Summary:
Back in March, the Synapse DAO voted to transition from direct SYN emissions on SushiSwap to utilize Balancer gauges (through Aura) to enhance the capital efficiency of on-chain liquidity for the SYN/ETH pair. At the time the SYN/ETH pool on SushiSwap, had amassed over $10m in liquidity. Historical backtests on the Aura gauge mechanism suggested that migrating liquidity would return a 2-2.5x ROI rather than the 1:1 of direct emissions. The Synapse DAO followed the suggested phased migration and was meant to deepen pool liquidity (> $2m) and reduce spend by 40%. This proposal reviews those objectives and suggests a path forward to more efficient emissions.
Analysis:
Current Monthly SYN emissions are 513,825 SYN/month, annualizing to 6.2m, meaning that 25% of status quo emissions are to incentivize liquidity only on Aura. The pool currently has $2.7m of liquidity. *See notes for more info
The initial proposal reduced liquidity emissions for SYN/ETH from 250k/month to 140k/month. Despite this, a few factors impacted this proposal's ability to generate significantly higher yields and migrate liquidity/pool volume. Success for incentivizing on-chain liquidity should be measured across these factors, and prioritize efficient rewards distributions relative to the amount of volume routed to the pool.
Currently, the balancer SYN/ETH pool costs the DAO 5,000 SYN/day for on average ~$100,000 of pool volume per day. Conversely, the SushiSwap pool (entirely funded by swap fees) averages $350k in volume per day. Similarly, the Uniswap V3 pool produces similar volume results to the Aura pool, with no incentives on the pool. High volume trading locations generate more swap fees, and thus require less emissions to encourage LPing.
This effect can be explained mostly through demand for trading on a specific venue and sticky liquidity. Existing market dynamics result in a scenario where LPs are better off LP’ing in venues with higher volume rather than where emissions lie. Although the baseline metrics set for experiment have been achieved, the goal post for effective emission spend has changed. On-chain SYN volume is routed through SushiSwap long after the trial period ended, and an order of magnitude more trading happens on centralized exchanges.
Results:
Big picture, SYN spend on Aura unnecessarily inflates the token supply, fractures liquidity across venues that naturally have more trading volume.
In line with other efforts to improve SYN token economics, removing liquidity incentives from balancer takes advantage of historical emission spend and natural yield to provide on-chain liquidity, and reduces annual inflation by 25%.
Notes:
Most of the data used is from the last 90 days of on-chain SYN trading on: Uniswap, SushiSwap, and Balancer.
Current Emissions can be found here: [https://synapseemissionsdashboard-3d76b3202ae7.herokuapp.com/]
SIP-30 reduces emissions by 50k SYN/Month: [https://snapshot.org/#/synapseprotocol.eth/proposal/0x963e2a3567dcef3e7842cd33d3ee213052e535bb2fb1fdc3d6a0e5cdc094d5e4]
Data:
[https://app.apy.vision/pools/balancerv2_eth-SYN-WETH-0xa3c500969accb3d8df08cba313c120818fe0ed9d]
[https://app.aura.finance/#/1/pool/62]
[https://www.geckoterminal.com/eth/pools/0x2dd35b4da6534230ff53048f7477f17f7f4e7a70]
[https://www.gauntlet.xyz/resources/uniswap-incentive-design-analysis]
[Uniswap Pool]
