We must reform the Honeycomb

aka, An Incomplete Survey of AMM Reward Tokens and What They Can Tell us

Goals: Review the characteristics of farm reward tokens and compare them, specifically with the intent of understanding how COMB stands up to the benchmark set by other farm reward tokens.

Assumptions:

  • You are familiar with cryptocurrency
  • You are familiar with the xDai and Polygon sidechains
  • You have an understanding of automated market makers (AMMs)
  • You have an understanding of liquidity provider (LP) token mechanics and LP staking incentive programs (“farms” or “liquidity mining”)

Context: Honeycomb farm rewards for Honeyswap AMM launched on xDai in June 2021, along with Honeyswap on Polygon. Honeycomb farm rewards launched for Honeyswap Polygon in July 2021.

As of early August 2021, I do not believe it would be controversial to state that Honeycomb farm rewards have not achieved their desired effect - which is to attract and retain liquidity in Honeyswap liquidity pools. In the case of both xDai and Polygon, total value locked (TVL) and average weekly swap volume in Honeyswap pools are back to roughly the same levels as before Honeycomb farm launch.


Honeyswap Polygon, taken July 25 2021


Honeyswap xDai, taken July 25, 2021

It’s possible that, without Honeycomb rewards, Honeyswap would have suffered a net loss of TVL, but this counterfactual is hard to assess with any certainty.

(Sidebar: why do we want more TVL? High liquidity pools enable high swap volume with low slippage, which makes the dex attractive to traders. More swap volume drives more revenue for liquidity providers and for 1Hive. Therefore, we want to do what we can to sustainably incentivize both liquidity provision and swap volume.)

As a result of market conditions and COMB tokenomics, farm rewards offered by Honeycomb are currently not very attractive compared to yields offered by other AMMs on similar pairs. It can credibly be argued that the (relatively) low yields offered by Honeycomb is a major contributing factor to capital flight.

Methodology:
I used Dune Analytics, Coingecko and DeFi Pulse to identify the top 5 AMMs (by TVL and swap volume) that offer farming rewards across Ethereum mainnet, xDai, and Polygon. Here is the list:

DEX Networks TVL (maximum) 24H Swap Volume (July 25, 2021)
Curve Ethereum, Polygon, xDai $8B $143MM
Sushiswap Ethereum, Polygon, xDai $3B $113MM
Quickswap Polygon $1B $56MM
Bancor Ethereum $1B $30MM
Balancer Ethereum, Polygon $615MM $21MM
Honeyswap* Polygon, xDai $8MM $102K

I excluded Binance Smart Chain dexes because Binance is predominantly turbo pyramid farms (yes, even Pancakeswap. Especially Pancakeswap. Don’t @ me.) Uniswap doesn’t make the list because Uniswap does not offer farming rewards.

Comparison

Curve Sushiswap Bancor Balancer Quickswap Honeyswap
Token CRV SUSHI BNT BAL QUICK COMB
Issuance ~3B total supply 250MM total supply it’s complicated 100MM hard cap 1MM total supply 1MM total supply per chain
Dex Swap Fee variable (0.030% for 3pool) 0.3% variable (0.1%-5.0%) dynamic 0.3% xDai: 0.3% Polygon: 0.15% on WETH pairs 0.3% on all others
Protocol Fee variable (0.015% for 3pool) 0.05% it’s complicated none 0.05% xDai: 0.05% Polygon: 0.025% on WETH pairs 0.05% on all other pairs
Revenue Stream 3pool fees are used to purchase 3pool and allocated to veCRV (staking) holders protocol revenue is used to purchase SUSHI and allocated to xSUSHI (staking) holders BNT is minted and burned to incentivize LPs and protect against impermanent loss (IL) none 0.04% protocol revenue is used to reward Quick staking holders (dQuick)0.01% goes to Quickswap Protocol swap fee is split between HNY and COMB buyback. Half of COMB buyback is burned.
Governance yes yes yes yes yes* no
Single-sided staking yes* effectively available through yearn yveCRV yes yes yes yes no
Single Reward Token used across chains yes yes n/a yes n/a no
Other Utility locking CRV multiplies CRV farming rewards - - - - -
Est. Revenue (daily, July 25, 2021) $16K $56K I didn’t want to try and figure this out $0 $22K $500
Token Market Cap (as of July 30, 2021) $600MM $1.6B $800MM $223MM $53MM $200K (xCOMB + pCOMB)

Key Takeaways

The primary value of a farming reward token is the revenue stream which is directed towards creating value for the token (usually through the Sushiswap MasterChef model of purchasing the token and allocating it to token stakers). As such, it’s reasonable to expect that COMB tokens will be valued at a price which is proportionate to the revenue being directed at them. When considering this aspect, several issues immediately present themselves:

