[Circle of Tokens] 1. Proposal: Change Liquidity Mining rewards

Bitocracy Circle of Tokens
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Proposal: Change Liquidity Mining rewards

Hello Sovryn’s,

this is the first proposal of the Circle of Tokens.

In Summary:

The Circle of Tokens proposes to change the rewards for Liquidity Mining by the following numbers.

BNB / BTC pool: Remove the weekly SOV payouts entirely from 15.000 SOV to 0 SOV.

ETH / BTC pool: Reduce the weekly SOV payouts from 15.000 SOV to 5.000 SOV.

MYNT / BTC pool: Reduce the weekly SOV payouts from 15.000 SOV to 5.000 SOV.

XUSD / BTC pool: Increase the weekly SOV payouts from 15.000 SOV to 25.000 SOV

SOV / BTC pool: Increase the weekly SOV payouts from 30.000 SOV to 35.000 SOV.

In total, this will reduce the weekly SOV rewards by 20,000. On the one hand, the two biggest revenue-generating pools are strengthened with the XUSD / BTC and SOV / BTC pools, while on the other hand reward-SOV is saved on unprofitable pools.

Reasoning:

In recent weeks, the Circle of Tokens has published data and argumentation in the forum. To get a complete picture of the arguments and our decision making, I recommend reading through all the forum threads. The following compilation of arguments refers to this information.

We have 3 goals with this proposal.

  1. We want to stabilize the Sovryn token price in order to maintain or increase the APY of important pools.

  2. We want to increase the protocol revenue, and incentivize this by boosting key liquidity AMM pools.

  3. We want to reduce the overall inflation rate of the SOV token.

The subgraph data from @Bananas_in_the_sky shows the following.

The cost that the Sovryn protocol pays weekly for liquidity in the amm pools looks like this:

BNB / BTC pool: 0.78 % of liquidity provided

ETH / BTC pool: 0.28 % of liquidity provided

XUSD / BTC pool: 0.4 % of liquidity provided

SOV / BTC pool: 0.41 % of liquidity provided

MYNT / BTC pool: 1.07 % of liquidity provided

The BNB and MYNT pools are extremely expensive in terms of borrowing liquidity. The ETH BTC pool is the cheapest pool by this metric.

In addition to the costs, we also consider the benefits. How much revenue do the pools generate? If you take the trading volume of the individual pools into account, the picture shifts somewhat. The borrowing costs (SOV-rewards) in relation to the trading volume are as follows:

MYNT / BTC pool: 0.291259 BTC borrowing cost per 1 btc trade volume.

BNB / BTC pool: 0.115053 BTC borrowing cost per 1 btc trade volume.

SOV / BTC pool: 0.069628 BTC borrowing cost per 1 btc trade volume.

ETH / BTC pool: 0.028068 BTC borrowing cost per 1 btc trade volume.

XUSD / BTC pool: 0.007877 BTC borrowing cost per 1 btc trade volume.

Looking at this data, it should quickly become clear why we want to further strengthen the XUSD / BTC pool. This pool is by far the most profitable. We hope that an increase of the rewards in this pool will lead to increased liquidity and even greater trading volume.

The Mynt pool is by far the least profitable of all. However, since MYNT is an integral part of the Sovryn protocol, unlike BNB and ETH, there are strategic interests here. The launch of Zero and Mynt is imminent and Mynt holders also have a high impermanent loss in the AMM pool. Holding MYNT locks up SOV via bonding curve. With the MYNT Subprotocol not having launched yet, we do not want to remove the only incentive to hold the token entirely just before it kicks off. But we would like to reduce the SOV rewards and thus the cost of the pool and bring it more in line with the other important pools.

The costs in the BNB pool are very high and there are no strategic interests in the pool. It is extremely unprofitable, so we propose to suspend the SOV rewards.

The ETH pool is in a better position than the BNB pool. However, the ETH pool also incurs more costs than it generates profits. We propose a drastic reduction of the SOV rewards for this pool.

If SOV is traded somewhere, it should happen on Sovryn. We want to expand the liquidity in the SOV pool and give the holders a small compensation for the large impermanent loss. Therefore, we would like to slightly increase the SOV rewards here.

This data is discussed in more detail here, also the revenue per amm pool is listed further down the thread.

