RFC: LP Rewards Restructuring Part III

As the currently minted protocol rewards are running out, we at DeFi Capital Markets wanted to propose a new reward rate and structure going forward.

The previously proposed reward structure was unfortunately unable to be implemented by the team. We understand that the implementation of the proposed changes would/will cost significant engineering time that could/should be spent on building the mechanism to enable CFG rewards for pools on Cent Chain, the Centrifuge parachain.

The below formula is what was previously suggested:

Reward Rate = Daily Global Rewards / TVL

This formula attempted to set a fixed Daily Global Reward rate that would be dynamically adjusted based on TVL. Lucas outlined in a response to the last poll on rewards what can and can’t be done for Tinlake Rewards. Therefore we propose only small changes to the currently used, and previously implemented reward mechanism: a fixed reward rate per DAI invested per day (independent of TVL).

The current reward rates are as follows:

Type Reward
TIN Reward CFG 0.00072
DROP Reward CFG 0.00048
AO Reward CFG 0.00004

Finding senior investors has become difficult. The underlying interest rates are low for DeFi and the reward rate has come down materially. We believe that we need to more fairly incentivize senior investors vs junior investors if we want to attract financing into this tranche, which is by far the lionshare of pool TVLs. We therefore would propose that we make DROP and TIN CFG reward rate equal going forward. There is some more context in this post as well.

Furthermore, as the protocol grows it has become evident that it has a stronger value prop (at the moment) for AOs. As credit conditions tighten in traditional markets DeFi can be a great solution offering fairer rates. We understand that demand remains elevated at this time for new assets to finance and we don’t believe we need to incentivize them further by providing CFG rewards for asset origination.

In summary, we propose that DROP and TIN investors earn equal rewards on a per DAI basis and AO rewards are no longer provided for assets brought to the platform (as per this poll they can still earn rewards from investing in their own pool). Also, we would suggest lowering the CFG per DAI per day to 0.0003 (for both DROP and TIN), as shown below. Lowering the CFG reward rate is necessary as the protocol continues to grow and the rate we proposed would keep reward inflation around a reasonable 3% per year on a 12 month rolling basis.

Type Reward
TIN Reward CFG 0.0003
DROP Reward CFG 0.0003
AO Reward CFG 0.0000

We would also propose to review and adjust these rates on a monthly basis or more frequently if TVL changes significantly.

We would lastly propose that protocol mint 1,800,000 new CFG to cover an estimated 2 months of protocol rewards. This assumes that the protocol will have an average TVL of DAI 100M over the next 60 days.

7 Likes

Good day thespaceacatjr

Your restructuring part looks good. Good work.

I would like to propose to mint 2 000 000 CFG instead of 1 800 000 CFG. Will try to explain why i would like to add +200 000 CFG.

If the proposal to decrease actual TIN/DROP/AO rewards until 0.0003/0.0003/0 CFG will pass this is mean that with TVL 100 0000 000$ we will get (Rewards Earned Today) Rewards Reward Daily = 29750 CFG - and this is cool and we will keep this rate under 30k. (instead of 41 686 CFG now and this is ~ -29% Less. )

We can suppose 2 scenarios:

  1. Scenario I:
    Following this mats(with TVL constant 100 000 000$) with 29750 CFG Rewards Earned Daily we will cover => 1 800 000/29750 = 60.5 days minted amount will cover only 60.5 days

  2. Scenario II:

Following this mats(with TVL 107 500 000$) the Rewards Earned Dail will increase up to 31981 CFG and we will cover => 1 800 000/31987 = 56.3 days minted amount will cover only 56.3 days

To avoid any bad situation in the future i would like to propose mint 2.0M CFG, this will help us to have some insurance:

  1. 67 days with the minted amount and constant TVL 100m
  2. 62.5 days with the minted amount and 107.5m $ TVL

In both scenarios +200 000 CFG minted will be used in the future.

This is just my 2 cents.

2 Likes

If the currently minted reward pool is running out, I would ask to please separate the votes for restructuring and minting as they are separate topics (and minting might be more urgent). Will get some feedback from AOs and provide comments on restructuring by tomorrow.

This is the right path forward to increase Centrifuge sustainability, I strongly support this proposal!

1 Like

I think it’s fine to mint a larger amount. However I personally think that we shouldn’t make any commitments to LPs that these reward rates won’t change earlier than the 60 days we minted for.

@prankstr25 the way these polls are structured there will be separate questions in the forum poll and then there is one onchain vote that can either pass or fail with the entire proposal that can be proposed in a democracy vote or through the council.

1 Like

In the longterm the LP reward rates for the protocol should decrease to keep reward inflation to a minimum. Inflation corresponds to the minting of new rewards, the important thing is the quantity created and what is done with. There are many new scenarios and here are two extremes:

  1. Issuing a large amount in order to invest massively in its infrastructure/ governance/ building the protocol (= long-term investments).

Here, inflation can be controlled because new rewards issued are used to finance investments that develop economic potential in the long run.

  1. Issuing a large amount of rewards to finance short-term compensation or short-term incentives to contribute to the protocol.

This is obviously unsustainable in the long run. In this scenario, inflation can only be massive as a large amount of new rewards are issued.

The focus should be on the first scenario → longterm incentives to hold protocol rewards and keep DROP and TIN rewards at the same level to attract both investments equally. Besides, each tranche has its own benefits to serve different risk appetites from investors (DROP= lower risk, lower yield vs TIN higher risk/ higher yield).

4 Likes

We have allocated all rewards that have been minted to date according to the approximation in reward overview sheet. Given this is the most recent proposal discussing rewards I would suggest to put this forward to a vote soon as the rewards have ran out of funding already.

cc @prankstr25 & @thespaceacatjr

1 Like

Good day Lucasvo
Agree that we should first assure the correct work of Tinlake.
Just now we are running out of ~ -70k CFG (17/07/2022).
image

So I agree with your proposal to forward their RFC and vote as soon as possible.
Meanwhile, we can discuss the improvement of the Rewards Restructuring Part with Community, AO, and find the best way for all.

2 Likes

I would ask that all the separate questions are separated for voting purposes. I see 4 separate questions here, which I summarized below. It would be nice to perhaps offer some options for nunbers 2 and 3 as I believe at least a few folks expressed that the cut was drastic for this time.

  1. Remove AO rewards
  2. Lower Tin rewards
  3. Lower Drop rewards
  4. Mint new rewards
1 Like

On all these parts could be voted in the poll as separate questions

Thanks for all the discussion on this topic. @prankstr25 you are correct, those will be the seperate poll questions.

I suggest we move this to a poll for tomorrow. I think many valid points were raised over the last week or so, but still believe the basis of the proposal is valid and in the best interest of the long-term sustainability of the project.

3 Likes

Given the rewards have run out, I agree with moving this forward asap. We need to come to a decision as soon as possible on this topic.

1 Like