[Circle of Tokens] Proposal: Liquidity Mining rewards in the DLLR Era

Bitocracy Circle of Tokens
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Hello Sovryns,

this is a proposal from the Circle of Tokens for the new era Sovryn is entering. If you want to just read the proposal, scroll down. Before we get to where the journey is going, however, I’d like to take a quick look at the road that lies behind us.

Where we are coming from

For well over a year, Core team, Exchequer and CoT have been working incrementally to reduce SOV rewards for lending, various AMM pools, and staking in order to become more sustainable. We aimed to provide SOV subsidies only in pools where was demand and volume. Our long-term goal has always been to offer long-term Sovryn stakers a good and realistic yield, in BTC and USD.

However, this is only possible with existing protocol income if there are not too many SOV in circulation and that can be staked. Accordingly, the transformation phase with many SOV in expiring vesting contracts was very long and difficult.

But we are getting closer to the goal. SOV rewards have been cut considerably, and circulating supply inflation rate has been massively curbed. At the same time, for the dire market conditions of 2022, some liquidity and trading volume could be ensured.

We have also worked to ensure that the protocol does not sell under value and generates much-needed revenue. With SIP-51, the AMM fee for the protocol and its stakers was doubled.

Just today the SIP, which raises the origination fee for Zero to 2.5%, has been passed.

Where we are going

In the last weeks a lot of work has been put into calculations for the future subsidies in the Sovryn protocol. The above mentioned points have been taken into account and the data of the last year has been used as a basis to bring the protocol on a good track.

As you surely know, the launch of DLLR and Zero open access completes a long development phase.

This means that the SOV subsidies for XUSD should come to an end. DLLR will henceforth be the preferred stablecoin for the AMM and lending pools. Liquidity should be encouraged here.

The goal of this new proposal is for Sovryn to have a positive balance sheet for the first time in terms of subsidies and protocol revenue.

We want to take advantage of 3 things in particular:

  1. The increased SOV price and associated increase in APY in the AMM pools.
  2. Liquid rewards instead of linear 10-month vesting periods.
  3. Increased protocol revenue as discussed above.

These points enable us to cut SOV rewards and still offer an attractive yield that is paid out directly rather than over a long period of time.

We believe that the increased AMM revenue and the expected Zero revenue for stakers will be able to at least absorb the weekly SOV subsidies.

Proposal
CAUTION: the liquid SOV rewards described here are only 90% liquid. the remaining 10% are still in a 10-month vesting contract. According to Ororo, 90% is the maximum that is technically possible with the existing contracts.

  1. Reduce weekly XUSD/BTC AMM SOV-rewards from 25k => 10k (liquid) => 5k (liquid) => 0
    Following the DLLR launch, with each week there will be less rewards for XUSD/BTC. The rewards will be liquid to ensure that some liquidity remains while the DLLR/BTC AMM ramps up.

  2. Reduce weekly SOV/BTC AMM SOV-rewards from 25k => 7.5k (liquid) until end of 2023.
    At current SOV price and pool size, this is about 10-12% APY, but with the ability to compound rewards on a weekly basis.

  3. Provide 15k SOV/week (liquid rewards) for the DLLR/BTC AMM pool until end of 2023.
    The liquid SOV should incentivize a kickstart of the DLLR/BTC pool. Weekly liquid rewards should
    also help to reduce the risk of impermanent loss and delayed rewards that have reduced in value
    due to long vesting periods.

In total, this would reduce weekly AMM subsidies from 50k SOV to 22.5k SOV. We’d like to reserve an additional 2.5k SOV/week for further actions, but suggest that total subsidies do not exceed 25k SOV/week. This would essentially be a halving on the issuance rate of new SOV on the open market based on subsidies.

Stay Sovryn!

Sacro

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To clarify, pool rewards for XUSD/rBTC pool will, essentially, sunset over three weeks after DLLR launches?

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Yes, that is the suggestion. Of course, there may be lively discussions!

