paid back with some additional interest on top. This option was unattractive for us right now because we do not want to have liquidity located in Uniswap v2 where it is highly capital inefficient and fragmented from the remaining current liquidity which sits in Uniswap v3.
Moreover, LaaS models, similar to liquidity mining schemes, are only short term solutions to the problem of lacking liquidity and we believe that if the Gelato DAO’s treasury should be used to create more liquidity for GEL, it should have a long term effect.
Option 3: Creating protocol owned liquidity via Olympus DAO & G-UNI
The third and most viable option in my opinion is a new concept called “protocol owned liquidity” which Olympus Pro is the most well known platform for, which aims to make liquidity truly “sticky”. Protocol owned liquidity is liquidity which is owned by the Gelato DAO, who naturally has a long-term interest in making GEL liquid.
Using Olympus Pro, the Gelato DAO can issue “bonds”. Those bonds can be acquired by anyone who has an interest in buying GEL at a discount to the current market price. In order to buy these bonds, investors must first provide liquidity by entering the G-UNI GEL / ETH pool. After that, they can use their G-UNI tokens to “buy” the discounted GEL via Olympus Pro.
This way, the Gelato DAO will end up with the G-UNI tokens and thus the liquidity, being able to accumulate more and more over time. Additionally, this liquidity will be sitting in Uniswap v3 via a G-UNI pool, minimizing liquidity fragmentation across different DEXs. Finally, this creates a long-term revenue stream for the Gelato DAO, as it will be earning a large portion of the trading fees in the GEL / ETH pair on Uniswap v3, generating more capital resources for the DAO that can be allocated to help facilitate the growth of the Gelato Network over the long run.
Thus, in order to create the foundation to make GEL liquid, I propose the following steps which illustrate the details of how we can execute “Option 3” to bootstrap GEL liquidity as soon as possible:
Step 1: Create the GEL / ETH G-UNI pool
The first step will be the creation of a GEL / ETH G-UNI pool via the Sorbet Finance interface. These pool tokens will later be used as the LP tokens that the Gelato DAO will receive for issuing bonds on Olympus Pro.
The G-UNI GEL / ETH pool will have an initial range set to 4x below and above the current price at the time of its deployment. As an example, if the current price is 1347.86 GEL per ETH, then the range would be ~ 337 GEL per ETH <> 5430 GEL per ETH. Assuming GEL trades at $3.42 and ETH at $4600 , this would mean we will concentrate the liquidity around the $13.65 GEL <> $0.84 GEL range, which we deem sufficient for now to provide liquidity in case GEL remains very volatile.
The goal is to be able to make this range more concentrated as time goes by while minimizing the need to rebalance in order to avoid realizing impermanent loss. This is one of the key benefits of using G-UNI after all.
Step 2: Providing some base liquidity to enable Step 3
The problem with any sort of liquidity bootstrapping program right now is that there are actually not that many GEL tokens in Uniswap v3 pools which interested investors can acquire with their ETH in order to get G-UNI tokens to be able to purchase GEL bonds. Investors would have to encounter significant slippage and push prices up above current market price in order to participate in the bond issuance, which will result in higher discounts to be needed in order to make these bonds attractive in the first place.
To allow for a more efficient way of users acquiring GEL tokens in order to get GEL / ETH G-UNI tokens in the first place, I propose the Gelato DAO deposits some base GEL liquidity via a one sided liquidity deposit on Uniswap v3 above the current market price. This base liquidity will then enable interested bond purchasers to efficiently acquire sufficient GEL in order to enter the GEL / ETH G-UNI pool without incurring too much slippage. This base liquidity can potentially be removed again at some point after sufficient protocol owned liquidity has been accumulated via Step 3.
Step 3: Issue bonds via Olympus Pro and G-UNI
The last step (which will most likely be a continuous process) is working together with Olympus Pro to start issuing bonds that will accumulate protocol-owned liquidity for the Gelato DAO. The Gelato Core dev team have been in close discussions with the Olympus team over the past weeks to work together, also beyond the GEL specific liquidity program.
Most interestingly, Olympus Pro currently only accepts Uniswap v2, Sushiswap or Curve LP tokens within their system, which are of course highly capital inefficient. A lot of projects, including us, demanded that they also accept G-UNI tokens as LP deposits, enabling the teams to bootstrap significantly more concentrated liquidity on Uniswap v3.
This would not only be great for the teams using Olympus Pro, but also for Gelato because more liquidity will flow into G-UNI tokens, from which Gelato earns 2.5% of all fees generated. Just imagine, having a certain fraction of the ever growing liquidity owned by Olympus Pro (currently around $643,031,656) be sitting in G-UNI tokens, earning fees over multiple years. This would be huge for G-UNI and therefore for Gelato as a potential revenue source!
The process of issuing bonds via Olympus Pro will most likely be a continuous process, spanning over several months with multiple issuances. We plan to have the first one take place very soon. The size of the first bond issuance will most likely span between $500,000.00 - $1,000,000.00, depending on the GEL price during that time. The process of managing the issuance and making sure everything goes smoothly will be handled by the Swiss Gelato Digital GmbH.
Long term budget:
In order to finance a long term initial liquidity bootstrapping phase, I propose that the Gelato DAO allocates 3% of its 210,345,000.00 GEL token treasury (6,310,350.00 GEL) to this long term liquidity program.
Note: This amount will not be allocated all at once. This process of establishing a solid liquidity base will span over multiple months, will require some experimentation and trying out different things. The mentioned GEL amount will be transferred to the Gelato Digital GmbH multsig which will manage the communication, allocation of funds on Uniswap v3 and Olympus Pro and the execution of this and following liquidity programs.
Moreover, other means of providing liquidity, i.e. on centralized exchanges might be useful at some point, for which this budget will also be used for as well as to bridge GEL over to other networks such as Polygon, BSC or Avalanche, where GEL should also be available to be purchased. Details around these sorts of programs will be released in the upcoming weeks.
Initial resource allocation:
For step 2, we will start by using around 2.77% of the allocated GEL budget (174,825.17 GEL) for creating base liquidity on the GEL side of the GEL / ETH pool on Uniswap v3. For Step 3, issuing the initial bonds, we will start off by using a $500,000.00 - $1,000,000.00 monthly bond size to establish the initial protocol owned liquidity, ranging from 2.77% to 5.54% of the allocated budget.
The rest will be left unallocated for now and we will iterate on following liquidity bootstrapping strategies after gathering the learnings from our first bond issuance. Liquidity will enter the market slowly and sustainably, but more importantly in a way where liquidity is being built up by the DAO.
As the community already discussed the need for an initial liquidity bootstrapping strategy in this forum extensively, I will move this proposal straight to Snapshot where we can all vote for or against it. I will keep everyone in here updated on our discussions with Olympus and future plans on making GEL more liquid, which can be voted upon separately.