Push to Launch Layer 2 Liquidity Mining on Uniswap Gains Steam

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A Uniswap community member has called for the decentralized exchange (DEX) to launch a liquidity mining program and incentivize users to migrate to its Layer 2 deployments on Arbitrum and Optimism.

On Dec. 1, Hop Protocol’s growth lead “zkLito” announced they had submitted a detailed proposal for L2 liquidity incentives for Uniswap’s second stage of governance. Their previous proposal had passed an initial temperature check in Uniswap’s governance forum last month.

zkLito describes the proposal as both seeking to entice “deep liquidity for key pairs on L2,” and more importantly to “kickstart L2 adoption by incentivizing users to bridge and shift their DeFi activity to L2s.”

Large Whales

The author notes the challenges associated with conducting a typical rewards program on Uniswap v3, asserting that the majority of normal liquidity providers (LPs) “would only receive a tiny share of rewards […] because these liquidity mining programs incentivize LPs the closer their LP range is to the spot price.”

“Large whales provide liquidity on a single tick and re-balance their range every minute to get the vast majority of rewards.”

To alleviate this, zkLito proposes incentivizing L2 liquidity providers using wide fixed ranges in which all providers receive the same pro-rata share of rewards. For example, they suggest that incentivizing Ethereum LPs within the range of $1,000 to $10,000 would reward passive LPs while active providers can still set narrow price ranges to accumulate additional swap fees.

They propose offering three-month rewards programs for ETH/USDC, ETH/DAI, WBTC/ETH, and ETH/USDT. zkLito also suggests offering rewards for USDC/DAI within the range of 0.9999 to 1.0001, and proposes swapping USDT for LUSD or sUSD to strengthen liquidity for decentralized stablecoins.

Incentives would be designed to offer a target APR of 10% should the v3 pairings achieve liquidity on par with their v2 counterparts at a total cost of roughly 1.5M UNI (roughly $33.5M). 

As of Thursday, almost 98% of the votes, or 9.06M UNI, have been staked in favor of the proposal. Some governance forum respondents have suggested adjusting the incentivized price range to ensure trades on Uniswap v3 are executed with at least twice the capital efficiency of those on v2.

Rollup Pioneer

Despite the proposal coming amid increased scrutiny of deflationary token reward schemes in DeFi, analysts such as Ethereum commentator Anthony Sassano have been advocating for L2s to introduce incentives designed to attract liquidity away from Layer 1.

Liquidity mining incentives recently propelled Optimistic rollup network Boba Network to rank as the second-largest Layer 2 by total value locked (TVL), with its TVL surging from just $76M on Nov. 13 to more than $1.3B today according to L2beat. Boba currently boasts roughly triple the TVL of Optimistic rollup pioneer, Optimism.

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