Waterđź’§ Shared Liquidity Proposal

Background:

Following the success of the shared liquidity proposals with Shapeshift and BrightID, we went to the drawing board on a more scalable shared liquidity solution that could benefit many projects at once.

This proposal is seeking [updated] $100k in HNY to be paired with Waterđź’§- a to-be-minted shared liquidity token. This is a joint effort between the token projects that have expressed interest in joining:

  • 1Hive
  • Shapeshift
  • BrightID
  • Giveth
  • Panvala
  • Opolis
  • Agave
  • Token Engineering Commons

We’re seeking community feedback before posting the funding proposal to the Honey Pot.

Token Description:

Waterđź’§($WATER) is a shared liquidity token between projects with aligned interests who are building long term value on Gnosis Chain.

By limiting $WATER to be used only in Liquidity Pools, it can be minted with enough supply to be a meaningful amount of liquidity for many projects, while taking advantage of price correlation to work like an index token for the projects it shares liquidity with.

Token Rationale:

Building significant liquidity on AMM-style decentralized exchanges requires a boat load of tokens. It’s easy for most projects to supply their own token for these pools, but extremely expensive to get other tokens to pair with.

Shared liquidity proposals have shown that there is a better option. 1Hive, Shapeshift, BrightID, and Giveth have all funded shared liquidity proposals giving them affordable and substantial long term liquidity. $WATER can scale the success of these proposals.

Token Launch Timeline:

  • Gnosis Safe created with members from all participating token projects (Water Liquidity Board).
    • Safe will require 7 out of XX signers for transactions described in this proposal.
    • Token minting and governance approvals beyond this proposal will require 75% signer agreement.
  • Participating DAOs send $100k of their token to the Gnosis Safe
  • $WATER token is minted and liquidity pools created.
  • Governance Setup (optional): at this point multisig members can choose to create a governance process for adding new DAOs to $WATER liquidity (with 75% approval).

Prenuptial Agreement:

  • If at any time a participating token project passes a proposal deciding it no longer wants its WATER liquidity (#RageQuit) - its DAO<>WATER LP is removed and the DAO receives back 85% of the tokens it provided for liquidity, or 85% of its total tokens still in its DAO<>WATER LP - whichever is lower (15% penalty).
  • If at any time the Water Liquidity Board decides it doesn’t want a participating project’s liquidity with WATER anymore (#Excommunicated) - that project receives 100% of its tokens still remaining in its DAO<>WATER LP back.
  • Participating projects can repeat this proposal to add more liquidity (#ReUp) without needing to approve a new governance process, as long as no new tokens are joining.

Team Information

@gabi and @paul will represent 1Hive in the Water Liquidity Board.

Skills and previous experience in related or similar work:
@gabi is a 1Hive seed and Gardens Swarm contributor. @paul is a 1Hive contributor and signer on the Shapeshift and BrightID shared liquidity multisigs.

Funding Information

Amount of HNY requested:
$100k WXDAI equivalent.

Ethereum address where funds shall be transferred:
[TBD] - Gnosis Safe with members of the Water Liquidity Board.

12 Likes

Interesting plan @paul , so the Water Liquidity Board will be deciding to accept new applicants in future?

I am wondering how many Water tokens will be minted equally for each project, 200k ? Meaning it will act as a stablecoin ? This will give an auction price of minimum 0.7 xdai per $Water.

2 Likes

I value a lot the work that the WATER project is doing on joining different DAOs in Gnosis Chain, and I hope it will succeed and provide further collaborations between those DAOs in the future.

However, I don’t like how this proposal is going to be implemented. It is unclear how each community will choose the representatives that will have the control of the multisig, which is going to be the criteria to add or remove communities from WATER, why all communities should add the same amount, and how $200k of liquidity was chosen.

I liked way more the initial WATER proposal that worked with a veneto garden instead of a multisig and people was signaling with conviction voting which communities and how much liquidity to allow into the DAO. It felt way more organic and decentralized than a small group of people choosing with binary decisions (yes/no) if a token should be in or out of WATER.

As I said, I like what the proposal is about, and I would love to hear there is a chance to recover the original spirit on how to implement it.

6 Likes

@sem - the scope of this proposal did change a bit after some brainstorming calls… once we started talking about governance for adding new tokens after launch we quickly realized there are a lot of challenges with that.

