A path to sustainable rewards
Token Rewards in DAOs and DeFi are a powerful tool, they allow projects to influence behaviour in such a way to achieve a positive outcome for the protocol. In the last few months, we have been seeing a number of DeFi projects using rewards mainly to incentivize liquidity provisioning into AMMs pools, while that is useful the vast majority of the protocols out there have been doing so by only inflating the circulating supply of the token which often results in continuous sell pressure for the token being rewarded. Some outstanding example of these fact can be found in CRV and others. Rewards in order to last for a long time need to sustainable over time, with this goal in mind, in this proposal I want to sketch out a path for minimum viable rewards and sustainability.
In order to get to sustainability of rewards, those should be distributed in such a way to bring maximum value for the protocol itself and therefore token holders of the ecosystem. To make an example, right now PieDAO has been distributing 150,000 DOUGH on a weekly basis to incentivize liquidity provisioning into the AMMs pool for Pies, here’s a snapshot of the current situation as for today October 21, 2020. DOUGH / ETH: $ 8,444,199.13 DEFI+L / ETH: $ 2,108,171.88 DEFI+S / ETH: $ 1,522,356.66 (2108171.88+1522356.66+8444199.13) / ((150000*4)*1.5)
Considering the current DOUGH price at $1.50, currently PieDAO is paying $13.41 for $1 of liquidity, an high ratio. With PIP-18 and PIP-19, initiatives have started in the last weeks to create a recycling loop for rewards being awarded to LPs, the preliminary data gathered from the last two weeks, we can see PIEs are earning on average ~2,000 BAL weekly equivalent to ~$25,000 which have been used to buy back DOUGH on the open market. To recap, $ 225,000 worth of DOUGH are rewarded every week. $ 25,000 worth of DOUGH can be bought back every week A bit more than 11% of the weekly rewards are currently sustainable, this is a great result considering the liquidity mining program is only two weeks old, however more is needed to get to a stage of Minimum viable dilution first, Rewards sustainability second and lastly protocol profitability.
I’ve been chatting about the issue with Tarun Chitra, a PieDAO Member with deep knowledge of incentivize design. Vested rewards to the rescue.
Move the current rewards dynamic to a mix of partially escrowed rewards + liquid rewards, which gradually shifts from the status quo of 100% liquid rewards to a combination of escrowed rewards and liquid rewards where the ratio is determined by the DAO earnings. Basically the more earnings PieDAO does from fees/farming the more rewards. This change if implemented, would have the following benefits:
- Attract users with long term vision on the project and create a stronger community
- Mitigate sell pressure on the DOUGH / ETH pool
- Tie up the rewards issuance to PIEs usage and farming instead of simple dilution. The process should happen gradually as it’s only reasonable to We have seen this in action in the Sythetix community with great results in terms of community and platform engagement.
- NOTE: This sort of incentives it’s probably better suited for minting Pies or holding dough instead of actual LPs staking, considering there is IL in those pools.