Council Proposal: 2021-06-29 Rewards allocation and rewards rate for AOs & Investors

[lucasvo]

Since the inception of the CFG rewards program, a total of 8’489’780 CFG have been awarded to both AOs and LPs. The protocol allocated 8.6M CFG to rewards to date. This means that the CFG allocated to rewards will run out in the next 24hrs and the council needs to vote to mint more. Today we are proposing to mint another 1 Million CFG and decrease the reward rate for LPs by 50% and for AOs by 33%. Given the urgency of the situation, we will be working to propose these changes in the council today. While this does not allow for direct communitnd stay within the target rate of no more than 3%.y feedback, the community will have the option to vote yes or no on the proposal once the council approves it. I strongly encourage continuing the discussion on future adjustments to the program in the coming weeks before the rewards run out again.

Proposal to be submitted to the council

We are suggesting another 50% decrease in rewards for both AO & LPs. The proposal I want to put forward to the council is the following:

1. Mint 1’000’000 CFG into the rewards account
2. Lower the Liquidity Provider rewards from 0.002 to 0.001 CFG per $ invested per day
3. Lower the Asset Originator rewards from 0.0003 to 0.0002 CFG per $ invested per day

At the current TVL the supply growth would be 2.5% per year giving us room to grow TVL at these rates.

The proposal hash is: QmPpXRU41kLSkByhDE7RJQq892cFp6PvhUUcVjGcyEJiGj

Background on the reward changes

As a community, it is important for us to be agile in responding to prevailing market conditions. For more context, I would suggest reading the forum thread that @Ash started on informed decisions in future governance proposals. Even though Tinlake AO & Investor rewards have been reduced significantly in the most recent reward discussion, they are still too high because:

• DeFi yields have come down significantly and the fixed yield of Tinlake assets have become significantly more attractive
• A big reason for not lowering rewards more drastically in the last adjustment was because of the concern of large withdrawals happening when lowering the rewards. This has not occurred.
• At the current reward rate the supply growth is quite significant (north of 10% by end of this month) which I believe is bad for the long term sustainability of the project.

This is the fourth proposal that’s been voted on to update Tinlake liquidity rewards parameters (CFG rewards), the first 2 proposals resulted in no change to the rate of rewards or governance process, the 3rd can be found here.

Forum polls serve to inform the chain council about the preferences of the community which are then put forward as proposals to be voted on. If the council strongly disagrees with a poll outcome, in the interests of the health of the ecosystem it can modify and pass a different proposal. In this instance because of the time sensitive nature of it, we will be putting this in front of the council immediately (Information on how council governance works can be found here).

Facts considered in the proposal

Supply Growth

When governing a token supply the mid to long term view needs to be taken into consideration. Even though higher rewards may seem better in the short term for an individual investor, a high CFG mint rate leads to more tokens in circulation and if more tokens are in circulation, a single token becomes less valuable if there is not an equal rise in the value of the network (Learn more: Understanding Inflation in token networks) This is not good for the project because if more tokens are minted and distributed than it has accrued value, it leads to overvaluation and a price correction follows.

In the last poll, the reward rate was voted to be reduced to 0.002 CFG per $ per day for Liquidity Providers and to 0.001 CFG per $ per day for Asset Originators. At our current TVL (~$25 million) these parameters put us over the intended CFG mint rate of 3% and this mint rate would continue to rise given Tinlake’s sustained growth.

DeFi Yields significantly went down

With the market correction DeFi yields have gone down significantly in the past weeks. Rates across all major lending protocols have come down for stablecoins.

Nik Kunkel

Data on Dune Analytics

Redemption Concerns have not materialized

One concern that came up in our last adjustment of the rate was that it would lead to a significant decrease in investor demand. Since the last adjustment the market has contracted significantly and many DeFi protocols have seen a huge decrease in TVL. Tinlake has seen a small increase in redemptions but it has not led to a decrease in TVL and we are still growing day over day.

[Tjure07]

At first sight the reduction of CFG-rewards for both AO & LPs may look disadvantageous for both parties because less rewards are granted but this is only a short-term perspective. In the mid term this reduction is highly needed because it lowers the yearly inflation. In the long term this leads even to an appreciation in the token’s value. The less tokens are in circulation, the more valuable a single one becomes

[hardik]

The inflation always need to be adjusted based on the situation as and when arise. Considering the volume of tokens in circulation through the medium of public sale/rewards and future forecast, there is still larger room of reduction (may be 0.0002-0.0005 CFG per $10k) required to keep that target inflation in control. @lucasvo what sort of forecast is expected in coming one/two month to keep rewards within 3% block rewards per year? Or Did we adjusted to these ?

[lucasvo]

I think the target inflation rate is something we want to review in the future. Reviewing these now is probably a bit pointless as we should have a much better idea of the CFG value once exchanges start listing after the 14th.

[hardik]

@lucasvo Would that be a good idea to have a matrix table (a slide) indicating forecasted TVL, best realistic reward rate (range) for both AO & Investors, current Inflation rate (against set target), etc. for having sustainable and organic growth for protocol once the CL tokens are out? This can be then put up in the forum/discord or pinned in discord channel (where the traffic is more) ? This will at least give a visible idea of what next to come in a month or two for investors. Obviously, all decisions shall be through governance voting (weekly/biweekly/monthly) in a democratic way but it can give a sort of high level indication which is best for protocol.
Do you think this is a good idea?