What works so well about Water comes from it being a purpose-specific token that only lives in liquidity pools. If $WATER is used for governance too that could hurt that utility, so a separate governance token for Water DAO might be needed, which raises a lot of questions:

  • How should such a governance token be distributed? Is it distributed equally to all communities or does it scale based on amount of liquidity?
  • Do new communities get equal governance as early ones, or should governance influence grow over time?
  • Is governance done by individuals in each community, or do we need a system where decisions are made collectively by the communities?

Adding to these challenges is that Water needs to be mintable in very large quantities to be useful as a liquidity token.

The current proposal is meant to meet the short term need for liquidity while still working towards making a governance system that works long term. In the current proposal there’s a requirement that 75% of signers approve any transactions outside the scope of this proposal - the intent is that initial multsig signers will use that to ratify a full governance system soon.

This proposal is meant to be very restrictive to secure the token while it’s in this centralized multisig phase, but if you think we need more security then we can think through ways to do that.

It is unclear how each community will choose the representatives that will have the control of the multisig

The current multisig is made up of the people that are championing funding for Water from their communities - max 2 per token project.

which is going to be the criteria to add or remove communities from WATER.

This criteria is in the “Prenuptial Agreement” section. New communities can’t be added in this proposal unless 75% of signers approve, so I don’t expect new communities would be added before a full governance process for approving them is ratified.

why all communities should add the same amount, and how $200k of liquidity was chosen.

At the time I proposed $200k that was the most HNY we could realistically get in a single funding proposal, but since then HNY’s gone down so now we’d need 2 funding proposals. In my opinion we should be aiming for more than this - at least $1M, where a $15k swap has less than 3% price slippage. We have this already with HNY<>GIV, but this is rented liquidity and HNY<>WATER liquidity is permanent.

Liquidity needs are different for each community but I don’t think $400k in paired liquidity is excessive for any of the interested communities. Adding all tokens evenly also gives everyone the same skin in the game and helps diversify price exposure, since $WATER will correlate to its paired tokens.

@solarmkd - Each participating community funds $200k of their token to join, but there will be price slippage since tokens won’t get funded at the same time. We’ll then match the current value of each token to Water valued at $1 at the time the LPs are created.

$WATER won’t act like a stablecoin - its price will correlate to the prices of the tokens it’s paired with, so it’ll act more like an index fund of those tokens. But yes I imagine the auction price minimum will wind up near 0.7 xDai per Water.

3 Likes

We have a call scheduled tomorrow and I hope I can convince you that a multisig controlling these amount of funds is a bad idea. I will share here my position as well, with the hope it is compelling for the rest of 1hive community.

I think multisigs that control large amounts of community funds are an anti-pattern because of the following:

  • It is difficult to select community representatives
    • It’s a lot of responsibility
    • It may have legal repercussions for the DAO if it’s not sufficiently decentralized
  • It is difficult to change community representatives
    • Once established, there usually aren’t periodic elections to revalidate the charge
    • They have a false legitimacy to take decisions, when it should never have been the case
  • Community losses the control
    • Once the funds have been sent to a multisig, they are not controlled by the DAO anymore
    • The decisions are centralized, usually by people who does not have enough skin in the game (signers are not punished if they decide wrongly), or may have conflicts of interest.

1Hive and gardens in general were created to create truly decentralized DAOs where people could come in and go out without having to be accepted, and where the people would be listened even if they can’t reach the 50% of the voting power (but they are “convinced” enough to carry a proposal forward).

I know setting up a multisig for WATER is to facilitate the kickstart of it, but I ask you to reconsider it and work on a method that is truly decentralized from the beginning and give the tokenholders of each protocol the direct control on the liquidity that is shared with the rest of the protocols. I have some ideas that I’d love to share with you in our call tomorrow, and in further posts. Let’s try to solve this lack of liquidity problem the right way :wink:.

6 Likes

Can Water also hold the LP tokens for the pairs that have already done token swaps and provided liquidity? For example, can we take the Bright/HNY LP tokens that belong to the multisig that created it and have them add those to Water?

1 Like

After talking with @sem about building a more decentralized and long term governance structure for Water, the method we were aiming for isn’t buildable yet.

