Uni-v3 ETH-$DG LP

Background

Today, the ETH-$DG pair on UniSwap has ~$13M in Uni-v2 LP. Of that, the DG DAO provides ~$1.8M itself. At the time of writing, the ratio of ETH-to-$DG is approximately 1-to-10.

UniSwap v3 launched yesterday. Details and a comparison of v3 and v2 can be found here: https://uniswap.org/blog/uniswap-v3/. On v3, “LPs can provide the same liquidity depth as v2 within specified price ranges while putting far less capital at risk.”

Proposal

(1) Convert 250K DAI to ~$250K ETH, pair with $250K $DG from the Treasury, and add $0.5M to the DAO's ETH-$DG LP position.

(2) Move the DAO provided ETH-$DG LP to Uni-v3. Suggested initial range: Down to ~1/2 of the current ratio, up to ~2x the current ratio.

(3) The DG Team has discretion to move the range over which liquidity is provided real time.

Rationale

Over the specified range (1/2, 2x), Uni-v3 LP will be ~3.5x as efficient as Uni-v2 LP. With ~$2.3M in DG DAO provided LP on Uni-v3, we expect slippage to be the same as if ~8M in LP were provided on Uni-v2.

After the changeover, we expect to still have over ~$11M in ETH-$DG LP on Uni-v2, so we will have ample liquidity for traders who want to exchange on v2 or v3.

It’s important for the DG Team to manage the specified price range of the Uni-v3 liquidity in the case that “active management” is required. From the Uni-v3 blog post, the scenario we’d like to avoid is “market prices [moving] outside an LP’s specified price range” and “liquidity is effectively removed from the pool and is no longer earning fees.” As an example, if the ratio of ETH-to-$DG moves from 1-to-10 to 1-to-6, we might want to move our specified range to ~3 < $DG/ETH < ~12.