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FWIW, all looks good to me

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To my mind this is an excellent proposal and would represent a halving of the current SOV rewards. There is currently work being done to find the most efficient path forward to implement this proposal and also investigating additional optimizations.

A couple of points worth noting:

  1. I initially believed that we would be able to transition to 90% liquid almost immediately but a deeper dive revealed that this could break the current vesting program. So some code changes and testing will be required before this can be implemented.
  2. I have been working on an analysis of Zero Stability Pool subsidies which I hope to publish this week, suggesting we can get a great deal of leverage out of SP rewards, in addition to AMM rewards.
  3. In determining the level of rewards I think there are two key heuristics. First, we should seek to have neutral issuance. That is, emissions that will be fully absorbed by new staking. This depends on the total value staked divided by revenue. A secondary heuristic is what % of monthly trade volume can come to market without meaningfully impacting price. Based on conversations with professional market makers, this seems to be in the vicinity of 3% or the average daily trade volume, across all venues.

For the coming months, we should examine subsides primarily through the lens of matching DLLR supply and demand. I believe we can expect to be subsidizing DLLR demand during this period. We also want deep DLLR/BTC liquidity as this should encourage trade with lower slippage and provides an important ability to liquidate positions in the event of a BTC market downturn.

Finally, we should be able to get more ‘squeeze’ out of our subsidy ‘juice’. Current APY in XUSD pool is 23% and in the SOV pool 38%. These are very significant returns and the world is missing out by not participating.

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Relevant to the discussion - please see this thread:

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Is there any plan to increase the traded volume for the SOV token? It is useless to do all this amazing work if selling pressure from rewards creates double digits drawdowns weekly!

Are there steps initiatives in this direction ? Otherwise we will only poop on each other heads if there is no market to sell the token into.

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I’m so happy to see liquid rewards proposed! I think this is better in so many ways; people get rewards that are closer to what they expect, they can use these rewards in ways they prefer (some sell, some compound, some a bit of both - when there is more flexibility, users are quicker to come to some setup that they are comfortable with), the impact on the economy is more direct, so less build up of fear & doubt about ‘potential impact’. I can go on. I think this will really boost the experience of the protocol!

But let me also say two things that I would do differently, and why. The SOV/RBTC decrease, of 25k->7.5k, feels too much to me. There is a risk that this unleashes SOV from that pool onto the market (especially if the DLLR/RBTC pool offers a higher APY, people may swap their SOV in their SOV/RBTC position for DLLR). Secondly, the SOV/RBTC pool offers the best access to SOV and there is already high slippage. With fewer rewards, liquidity might shrink and it might become less attractive for someone to buy largish sums. I would really consider leaving this pool alone, or only shrinking a little (maybe at most 25k => 20k; I agree that there is some room to shrink, especially with the current price/APY).

Regarding the DLLR/BTC, the proposal is to give it 15k SOV/week. This would be the most incentivized pool. Here I have the feeling that much less incentive will be needed, for the simple reason that people will want to do something with their borrowed DLLRs, and having exposure to $$s and btc needs far less incentive to be attractive (as it is way less risky). Maybe start with 5k SOV/week, see how the pool builds up and develops, and what people do with these rewards, and then re-evaulate accordingly. In general, I would always be hesitant to heavily incentivize pools that are not against SOV with SOV rewards, since: (1) these pools do not themselves draw in SOV, and (2) as people can enter such pools who have no interest in having exposure to SOV, they are more likely to dump them when they get these rewards.

Let me repeat that there is much in the proposal that I really like! Thanks!

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Yes-i recommend checking out Yago’s post.
Adding to that:
We have a fair chance that staking revenue is good enough that it will drive enough demand for buying and staking SOV to counteract selling pressure from LM.

-Increased Zero revenue due to an increase in origination fee.
-Increased AMM revenue due to SIP-51.
-Overall reduced selling pressure due to overall tokenomics and reduced rewards.

I do not think that 25k SOV/week will provide for double digits of draw-downs. Annualized, this would be roughly 5% inflation on circ supply.

