18th March 2023

Mellow & Uni

On the 24th and 27th of Feb, Lido launched two Mellow vaults with incentives:

1. Univ3 wstETH-ETH 5bps - “Tamper”
2. Univ3 wstETH-USDC 30bps - “Pulse”

These are the performances of each, along with those of the underlying pools, plus comments:

Tale of two cities

1. wstETH-ETH

   • Univ3 pool
   • Mellow vault

2. wstETH-USDC

   • Univ3 pool
   • Mellow vault

Challenges

1. Lower Fee Pools

   • A Race to the bottom is happening on DEX fees in general. As it pertains to us:
     • Kyber has a 4bps fee on the same assets on the same chain (wstETH-USDC on ethereum). Furthermore it is incentivized heavily by us + them and has much higher TVL.
     • Maverick has a 1bps (variable) fee on wstETH-ETH on ethereum, which makes it an insanely utilized pool, but diverts a lot of volume from higher fee pools (such as uniswap or curve’s)
     • Kyber has a 0.8bps pool on wstETH-ETH where the capital LPed is independent of returns since it is supplied entirely by Kyber as part of our deal.
   • These pools divert most aggregator volume away from the Uniswap equivalents (and were even designed to do so). Uniswap still derives a lot of it’s volume from frontend users which is why the pools are not doing that, even taking this into account.

2. Cost of incentivization

   • While the wstETH-ETH Mellow strategy is doing great (8 to 9% of organic fee APR, which is higher than most yields on ETH available), the wstETH-USDC startegy is realizing too much IL (40 to 50% annualized on many days). This makes it infeasible to incentivize.
   • Kyberswap which has been a much cheaper DEX to incentivize for wstETH-USDC still regularly needs >50% APR in liquidity mining. This has been working for the magnitude of ~$10m of TVL and volume but wouldn’t scale to 100m (can’t ever allocate 500k LDO a month on this)

Next Steps

1. We are modelling and then switching the Mellow wstETH-USDC vault to the 5bps Uni pool (down from 30). This should 1. avoid larger wstETH→USDC uniswap trades to be routed wstETH→ETH→USDC as some are still now, 2. drive volume up from routes and arbitrage and 3. not hurt TVL since it is there for the incentives and not for the fee revenue at this point.
2. Fine-tune the current Mellow Pulse strategy to rebalance less often & to take learnings from the market-expressed solutions found by LPs on our Kyber elastic pool.