[Ivor]

I am onboard with lowering rewards for both the AO and investors but for this point in time but I would propose to mint 500’000 CFG for rewards. This would ensure that we have another vote closer to July 14th so we can react more quickly to market conditions.

I did an exponential regression on the TVL to get the function. I took 21.May, with a step of every two days, as a starting point because in that week we had a stagnation of TVL due to all pools being oversubscribed and the result is TVL=e^(16.66+0.01Days); 2.01% avg. error. After 2 weeks time cumulative rewards, with proposed reduction would be 381’363,3 for investors and 68’100.9 for AO. When we add together both rewards we get 449’464.2 CFG*.

Another thing I would like to add is, and this is my personal opinion, I would decrease investors rewards gradually all the while keeping AO rewards the same, to the point where they match eachother (for now). The reason behind this is that every time a new pool opens it gets oversubscribed very quickly which tells me that there is an abundance of investors, not to mention Maker inclusion in the pools and we need more AO. Reducing rewards like this would incentivize more AO being onboarded. I understand that AOs are getting a competitive advantage in just using the Centrifuge chain but I would like to reward them even more since they are actually doing the underwriting on the borrowers and they are the ones providing real world assets onchain. In short they are the real MVPs.

*Numbers might be off by a bit but it helps to visualize the changes

[lucasvo]

The council already voted on the update but I think you make good points @Ivor. I agree we should revisit again in a few weeks - and we can start that thread on the forum in two weeks.

@Ivor

Another thing I would like to add is, and this is my personal opinion, I would decrease investors rewards gradually all the while keeping AO rewards the same, to the point where they match eachother (for now). The reason behind this is that every time a new pool opens it gets oversubscribed very quickly which tells me that there is an abundance of investors, not to mention Maker inclusion in the pools and we need more AO.

This was the case for most of June but unfortunately is not anymore. We are now actually short of investors - Branch & Fortunafi are all raising 3-5M DAI each in the coming days. So that’s good news Let’s rally some folks to fill the supply gap we have right now!

[tjragsdale]

I am new to the community and surely don’t understand all the dynamics at play, but my disorganized thoughts:

1. CFG is not vulnerable to the same reflexivity that other yield-bearing assets in the defi ecosystem are. The value locked is stickier, as we witnessed after withdrawals were minimal following the last adjustment. I believe this behavior occurred for two reasons. Lucas mentioned the first: when the rates on alternative yield-bearing opportunities in crypto drop, a fixed yield becomes relatively more attractive. But I think another factor at play is the essence of the yield accrued via holding CFG. It is genuinely a hybrid of a bond and equity. The cash flows are comparable to lending stables to leverage seekers and come from a more resilient place. Real assets diversified across verticals that real/people investors can understand. This is a unique value proposition within crypto. Centrifuge lies at the intersection of main street and crypto. I come from traditional finance and I don’t think the unique appeal of this to investors should be underestimated. Whereas many of the LPs thus far may have been crypto-natives and thus more sensitive to reward reduction, I can see part of the next cohort of LPs being finance-native, but not crypto-native. If insurance companies are looking at NXM, then I must imagine TradFi/debt funds are looking at CFG. LP growth may be limited partially because of lack of education/awareness as opposed to rewards. For these reasons, I believe some reduction to rewards for LPs are stomach-able. Especially because reducing issuance over the long run is sound monetary policy for any scarce asset.

2. The perceived value/upside of the CFG token is probably very different for an AO and an LP. To me, AOs derive most of their utility from using the protocol itself. CFG rewards are just a bonus. Centrifuge, the rails, makes their lives easier: ability to sell off the first-loss piece of exposure to borrowers, previously inaccessible liquidity for idiosyncratic assets that could not be securitized via traditional routes, quick onboarding, quick access to proceeds, etc. For LPs, CFG represents the opportunity to buy a slice of high-yielding fixed income with an equity-like upside in the protocol. In other words, LPs look at CFG as “preferred equity” whereas AOs don’t so much. I believe, all else equal, that LPs will be more sensitive to a decrease in rewards than AOs. On top of that, it sounds like Centrifuge is experiencing a liquidity supply shortage. Conversely, it cannot onboard AOs fast enough. It may make sense to switch the percentage decreases for AOs and LPs: 33% for LPs, 50% for AOs.

3. Token subsidization/reward solves the chicken-and-egg problem. Presumably that’s why it was done. And now that we have both chickens and eggs it makes sense to naturally wind down the volume of subsidization which seems to be happening. So when thinking about how to reduce rewards to the two separate parties (AOs and LPs) most elegantly, we may need to think about the first principles of how the protocol solves problems for business and people. I think ultimately the core value of the protocol is derived from deeper liquidity for these RWAs. The more demand there is from LPs the cheaper using Centrifuge is, relative to other financing routes, for everyone in the chain. This allows AOs to provide cheaper financing at the source of capital to borrowers which generates additional assets to be pooled. Presumably if an AO has successfully sold assets into centrifuge pools in the past, they will continue to do so. As a more diverse array of assets come into Centrifuge/Tinlake, new types of investors will enter the fray, which then perpetuates the whole machine.

TL:DR

LPs seem in shorter supply and are, in my opinion, now the keystone species for growth of the protocol. I think it is more clear that expanding the LP base expands the AO base, rather than vice versa. While I think it makes sense to mint an additional 1MM CFG, decreasing rewards to LPs may be more painful for the protocol than decreasing rewards to AOs.