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Summary:
Currently, Across Protocol’s $ACX has little liquidity on Layer 2s, limiting the ability for users to acquire $ACX with low slippage and provide liquidity on L2s. This proposal aims to bootstrap $ACX liquidity on Velodrome and establish a meaningful presence for Across Protocol in the Optimism ecosystem.
Motivation:
L2 adoption has gained significant momentum over the past 12 months and is expected to continue as more users flock to ecosystems that inherit Ethereum’s security, while offering significantly cheaper fees and faster transaction times.
- L2 majors (Optimism & Arbitrum) alone have seen a net inflow of ~$4.3B by over 983,000 wallets and L2 users represent ~30% of all Ethereum users (compared to ~4.5% in July 2022).
- Users also benefit from a better experience on L2s, saving about 95% in transaction fees compared to Ethereum mainnet with the average number of daily transactions on L2 majors having increased by about 7x since July 2022.
As a core cross-chain bridge, Across Protocol stands to grow alongside Layer 2s. Building a strong presence for $ACX on Optimism will give Across Protocol further exposure to the ecosystem and improve the user experience for those looking to buy or provide liquidity for $ACX.
Upon successful completion of the pilot, Across will also benefit from receiving a veAERO airdrop to direct $AERO emissions and incentivize liquidity on Coinbase’s upcoming L2 chain, Base 2.
Specification & Implementation:
On Velodrome, $VELO emissions are directed to liquidity pools based on votes by veVELO (vote-escrow VELO) holders. Protocols such as Across can use veVELO or voter incentives (bribes) to attract votes and emissions for their liquidity pairs.
Protocols bribing on Velodrome often receive $2-$3 in $VELO for every $1 they deposit. Major DeFi protocols such as Lido, Synthetix and Stargate leverage Velodrome’s mechanics to maintain deep liquidity on Optimism in a capital-efficient way.
Across will implement a 10 week pilot program using 750k $ACX tokens. The protocol will bribe the ACX/WETH liquidity pool on Velodrome at a rate of 75k $ACX per week. Velodrome also offers to match at least 5% of Across Protocol’s bribes each week with $OP tokens. Once an epoch is completed on Wednesday at 23:59 UTC, VELO emissions will begin to flow to Across Protocols’ LP.
Similar protocols typically attract 2-3x the value of their bribes in $VELO emissions. 75k $ACX tokens at current prices are worth about $3.5K; which Velodrome would complement with a minimum 5% bribe match, resulting in ~$9K of $VELO emissions going to the ACX pool at current rates. Using Aura’s $ACX/wstETH pool as reference which has an APR of 36% and ~820k in TVL, Velodrome could attract upwards of $1.3M TVL ($9K * 52 weeks / 36%). In other words, Across could achieve a ~50% growth in TVL on Velodrome for the same cost, while getting exposure to the Optimism community and a potentially new holder base.
Protocol Owned Liquidity (POL)
If available, Across Protocol can also deposit Protocol Owned Liquidity (POL) to capture and farm a portion of $VELO rewards that are streamed to its pool. Across can lock all $VELO farmed as veVELO, allowing it to build a voting position that will direct additional emissions in perpetuity, while generating fee rewards, bribe rebates, and bonuses for locking. Any rewards generated by these locks can be compounded further into veVELO to grow protocol owned votepower and reduce reliance on voter incentives over time.
Locking veVELO is an attractive strategy for protocols as it reduces net cost of incentive programs through a Lock Bonus airdrop, typically worth 10% of the $VELO locked, paid in OP. In addition, protocols with veVELO votepower will be eligible for the upcoming Aerodrome veAERO airdrop, which will enable protocols to bootstrap TVL for their tokens on Coinbase’s L2, Base and gain exposure to Coinbase’s 110m+ users and 80bn+ TVL.
Rationale:
Velodrome is the single largest protocol on Optimism and the largest DEX on Layer 2 Ethereum with ~250M TVL. Velodrome’s governance community is one of the most active and diverse in crypto, with 14,300 veVELO holders participating in Velodrome’s weekly voting epochs.
Incentivizing liquidity on Velodrome will naturally boost exposure for Across Protocol, as veVELO voters and Liquidity Providers will find $ACX near the top of the voting and LP pages respectively.
Velodrome will also actively support Across Protocol’s marketing initiatives during the pilot program which means the community will not only benefit from having the option to provide liquidity and trade $ACX but also generate demand towards Across Protocol’s bridge services.
Downsides:
Liquidity incentives on Optimism can represent an additional expense for Across Protocol. However, this expense can be significantly reduced through Velodrome’s bribe-emissions multiplier and any potential VELO rewards and the other incentives described above.
Furthermore, given this pilot program will run for 10 weeks, the DAO may use this time to assess results and decide on whether to continue or suspend its program on Velodrome after this period. At current prices, the total cost of the strategy to bootstrap liquidity via voter incentives without farming and locking $VELO emissions is about USD $35k (750k $ACX).
Voting:
Yes - move forward with pilot program
No - do not move forward with program
Abstain - no vote