The reps championing Water liquidity to the other communities would like to move forward with the existing proposal, but at a lower amount of $100k per each community’s token. This is in line with the other shared liquidity proposals that have already passed.

Our long term goal is to build a secure governance system for onboarding new tokens to Water, but we need to put a lot of thought into how that gets built. In the meantime 75% multisig approval would be needed to do anything outside of what’s in this proposal.

In spite of sem’s concerns I think Water is a significant improvement on the status quo, which is shared liquidity proposals directly between DAOs that live in smaller multisigs, or expensive rewards that only provide temporary liquidity.

1 Like

Sure we could do that. Maybe as a separate proposal?

1 Like

Hey great proposal @paul ! I think something akin to WATER is a great idea, I do however share some of the governance concerns of @sem maybe there’s a less restrictive solution out there? Also, how does the WATER token and its liquidity interact with the broader network economy?

What would be awesome would be to allow anyone to mint WATER with this initial batch of DAOs bootstrapping liquidity. I think creating a token that can be available for anyone on the network to buy or invest in would be extremely useful. How is $WATER being minted exactly? Is it something like a balancerPool contract?

If instead each participating DAO would send funds to an escrow which once all DAOs have sent the required funds then is sent to a $WATER minter contract and then disburse $WATER back to each DAO’s treasury (a multisig, agent, or other decentralized entity that can manage a funds). WATER tokens are then all minted equally for those who bootstrapped the token and funds can be managed by each participating DAO independently from the other using their own unique DAO structures.

We could then setup an aragon app(Gardens with an agent) to be the owner of a modified BalancerPool, allowing for certain high level functions such as adding and removing tokens (and sending liqudity back) this agent can be governed by a Tao Voting app (thus being disputable) with $WATER as the voting token. Effectively then with some intial guidance from the technocracry the $WATER token could be self-governing without DAO representatives becoming the gatekeepers.


Does this make any sense or am I a rambling madman? I don’t know from your proposal what your existing technical layout is for $WATER but I’m extremely curious.

Are there any current protocols on gnosis chain that can create index tokens or something like a balancer pool? Do we need to reinvent the wheel or is there something easily forkable?

3 Likes

A few updates on this proposal (I’m updating the original post with these and putting the deleted parts here to keep OP accurate):

  • No more Gnosis Auction. Given the lower entry amount of $100k, a token auction for $WATER won’t create a meaningful amount of xDai liquidity and adds more complexity than value it brings.
  • RaidGuild has passed on joining.
  • Stewards from the Token Engineering Commons have expressed interest in Water and will be considering a proposal to join.
  • Gnosis Safe to receive funds is created - funding from proposal will go here: gno:0xb5F50e42aD28fB4BFc25b6B4c5a34AaD30649FC0

Deleted from original forum post:

In “Token Launch Timeline”:

  • [10%] of $WATER supply will then be made available in a Gnosis Auction.
    • Buyers can bid with xDai on a discounted, vesting stream of $WATER
    • Minimum bid price: [30%] discount
    • Streaming period: [6] months
  • xDai earned in auction is paired with $WATER to build liquidity for WATER<>xDAI.

Communities that have expressed interest in joining:

  • RaidGuild
4 Likes

Giveth had a Governance Meeting and the only blocker that came up for this proposal is, sadly, that including Agave makes this a dangerous proposal :-/

I know it sucks but given the situation and the unknown future of the Agave token I don’t think it makes sense to include them in this experiment at the beginning. There is a real chance that a lot of Agave tokens could be printed to compensate users… or various other similar economic solutions that can put a strain on the liquidity of Water and therefore, the liquidity of the projects associated with Water.

I hope to hear some reasoning on why it makes sense… but I would love to hear if other projects would be interested in doing a token swap with Agave right now… Giveth wouldn’t, which is why we aren’t super interested in them being in the initialization of Water.

These are extenuating circumstances and Giveth wants to support the Agave community, I would love to endorse other ways to support the Agave community, but bringing them into this experiment adds unnecessary risk to an awesome proposal IMO.

Let’s add them in later a month or 2 after they have everything sorted for their recovery.

