UIP 02: USH Liquidity Incentives Strategy Update

Summary:

This UIP is to propose and enact changes to vdUSH weightings as well as get broad community consensus and feedback on changes to strategy on USH liquidity incentives.

Based on community feedback as well as general ROI calculations, the overall liquidity incentives strategy will be shifted towards:

• Consolidating liquidity incentives under vdUSH (rather than having multiple fragmented farms)
• Making USH farm rewards tilt more towards locked rather than directly claimable rewards
• Drive more USH emissions towards destinations with attractive co-incentives - Practically, this means reduce USH incentives to single-sided unshETH farms in favor of productive uses - e.g. unshETH-ETH liquidity, lending protocol integrations.

With the proposed changes - the expected outcome is:

• 58% reduction in effective USH emissions
• Growth in USH liquidity by shifting liquidity incentives from single-sided to LP lockers
• Growth of unshETH utility in DeFi
• Reserve emissions to grow unshETH as a blue-chip protocol beyond 2+ yrs

Abstract:

Currently, vdUSH on ETH and BNB has been empowered to vote on unshETH governance. vdUSH is earned via locking single-sided USH, or via locking LP tokens (Sushi LP and Balance 80-20 BPT on ETH, Pancakeswap LP on BNB). Locking LP tokens get a boost multiplier when calculating vdUSH amount since liquidity providers are taking additional risk and providing healthy liquidity for token holders. Currently, this boost multiplier is set to 2.5x for BPT, and 3.5x for Sushi and Pancake LP.

In addition to earning governance power, vdUSH stakers can also participate in the governance farm - where they’re rewarded with USH tokens and partner co-incentives (ANKR currently). The USH tokens earned by vdUSH stakers are currently 50% directly claimable, and 50% added to the existing vdUSH lock. This ensures that long-term 1Y lockers don’t dominate the claimable USH from the farm rewards, while also ensuring vdUSH governance power is maintained.

The exact mechanics are described here in the docs: USH - unshETH API Reference 1

Recently, unshETH expanded to Arbitrum and launched vdUSH. vdUSH on Arbitrum works differently in 2 ways: (1) LP tokens are awarded a 5x multiplier, and (2) The farm rewards are 20% directly claimable, 80% locked. This has had pretty decent growth and driven a healthier balance in single-sided vs LP vdUSH (almost 2:1 ratio of LP).

The following changes to vdUSH are proposed to align with the strategic goals described above:

1. Include Arbitrum vdUSH for governance power, similar to ETH and BNB vdUSH
2. Align the LP token multipliers to be similar to Arbitrum (e.g. 5x multiplier instead of 2.5 and 3.5x)
3. Change the percentage locked USH in vdUSH farm to 80% locked instead of 20% locked, as in Arbitrum

Additionally, to align the overall liquidity strategy to align with the goals described above, the following additional changes to emissions are proposed:

1. Reduce single-sided unshETH farm emissions
2. Drive more emissions to co-incentivized / productive uses - e.g. Mav, Pancakeswap, and Camelot liquidity pools for unshETH, as well as new integrations
3. Drive more emissions towards Arbitrum (vs ETH mainnet and BNB Chain) where we have the greatest number of upcoming integrations and growth planned.

USH emissions and liquidity incentives overview:

USH token allocation was initially laid out at start here in this blog post.

The initial blog post laid out a plan to emit USH over the period of ~2 yrs, with 1/3 distributed pre-Shanghai. At this time, ~35% of the total supply is circulating. Of that, a meaningful portion is locked into vdUSH.

As we’ve grown, it’s become clear that unshETH will be a blue chip protocol for years to come and that it’s better to sustain and build the protocol through the bear market rather than expending on emissions straight away. With the new strategy, the liquidity incentives emissions are a lot lower in order to reserve USH token emissions to sustain the protocol beyond 2 yrs. See image below: ~60% of USH token supply will be emitted over 2 yrs (rather than 100%), the remaining being reserved for (a) treasury, (b) ecosystem fund, (c) future emissions to grow the protocol, (d) marketing and exchange listings, and (e) future investors.

With the changes proposed above: effective monthly unlocked USH emissions will be cut to 860k / mo - and total emissions will be 1.4M / mo (inclusive of the locked vdUSH rewards).

For the current month - liquidity incentives were 2M USH / mo. The new strategy represents an effective emissions reduction of 57%.

Effective USH emissions of 860k/mo = ~$129k / mo at current price. With the new strategy - given the focus on co-incentivized farms and locked emissions, even with a significantly reduced emissions schedule - the actual dollar value of USH + partner co-incentives is almost 2x that of the unlocked USH Emissions. See below:

Details on vdUSH TVL:

A lot of community feedback has been to drive locking of vdUSH towards the Balancer 80-20 LP or other LP tokens. See below for the current picture of locked vdUSH tvl - most of it is in single-sided on ETH and BNB Chain, a decent amount in the Sushi LP on ETH. The Balancer 80-20 LP has seen poor uptake. On Arbitrum, the LP portion is much higher and healthier - the LP tokens have a 5x multiplier here. This is the desired outcome, which is why the proposal is to shift ETH and BNB Chain to these bonus multiplier weightings as well.

Details on overall USH liquidity pools:

See below for the overall USH liquidity picture.

USH liquidity is often mis-represented as only being equal to that of the Sushi pool ($400k), but in reality USH is backed by another ~$400k in Balancer on ETH mainnet, as well as a decent / growing liquidity on BNB and ARB. To combat the fragmentation of liquidity, incentives will be driven towards the vdUSH pools on all chains, except where there are meaningful co-incentives / efficient / concentrated liquidity (e.g. Pancakeswap v3 USH/BNB pool). On ETH Mainnet, the liquidity on Balancer USH-WETH pool will be coaxed into one of the locked vdUSH pools with the proposed multiplier changes, while we reserve the ability to boost liquidity at any given point by driving incentives to the Balancer gauge.

Voting options:

• Yay = enact vdUSH changes and new liquidity strategy (as described in the abstract)
• Nay = do not enact proposed changes