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Thank you for the feedback. You make good points. I’ll try to defend the proposal and add some thoughts.

APY on the pool varies based on pool size and rewards. For DLLR, Zero and BTC trading, DLLR/BTC is the most important pool. It has a very large impact on protocol revenue and with it, SOV value.

That is why we want the DLLR/BTC pool to have the largest liquidity. With double the amount of rewards for that pool, we do roughly expect the pool to also have double the size of the SOV/BTC pool. Regarding importance, that should make sense.

We also want to kickstart the pool. As XUSD/BTC looses liquidity, we want to get the liquidity for DLLR/BTC up as soon as possible to get a smooth transition. Starting with less rewards would prolong that period. I am completely fine with 15k SOV/week sold from these pool rewards. Staking APY should create enough demand at these SOV price levels to counteract that selling pressure. In addition, selling of SOV gives AMM revenue :slight_smile: The positive thing about last year’s SOV price decline is that we do now have a chance to create a sustainable ecosystem with a price floor for SOV that’s driven by real BTC and DLLR yield for its stakers which is pretty unique.

Regarding the SOV-pool: Yes, that’s a big reduction in rewards. But the recent price increase makes the pool yield more than 30% APY. I’d say ~10% APY with the ability to compound rewards on a weekly basis is attractive enough. But we will monitor the development of the pool and consider acting on it if it does not play out as planned.

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We must continue the course you embarked on last year, which has made Sovryn more solvent.

As for whether the proposed figures are optimal, we won’t know until we can observe and analyze them. It’s certainly necessary to incentivize the BTC-DLLR pool enough, and if changes are necessary, we know you will propose them.

Perceived strength is attributed strength. SOV is perceived as more valuable as fund flows received by stakers increase. It doesn’t matter if I receive fewer rewards when profitability increases in satoshis.

It’s not within your area to increase revenue, but certainly controlling subsidies and making them more efficient makes Sovryn and SOV more valuable.

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From what I understand, we are reducing the rewards by (15k+17.5k) but adding rewards for DLLR liquidity by 15k? So still a negative 17.5k?

And,

90% of rewards are liquid?

Is this a decent tldr:?

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Right now, rewards are 50k SOV/week in total.
If this proposal is approved, it will be 22.5k SOV/week in total.
(15k for DLLR/BTC and 7.5k for SOV/BTC)
There is a transition period in which total rewards for XUSD/BTC go to zero.
90% liquid is correct.

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Sounds like a needed change, both for SOV, and DLLR.

Will this be going to a vote soon?

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A SIP vote is not required for changing LM rewards, it’s paid by the Exchequer budget and done by the exchequer. But we need Exchequer approval and consensus (which is looking good).

Theoretically, a new exchequer budget proposal requires a SIP and the LM rewards would be included there.

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Thanks for your response Sacro! I gave it some more thought.

I disagree with this assumption. With SOV/rBTC you expose yourself to a highly volatile and risky asset (SOV). With DLLR/rBTC you expose yourself to dollars and rBTC. Typically, the riskier the assets in the pool, the higher the APY around which it stabilizes. I expect SOV/RBTC to stabilize around 20%-30%, while for DLLR/rBTC it would be more between 5%-15% (depending on how risky DLLR will seem to people). So, with the same rewards for both pools, I expect the DLLR/rBTC pool to get larger, just by the nature of the assets pooled.

But more importantly, the need to bootstrap DLLR is not of itself an argument to cut the rewards to the SOV pool. I would really like to ask the CoT to think again about the huge cut in rewards to the SOV/rBTC pool: higher rewards for the SOV pool and a high APY does little harm, as it can draw people in to provide liquidity (providing demand for SOV, so rewards get absorbed). People need to be able to buy SOV without being hit by slippage, and we shouldn’t risk releasing SOV from the pools at a moment where liquid SOV are given out in rewards. I think this cut is unnecessary and really risky (the effects are very hard to predict).