4 Likes

2 final proposal edits before this proposal goes up :slightly_smiling_face:

  • Agave will not be participating because of token price uncertainty from the re-entrancy hack. Thanks @griffgreen for bringing Giveth’s perspective on that.
  • Number of signers for adding and removing liquidity lowered from 7 to 5. In total there are 12 signers representing 7 projects in the multisig.
1 Like

Proposal is up in the Honey Pot! Gardens

Gnosis Safe address: 0xb5F50e42aD28fB4BFc25b6B4c5a34AaD30649FC0

1 Like

I don’t think this proposal should pass, and here is why:

  • The proposal is asking for $100k which represent a 8.4% of 1hive’s treasury to be managed by an external multisig not controlled by 1hive.
  • The token created is not backed by anything, so pairing HNY with it means giving something backed by the 1hive community for something that does not have any value, which means that HNY an the 1hive community lose value.
  • Passing this proposal encourages other communities to do the same, giving huge amounts of their funds to a multisig that is not controlled by themselves, and pairing their token with this new token not backed by anything, creating a systemic risk, in which one hacked community affects the others disproportionately more because all of them share liquidity directly with WATER.

The points I’d like to make are:

  • We should not fake liquidity with tokens that do not have any intrinsic value. Liquidity and value must be earned, or we take the risk of destabilizating the economies we created with a lot of effort.
  • No proposal should be requesting for a 8.4% of the common pool, but even if it does, it should have a very detailed plan of what will happen and assess correctly the risks. I think we should have at least a simulation of how the economies will work when there is this new token connecting them; how a token such as GIV that is unlocking new tokens everyday will affect TEC that can only be issued using the bonding curve (although it will also unlock the hatcher tokens in the future), for example.

I kinkly ask @paul to cancel the proposal until there are more opinions of blockchain engineers on the table. A change like this to the tokenomics of gardens should be made with a lot of care, and what I’m afraid of is that when something wrong is done, it’s difficult to undo it when it is in the blockchain.

3 Likes

I am definitely in support of a common initiative by all the value-aligned communities to try an experiment with this proposal. However, I removed my support as I think the arguments @sem expressed are significant. Until further analysis and more transparent discussions or statements from the parties involved, I think we should stall it for the long-term benefit.

1 Like

Yes but it is also less than 1% of our mcap. So from that perspective it isn’t nearly as significant comparing it that way.

It’s backed by the other communities. The purpose for water was because communities can not pair liquidity with $Hny due to the difficulty.

This goes back to the very problem we are trying to solve. Our ability to perform D2D swaps, bootstrap garden DAOs, and add to honeyswap liquidity is being completely restricted by this model which has its benefits and thus the proposal for $water rather than support for making $200k+ Hny proposals easier to pass

The multisig I think is a real concern. I don’t know that it is enough to pull my support but it’s enough to at least slow the passing of this proposal. I would encourage any development help we can get to implement a better solution for this gap

2 Likes

I strongly disagree with most of these points.

The points I believe have merit are governance with a multisig and the risk of a hacked project minting infinite tokens. And while this proposal isn’t perfect, it significantly improves on the status quo for these concerns!

  • Governance with a multisig. Yes, we need to build a better governance system for shared liquidity, but Water is still a big improvement on current multisigs, which are the status quo. Water is a 5 of 12 multisig with members from 7 different projects. Our shared liquidity with Shapeshift and BrightID, and BrightID’s shared liquidity with Giveth, are all 4 of 6 multisigs with members from 2 projects. Honeyswap’s liquidity incentives are also managed by a multisig, which still hasn’t been able to switch STAKE<>xDAI rewards to GNO<>xDAI, 4 months after the merge. Our current liquidity governance is not in good shape.

  • Hacked project minting infinite tokens. The risk here is that a project with significant liquidity outside of their $WATER LP could be hacked and infinite tokens minted, which would disproportionately affect $WATER’s price beyond just that project’s share of the LPs. For this to happen, the malicious tokens would be minted and sold for other tokens with $WATER LP, and an unsuspecting arbitration bot would then buy those tokens in the $WATER LP and sell them through the token’s other LPs with more liquidity, until either those LPs were also drained or the arb bot was drained. A few important notes about this risk:

  1. This type of hack isn’t possible on a Gardens DAO with dynamic issuance.
  2. For this hack to be effective you need both rich, lazily built arb bots and a vulnerable project with a lot of liquidity outside of $WATER, which are generally the more mature projects. In this unlikely combination of exploits, the maximum price effect for HNY is still the same as our current shared liquidity proposals, where our paired LP token could $0. (OK, slightly more because we share liquidity directly with other tokens that will also have $WATER LPs, but this is more reason to move from direct shared liquidity to a shared liquidity token to reduce this risk).
  3. In this type of hack, a multisig is actually better equipped to prevent damage than conviction voting or another form of on-chain governance. On-chain voting is slower and would take more time to remove a harmful LP. For a governance comparison, it took Giveth 20 days to turn off liquidity rewards that were being abused on Uni v3.

