[HIP-23] Hermes V2 Liquidity Accelerator Program (v1.1)

Introduction

The V2 iteration of Hermes and Maia DAO Ecosystem is now live, with Total Value Locked (TVL) currently sitting around the $1.5 million mark. The ability to offer competitive quotes of up to 10 ETH on various routes is a display of the efficiency of the protocol. However, efficiency alone is not enough to support the growing number of partner gauges - especially with the upcoming Hermes Games, which are expected to drive significant partner / collaborator gauge creation - or to handle larger trade sizes. During the transition to V2 we reduced the tailEmission rate we had been using in V1 by a factor of 10x. This was done to adjust from a period of high inflation in V1 in which we were overpaying for liquidity. This choice was possible as liquidity is more abundant and thus cheaper on Arbitrum. However, now that we are working with live data we see that distributed emissions are lower than we anticipated for two reasons:

• A large amount of emissions returned to minter (only 41.5% were effectively distributed to LPs in the first epoch). For clarity, the amount of weekly distributed emission, vs weekly minted tokens, is a factor of:
  • How much of each LP’s liquidity is staked in our gauge. Emissions (minted) are allocated to the whole pool, but only distributed to staked positions. Thus if more positions from the UniV3 pool are staked, APRs aren’t diluted as they are pre-allocated, with remainder at the end of the epoch being returned to the minter.
  • How much boost positions in the platform have (i.e. if absolutely no user had any boost attached to their positions, 60% of LP emissions would be returned to minter).
• The current dollar value of weekly emissions is low, largely due one large holder exiting their bHermes position and suppressing the price.

The importance of Emissions to kickstart the Flywheel

Protocols want and need to rent liquidity, in order for it to make sense they need to get at least the same amount of emissions that their LPs already generate in fees. Right now there are less than 4k USD worth of Hermes emissions effectively being distributed weekly, so any pool that generates more than 4k USD in fees is out of our price range.

Thus at this early stage in our Arbitrum journey, making an increase in emissions makes sense, to onboard more gauges and offer their LP's a fair deal. Right now liquidity is expensive because we are a new protocol, so covering that cost to be able to grow and foster new integrations is key for long term growth. Onboarding new gauges exposes us to more users from other established communities, and increases awareness of and participation in the Hermes gauges system.

bHermes demand is derived from Hermes inflation:

• Boosting: increases users rewards APR from LPing.
• Voting: how much emissions users can direct to an LP.
• Bribes: volume of bribes from LPs that trade fees for emissions.
• Rebases: The conversion rate from Hermes to bHermes grows in proportion of new emisisons to circulating supply, working as inflation protection.

The protocol contains mechanisms to balance supply and demand once in motion, this early boost in emissions is designed to kickstart the flywheel by allowing for and incentivising new participants (partner protocols, LPs, Hermes burners).

Objective

Having succesfully launched V2 on Arbitrum mainnet, the protocol is now in a bootstrapping phase where adjustments to emissions need to be calibrated regularly to meet the strategic objectives of growing liquidity and onboarding new partner gauges. As a fully decentralised platform, recalibrations currently require governance approval which requires over 3 weeks for each adjustment. As such, this proposal seeks to:

• Increase emission to allow for more gauges to be added.
• Allow for more rapid adjustments to emissions, both up and down, during the bootstrapping phase, with a subsequent return to full governance control once this phase is completed.

To truly scale and accommodate a growing ecosystem, we must kickstart the liquidity flywheel by mobilizing liquidity providers from across the DeFi space. To achieve this, we propose the Hermes V2 Liquidity Accelerator Program.

This initiative will help establish a higher baseline for the liquidity we can attract and maintain through weekly emissions.

Program Overview

During the Hermes V2 Liquidity Accelerator Program, HermesDAO will establish the ‘Maian FED’, a committee composed of 3 Core Team members, the founders. This committee will initially increase emissions by 5x to help bootstrap liquidity. Following this increase, the Maian FED will strategically adjust emissions over time. This program will come to an end after a maximum of 15 million HERMES tokens are minted by the Minter contract, after the on-chain proposal is executed by the timelock contract. Once this cap is met, control over tail emission values will be returned to the onchain governace timelock contract.

Emissions

Every week the Hermes Minter Contract emits 0.2% of Hermes circulating supply and allocates it to gauges, however due to factors such as the percentage of unboosted or unstaked positions only 0.083% (first epoch’s value) ends up being distributed to LPs with the remainder being returned to the minter for usage in the following epoch. Current LP emissions are significantly lower than the industry averages for ve(3,3) systems.

Several of the features being progressively rolled out in Hermes UI, such as Talos Strategies allowing users to lend out their extra boost for a fee, as well as the Maia Boosted Talos Strategies, will contribute to increase the ratio of distributed emissions but for the sake of simplicity, we assume the same ratio in the following calculations.

Assuming a 41.5% distribution rate:

Current Baseline Emissions: 0.083% or 137,821 $HERMES per week. Target Baseline Emissions: 0.415% or 689,105 $HERMES per week (5x increase).

Note that not all emissions will be distributed, and that undistributed emissions will be returned to the minter - resulting in less minting in the following epoch.

Adjusting tail emissions should be done according to several factors, which include:

• Number of active partners and gauges
• Emission LP distribution rate
• Volume and other market condition related metrics

Contract Ownership and Operational Multisig

For the duration of this program ownership over the BaseV2Minter Contract will be transferred to the ‘BaseV2MinterAdmin’ contract - this contract will allow Maia DAO’s operational multisig to call the setTailEmissions function while retaining full onchain governance control over the remaining functions - setDaoShare and setDao.

Governance can always claim this power back and remove it from the BaseV2MinterAdmin contract. The program can also be terminated earlier by the multisig itself.

Operational Mutlisig: 0xD2ef1f4a205bf30f6515039785ceFBCb67e6d431 BaseV2MinterAdmin Contract: 0x00000000727199B385F90Ce2E0F73904e46B6fF2 BaseV2MinterAdmin Code