If you disagree and you really insist on the cut, what would be the harm in going in more smaller steps? SOV 25k => 20k. And then let the pool/APY stabilize, and then evaluate again?

I understand your argument about needing to bootstrap DLLR quickly, as XUSD rewards go to 0, and so I can see your point about ramping that up immediately to 15k. It also creates a nice synergy with Zero going open access.

Convinced me about the DLLR bootstrap rewards, but I still think you should reconsider the cut to the SOV pool.

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Keep in mind that we are are going from 10-month vesting towards 90% liquid, which should be much more attractive. I think a reduction in rewards is justified with this change. The SOV pool had pretty much the same liquidity with an APY around 15% so we have room to reduce it. 7.5k/week indeed is low though. This thread can serve to negotiate the numbers and hear other suggestions.

I’d like to keep weekly rewards below 25k in order to match it with protocol revenue. The proposal has 22.5k SOV/week. Yago mentioned very interesting opportunities with the stability pool where we might put some SOV rewards but that may be some time in the future.

I’d be fine with 15k SOV for DLLR/BTC and 10k SOV for SOV/BTC as a start.

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Could you say more about why protocol revenue is treated as a hard cap on rewards? Surely there are many factors involved in the potential absorption of rewards that are given out, and protocol revenue is hardly a clear indicator of the willingness to add to staking.

Lowering the APY for SOV/rBTC pool might release SOV, so matching rewards and protocol revenue is then not seeing the entire picture. If I stay with your assumption (of one-one correlation between rewards and pool size), if rewards to the SOV/BTC pool gets a -70% reduction in rewards (25k=>7.5k), it could trigger -50% reduction in pool size (granting your assumption that there is some slack and it wouldn’t give a -70% reduction in pool size). With 2 mill SOV in the pool, that could release 1 mill SOV on the market, which is way more significant than the SOV rewards given out.

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SOV has value because holders/buyers have a share in protocol revenue. If protocol revenue increases, the fundamental value of $SOV increases. The key factor here is how much %APY a staked SOV token can generate. While 5% APY may not be enough to create demand for SOV and to keep SOV staked, at 20% APY, many investors will certainly get the idea to invest in SOV and stake in the long run.

This means that protocol revenue generates a price floor. At the same time, APY is dependent on the amount of staked SOV. Also, the proposal assumes that 25k SOV/week (~13k$/week or ~700k$/year at current prices) in rewards can be countered by protocol revenue and demand for staking SOV (~200k in '22 and “hopefully” ~500k-1m in '23) . Essentially, to reach equilibrium between selling pressure from SOV rewards and demand due to protocol revenue. If we were to stay at 50k SOV rewards/week, at current prices, this would be somewhere ~1.5m$ which would very likely be unsustainable and make the future worse due to higher circ supply.

Above all, we must consider the future number of circ SOV. 25k SOV/week are 1.3m SOV per year, which come to the market. Of these, some will certainly be staked and accordingly the protocol will have to generate increased revenues forever to ensure and maintain an attractive staking yield. Here we are talking about close to 7 million staked SOV that could hit the market if they don’t get a good yield.

At 7.5k/week, that’s only 390k new SOV per year. So the risk of liquidating SOV from the pool is very quickly outnumbered by ongoing reward payouts and staked SOV that could be unlocked due to bad staking APY. In the long run, a reduction of SOV rewards is extremely important to keep circulating tokens low enough so that protocol revenue can offer a good yield for say ~10m staked SOV in a year from now.

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good news
The Sorcerers of Sovryn, the dev team, have another big update ready sooner than expected!

Within 14 days, all SOV rewards in the DLLR/RBTC amm pool will be FULLY LIQUID. That means that the 140% APY currently being earned will be unlocked. The DLLR pool will become the first Sovryn pool with fully liquid rewards.

Please note: don’t claim your rewards before the change happens, or your SOV will be automatically staked and will not become liquid.

The current extra-large rewards being paid out are, therefore, for this week only. They will readjust next week.

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