The Circle will closely monitor the AMM pools and investigate how the measures will affect them. Based on this research, further adjustments may be made in the coming weeks. We will keep bitocracy updated with data.

The token inflation rate will only be changed by these measures in the long term due to the 10-month vesting period and all the outstanding rewards. Nevertheless, we think this is an important first step. Adjustments may very well be made based on the data gathered in the next weeks.

We hope that the bitocracy and exchequer support this proposal.

Stay Sovryn!

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Great post!

I support all the above and think this is a long time coming. We’ve basically been hemorrhaging LM rewards with little benefit for many months. It’s time to trim the fat and then look to re-allocate. We can always adjust rewards back to these pools we’re taking away from, but we need to make these moves sooner than later, so we can see how the data reacts.

I think it’s worth adding we have discussed the implications of reducing rewards in these pools and possibly winding them down: Discord. & Discord

Ultimately, as Sacro pointed out there are three key considerations:

  • Are the LM rewards supporting some part of Sovryn’s long term strategic vision?
  • Are they incentivizing revenue generating activities (ideally that can off-set the cost)?
  • Are they supporting some larger security or tech dependency?

If no to all the above, then they likely deserve to be nixed. So BNB, ETH and Mynt are all low hanging fruit as things stand now, with that possibly changing for Mynt in the future.

Phase 2 of CoT will be how can we re-allocate these rewards to incentivize behavior we want (ex: staking, trading, borrowing, lending).

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I think overall a decent start and better than our current situation.

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When I first heard about the proposed changes I was against them.

After listening in to one of the “Circle” calls I still didn’t like it but I understand the rationale.

The BNB / BTC pool was my favorite. Good return and little impermanent loss as BNB tracks well with BTC. When the rewards go to zero, so will my participation.

The ETH / BTC pool was my next favorite. A fairly good return but a higher chance for impermanent loss. Since there will still be rewards I “may” utilize it but I need to see what the reward percentage is before making a decision.

MYNT / BTC pool never used and would never use. Farming an unused token makes no sense. Why risk BTC to the potential impermanent loss.

XUSD / BTC pool was never inclined to use. Why put BTC at risk when I can just lend XUSD, get SOV rewards and have no risk of impermanent loss against BTC… I’ll re-evaluate if and when the changes come but I doubt it will be attractive enough to risk BTC.

When this pool got increased from 15K to 30K I took out all my liquidity. I had already suffered a serious impermanent loss and saw it as a clear sign that there was little confidence in the valuation of SOV holding. Since then the valuation of SOV has been in constant decline. Increasing the weekly SOV payouts to only 35.000 gives me little incentive to risk BTC to further impermanent loss.

While reducing the weekly SOV rewards by 20,000. On and only increasing the biggest revenue-generating pools, which also experience the highest impermanent loss, is not enticing enough to put BTC at risk IMHO.

The bottom line is I may be out of the LM pools altogether and just lend XUSD. At least until the “Circle” determines that those rewards are too high and removes/reduces them too.

This will be interesting to watch play out. It may slow down those that have been leeching off the rewards and selling all their rewards bi-weekly but I got a bad feeling about this.

But hey, what do I know…

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I think LP rewards should not have vesting period. I think stakers should be the ones that should have that time limit. LP should have half it current rewards given to the stakers, and lose the vesting. While stakers will gain those rewards but get a vesting period of 10 months in all rewards except the pure rBTC so that they can buy SOV right away but have to wait 10 months for everything else

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Good insight, thanks for sharing! You’re exactly right that it will be interesting to watch play out; that’s what we’re hoping for! We ultimately don’t know unless we try. We need to make some relatively material changes to the rewards so we have some strong data points.

The risk of changing the rewards is pretty immaterial IMO. The stakes are very low, we already don’t generate much revenue whatsoever and we can always flip the switch and immediately put the rewards back on. But the opportunity cost of not changing the rewards is pretty steep. We just continue to eat losses, bleed tokens into the market and generate no revenue.

With that said, we’ll definitely be cognizant of what the community sales but above all else we’ll be monitoring The Graph data to see who is actually doing what as opposed to what they say. Then we’ll tailor actions from there.