  1. COMB tokens only receive 50% of protocol fee revenue (the other half is shared with HNY), which immediately discounts the value of holding/staking COMB by half compared to other farm reward tokens
  2. COMB tokens only receive the benefit of protocol fees collected on their respective chains (xCOMB from Honeyswap xDai, pCOMB from Honeyswap Polygon), which means that the value of COMB is only proportionate to the individual Honeyswap, rather than the combined protocol revenue of all Honeyswap instances
  3. Halving swap fees for wETH pairs on Honeyswap Polygon creates less revenue for LPs and the pCOMB token, which further reduces the expectation of future revenue

When we move on to consider the other sources of value for farm reward tokens, i.e., incentives for holding them rather than dumping them on the market, we can also see that COMB lacks any of the appealing properties offered by other dexes:

  • COMB does not offer any governance rights (even if those voting powers are non-binding, as in the case of SUSHI)
  • COMB cannot be staked single-sided, meaning that even if a farmer intends to retain COMB for reinvestment it must either be paired with additional capital, or (as a few 1Hivers are known to do) half of the farm reward is sold on the market (putting sell pressure on the price) to be paired with the remaining half
  • COMB does not offer any additional benefits or incentives to hold, such as BNT’s IL protection or CRV’s intensely recursive reward boosting

Conclusion

In light of this analysis, I would like to put forward the following assertions:

In order to reinvigorate the Honeycomb farm program and ultimately accomplish its intended purpose, we must radically overhaul the existing program of COMB rewards to bring its value proposition closer in line with the programs offered by other dexes in the space.

I believe that this reformation is necessary for the long-term success of Honeyswap on xDai, Polygon and, in the future, Arbitrum. Without any changes, I suspect it is very likely that our extant market share and liquidity will eventually be consumed by Sushiswap, Curve, and Quickswap.

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Hi
I really liked this post!
For Comb in particular I think the supply must be reduced faster than proposed and used as governance like weight voting for new pools and adjusting existing ones. Also pools should be reviewed and voted every forthright.
To grow LP we need to attract investors so we could pair new lps deposits with x ammount lps in each chain, also voted using comb.
So let’s say someone deposits xdai xcomb pair, the person gets double deposit that is locked for a determined amount of time. In that manner the TVL would also grow. This “bonus” would have to come from common pool or from a new function of staking xcomb.
I’m using xcomb as an example but the same would work for acomb and pcomb.
Also we need some hype, like a major exchange listing.

I hope I’m not rude in saying, and believe I’m not wrong in saying, the TLDR is: currently, comb tokens do nothing but create more comb tokens to be sold and drive down the value of comb tokens, and that is in essence the core issue

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I don’t understand why they created Comb in the first place.

It’s a little rude, but that is essentially the tldr.

I feel obliged to say though: COMB doesn’t do nothing, it does have a revenue stream pointed at it in the form of a buyback+burn mechanism, but given the present volume on Honeyswap it doesn’t do enough in its current form. Maybe it would be a different story if Honeyswap was already doing $5-10MM+ a day in swap volume, but we’re not even close.

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Great insights, thank you for taking the time to write this up. I subscribe to both your analysis of the problem and your assertions.

In addition to hardening the incentives, I’d love for us to step up our meme game too (the strength of our values is something which can really help differentiate us in this crowded space).

Not sure if you’ve come across this, but I find @burrrata’s framing here especially powerful :

1Hive seeks to realize a future that is more free, fair, open, and humane. To do so we need to create an economic engine that can effectively and sustainably fund public goods. By working together to make Honey valuable and then continuously distributing it towards public goods we can create a better future for everyone to enjoy. In order to run the economic engine that funds public goods we need fuel, aka liquidity…

I’ve occasionally experimented with tweets that try to communicate this aspect

But it’s clear that a more consistent and complete approach is necessary.

I do believe there’s a version of the following truth that applies to Ethereum apps

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Put another way, how do we create a world in which folks choose to trade and provide liquidity on honeyswap because they wish to help bring about a future that is more free, fair, open, and humane.

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While I don’t think this may be the perfect response but as you mentioned, the post by @burrrata seems to be a good start. If it could be modified to better suit the current problem, granted I don’t understand half of the post but I get the gist of things

This is very true. However, I don’t believe this is an issue with the distribution model rather a simple lack of demand for the supply within the current market conditions.

The news of xComb did not expand beyond the current demand within the community. So when active investors already in the community heard the news about xComb they were happy and excited to incure this extra reward. Because there was no cost from the inital airdrop, the bottom line was endless untill inflation stops, clearly seen as investors selling off as pure profit.

The initial peak was simply created by the arbitrage opportunity of investors flooding LP tokens into app to cash out on the highly over-evaluated xComb price caused by the initial low liquidity. Those prices could not be sustained because the rate of new xComb enteriting the market greatly exceeded the current amount of xComb in the xdai/comb pool.

If demand stays the same and issuance keeps expanding you have an ever decreasing price until you reach the point of inflection where the issuance supply becomes at par with the circulating supply and inflation starts to reverse percentage-wise.

Of course, this all changes If X amount of investors became aware of the ecosystem and suddenly flood the market the price and liquidity would surlily rise as new investors seeking to earn a piece of that issuance.