To address the other points:

  • Liquidity is a critically valuable part of token economies - they are the highways that allow value to move around. A token that facilitates that movement of value is inherently valuable.
  • The dynamics that correlate token prices of Uni v2 style LPs are relatively simple to understand. I still support blockchain engineers modeling this price correlation if they haven’t already.
  • Adding to @Monstrosity’s points on the proposal as a % of the Common Pool, building sustainable liquidity is a productive use of Common Pool funds, and since $WATER will function similar to an index fund of paired tokens, it’s likely to have a positive effect on $HNY’s token price as well.
4 Likes

I’ve been championing the practice of DAO’s owning their own liquidity - Spinning up a new multisig for every tokenswap deal has proven to be cumbersome and ineffective when change inevitably needs to happen. It would be great if somewhere in this system a DAO can hold it’s own liquidity - in the form of an index token or something liquiditable.

In terms of backing the value of $WATER - What about lowering the entry price (100k in tokens) and instead putting in a percentage of stables that is paired with $WATER then $WATER is subsequently paired with protocol tokens. Would there be a threshold where if a DAO had to sell it’s tokens to acquire xDai that it would make up for it by having a huge amount of liquidity created for it?

Have we considered other governance tools like an AragonOS, DAOhaus/Moloch?

  • AragonOS could be cool because we could leverage EVMcrispr in case we ever need to do anything complicated relatively quickly.
  • Moloch/DAOhaus - Having Shares that can be ragequitted proportionate to the value of the funds put in, this gives participating DAOs a bit more direct control over funds, social reputation and coordination being the glue that holds the funds in place.
2 Likes

The current proposal for Water is a very innovative, yet simple and elegant. It is multi-party token swap where you also get an index token out of the deal… and unlike most index tokens that require some sort of liquidity mining to bootstrap, Water has liquidity by virtue of it’s creation.

I don’t see the benefit in changing anything to make it more complicated. What is great here is the simplicity. I fully expect this model to be copied and I am bullish on Water.

If 1hive did token swaps with everyone in water it would have the same risk as Water has currently, with less upside (no index token), and more coordination.

As far as modeling… I don’t really see a need for it. It is a simple thing… if the prices of the other tokens go up, it positively effects the price of WATER and HNY, if they go down, then the price of Water and HNY go down. But now, not only do you get more liquidity for your token, there is also a reason to buy WATER. What really is there to model?

Multisigs have pro’s and con’s but this is a nice friendly multisig… I don’t see much risk in this multisig, as Paul said, i see more risk in multisigs that have fewer groups, this is a very diverse group.

It is a large amount of the Common Pool, but it is also a great use of the funds. It will not be sold to produce labor, which would lower the price, it will be directly utilized to provide liquidity, while also creating the utility of an index token, both of which help the economy.

If you don’t see the value in token swaps to add liquidity or Index Tokens… then this is not the proposal for you. But I see value in token swaps for liquidity and I love index tokens as a simple way to get exposure to a basket of assets.

This in no way would be fake liquidity. It is pass-thru liquidity… well hopefully… if Honeyswap works right.

The only thing I worry about is if Honeyswap will be able to route thru the liquidity… because with the GIV/TEC token swap the Honeswap front end doesn’t seem to recognize the liquidity well… Routing seems to be ignoring the GIV/TEC pool? · Issue #71 · 1Hive/honeyswap-interface · GitHub

5 Likes

The routing through liquidity can be easily solved with a simple PR as far as I know. It also happened with COLD/HNY before, and we were able to solve it.

By the way, the main point that I might be against the proposal is the multisig as I believe we can also leverage our own governance tools. That is why I thought a more comprehensive and transparent discussion would be better for the long term. Also, at this point, I can say that transparent info from other parties to be involved in the multisig is missing. We can improve that.

1 Like