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That’s something we’re exploring and may change in the future. It requires a little bit of development work and we’re trying to focus on making changes without taking on any technical debt whatsoever. The low hanging fruit is first and foremost seeing what impact shifting rewards can do, then stepping up from there as necessary.

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Thanks for sharing your thoughts, fair points made. The protocol does not have much to loose on the ETH and BNB pair because they are highly unprofitable. The liquidity in these pools does not bring value.

The resources are spent better else where and we try to propose what the data suggests. It will be interesting indeed to see how much liquidity is lost and how much liquidity changes pools based on our proposal.

There are no plans to change the XUSD lending pool rewards. This pool is very important and i would increase it rather than reduce it. However, this pool has no impermanent loss, which makes the 15,000 SOV rewards more attractive than in the amm pools.

We are not doing this to upset Sovryn’s or scare away liquidity providers. We are trying to make Sovryn and its bitocracy more successful with a data-driven approach.

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What is the rationale in increasing the rewards for the SOV/BTC pool? Is there a perceived lack of liquidity in the SOV AMM pool?

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Mainly, the increase in SOV / BTC pool rewards is to collect data.

What happens to liquidity when we create small incentives?

Can we see interesting behavioral patterns?

However, there is no lack of liquidity in the pool. The change to this pool is certainly the one that is least consistent with the data analyzed.
In our last call and discussions the Circle has expressed an interest in this change and this is why i included it in this proposal.

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Take away incentives for liquidity mining, lose liquidity.

People park their money here to earn. You’ll be sacrificing long-term health of Sovryn because of noise on short-term inflation.

All tokens will be in circulation eventually. The pools that “aren’t currently profitable to the system” will be critical when you have more users from other chains bridging into SOV, then trade their tokens here. Low liquidity will cause price disparities on each trade. They can use limit spot orders, but it will take ages to fill at their prefered rate.

Then we will start another discussion on how to get more people to add to LPs. Loop back to here.

LPs already had their fee earned slashed and transferred to stakers.
LPs already deal with a 9-month vesting on SOV rewards.
Cut their rewards as well and see how that goes.

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If we see that there is demand for liquidity in the pools, we may very well increase incentives for liquidity. That’s what we want to do with the XUSD / BTC pool.

The data suggests that this is not the case especially for BNB and also for ETH. And it has not been the case in the last months. If this changes, we will see it and propose changes accordingly.

I agree that the vesting schedule is bad. But changing it is difficult. We recently published a forum post around it and are looking for feedback on that topic so make sure to check it out.

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I also don’t understand why the rewards in the rbtc-sov pool should be increased.

If you want to do a test I would do it in the opposite direction. I would lower the rewards in the rbtc-sov pool by 10%.

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Thanks, we also just discussed @yago 's and your concern with regard to the additional SOV/BTC rewards internally and we mostly agree.

We might take this part of the proposal back and leave the SOV/BTC pool unchanged.

If anyone else has feedback with regards to this point, please add below.

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second it. Having zero LM reward is not good. Adjusting is fine but taking it away completely is not.

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Why? I mean that question sincerely. Some of these tokens serve no purpose in the Sovryn eco-system both currently and in the future. They also generate zero revenue. We also have no dependency on them. The only purpose they serve is to give a way for mercenary LP to get $SOV rewards, dump them as they vest which in turn lowers the $SOV price which in-turn makes the LP less valuable, which in-turn drives less liquidity to our protocol.

We have to stop the bleeding and pointless spending.

If we lose mass amounts of liquidity, well it wasn’t earning revenue in the first place so what does it matter.

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this is a very good first step in testing an active management of rewards! We must be efficient in our spending!

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Reducing the emission of SOV is a good idea, is better to get less tokens with higher value than a large amount with depreciating worth.

If we can get to level the value of the token it would be a massive improvement for the protocol. Right now almost every single complaint in the TG groups is about this. I know is hard but I believe this measures will be a great first step into accomplishing this!

Stay Sovryn everyone!!!

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I just posted about an issue that seems to have been overlooked by the Circle up to this point. The LM pools are already taking a 10-14% haircut over what is supposedly being issued. As an example, the rBTC/SOV pool isn’t issuing 30k rewards/week. I have data dating back to mid December 2021 to back this up, and @CEK confirmed in conversations we had November through February on Discord.

See my post here for more detail:

@dseroy @yago @lactarius

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