I think this is everyone’s biggest fear that is honeyswap is failing to grow because it prime value which was simply low fee trades is being absorbed by other more popular chains and dexs servicing that value proposition.

If xDai starts making payments a reality on the consumer level and not just settlements, or other high value consumer apps come to chain then this will certainly increase market conditions and then new money will use the on-chain services rather than have to move liquidity around all the time. Honeyswap will still always have value though here on chain kind of like a convenience store close to your block just might not become wallmart.

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This won’t protect us in the long run. The big difference between brick and mortar vs online is that the physical dispersion that enables corner stores to stay in business doesn’t exist on the internet. It’s just as convenient for someone to go to Walmart dot com as it is localstore dot com. In our case, Sushiswap and Curve - which already have dominant top-of-mind positions in the DeFi community - have set up shop immediately next to our corner store and we need to give people a reason to come here.

To @sacha’s point, we can and should use memetics to give ourselves an edge. However, there’s only so much yield LPs will be willing to forgo just because we offer ideological alignment. Memes can complement material conditions, but they cannot replace them.

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I tried to keep this about current comb tokens but obviously learnings should be applied to future comb tokens as well.

TLDR I think our biggest issue is awareness to the world: as @sacha said “because they wish to help bring about a future that is more free, fair, open, and humane.” This statement is why I already view comb as a governance token. Also, we have single side pCOMB staking right now paying out rewards in another token, does anyone even know this? We have an investor that added $50k in liquidity to comb, this normally would be bullish for other projects. We have an application process for adding more investors which will come, it will just take time. Once we have governance model; I can’t speak for others but for me my first proposal will be to request a tvl KPI metric be implemented to our allocation points at least for pcomb. I feel we overlooked this and we couldn’t change this after launch. This will be a very very hot topic but if it passes or fails under a free and fair governance system then we have our answer.


Improvement 1 - Governance & Investors

I would like to just second what everyone is saying about governance and propose:

Once we land 5 investors of the comb token farms we transition comb to become a governance token. I am really not opposed to just doing it now but this gives us some time for gardens and a clear objective for what is needed to become a governance token and makes this a priority. Announcing that comb will officially become a governance token after this milestone is reached may attract investors. I would hesitate to make the transistion sooner since right now we have 1 investor on the pcomb token who probably is the largest holder of the pCOMB token making it fairly centralized.

For those not aware here is the article on the application process for investors to recieve comb rewards.

As for arbitrum we need to have these investors before launch imo.


Improvement 2 - Tokenomics (kpi tvl metrics)

As we will have another opportunity for arbitrum comb token we probably need to consider these incentives before that deployment and if we have governance for pCOMB I will be proposing the tvl metric below:

For others who haven’t heard me talk about it, the tvl metric in brief would throttle comb in the following way:
with tvl less than $10M only 25% of comb farm rewards would be distributed
$10-$100M 50% rate
$100M- $250M 75% rate
greater than $250M 100% rate
I believe this would have slowed down the rapid sell off because as tvl dropped so to the rewards.


Improvement 3 - Tokenomics (single token staking)

All farms have single side staking token. since we missed this to fix this after launch we really could not add this using pcomb rewards as this would just cause more price decay. We have been able to salvage the pcomb staking dilemma with our investor adding it to their platform but we haven’t marketed really any of our products to people outside of just 1hive.

image


Improvement 4 - Tokenomics (Airdrop)

As for arbitrum I would like to see the airdrop go into a bucket that can only be harvested by staking the comb token. In other words you have airdrop eligibility probably in a similar fashion and then the single side staking comb token may have small base payout but all the airdrop can only be claimed by harvesting the airdrop from staking the comb token. There can be a claw back where after 4 months any un-harvested airdrop could go back to the dao. Even a deposit and withdrawal fee for single side staking isn’t a bad idea. this incentivizes adding liquidity a bit more over the staking.

There is a lot more we can talk about for arbitrum but I have already gone off in the weeds on that and wanted to stay more focused on what we can do about the existing comb tokens.

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Thank you very much for writing this thread! I’m excited to see the solutions that the 1hive community can create regarding this very common and troubling issue with current Ethereum token economies.

Hi, thanks to everyone for sharing your thoughts on this issue. I resonate with the comment that @sacha did and the vision that @burrrata had for 1Hive as the economic engine of public goods.

In my opinion, we should distinguish ourselves with efficient ways to create and foster liquidity of existing communities. Having this kind of mentality in mind we can ask ourselves why the communities will choose one DEX over the other. And what value proposition we are able to bring to the table for them.

One idea that comes to mind is to start developing a list of subscriptions that communities can opt-in by providing X amount of liquidity on Honeyswap:

  • Basic governance
  • Governance with dispute resolution
  • Sourcecred as a service
  • Ethereum nodes endpoints
  • Subgraph endpoints
  • Payroll DAO
  • 0% fee on exchanges with other whitelisted community tokens
  • Strategies to add liquidity with a capital-efficient use of funds (for reference BalancerV2)

I recognize we are dealing with a really hard problem. Let us try to change our perspective by “start with the end in mind”.

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