I wanted to request comments on proposed changes to CFG rewards. I believe the market landscape has fundamentally changed since our last CFG reward proposal and would like to propose the following changes to further iterations:
We rebalance the reward ratio between TIN and DROP.
Pool operators can’t double dip on rewards (ie. earn rewards supporting their own pool).
Rewards rates increase the longer you are invested in a pool (to the extent this is technically feasible).
Here’s why:
Several months ago it was decided that TIN was the rate limiting step in continuing to grow the protocol. Our live pools were all relatively early stage businesses that in most cases didn’t have sufficient resources to contribute to their own junior capital as the pool scaled. This made TIN scarce. Furthermore, the CFG price was meaningfully higher and therefore the reward rate was much higher than the underlying interest rate generated by the asset collateral. This made it a much better trade to go into the DROP (lower risk) and earn tokens rewards than the going into TIN, where you were taking most of the risk for a similar net reward (on a relative basis).
Fast forward several months and here’s what’s changed:
Couple things that relate to the market and some that relate to protocol learnings. Firstly, market conditions have driven the token price down, which has compressed reward yields and made the underlying interest rate on TIN much more attractive on a relative basis. It’s not such an easy trade to just sit in DROP earning rewards anymore, the underlying interest earned has become far more relevant. Second, 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. AOs can also lever themselves by financing off the senior and retaining the leveraged junior, a very attractive piece of financial engineering that can supercharge returns. As we move up the curve in terms of AO scale, we find that they have junior capital ready to grow their own pools and are in fact primarily looking for senior financing. The last point is the key learning, Centrifuge offers AOs leverage and this is what the larger AOs are interested in. They want the TIN returns for themselves and want someone else to finance the senior (hopefully at a low interest rate). Thus suggesting we should be incentivising the senior (DROP) more heavily going forward as this is the current pain point and will likely remain so going forward.
As a separate point, we need stable capital to provide a reliable long-term solution for AOs. This comes in the form of long-term investment. We should reward people to stick around longer.
Conclusions:
Finding senior investors has become very difficult. The underlying interest rates are low and the reward rate has come down materially. We need to more fairly incentivize investors if we want to attract financing into this tranche, which is by far the lionshare of pool TVLs.
The market place and solutions there within are tilted toward AOs today. Demand remains strong for new assets to finance and I don’t believe we need to incentivize them further by providing reward yield on investments into their own pool/
AOs need a stable capital base to grow their business and meet obligations. Lets incentivize longer-term capital if we can.
I support the changes because it is an adaption to the current market situation. Especially the incentivization of long-term investors is a plus for both Asset Originators and investors. In my opinion the first thresholds for rewards increases should be 3 months and 6 months because the min. duration - to receive CFG-rewards - is already 30 days and maybe 12 months in the future.
In terms of rebalancing the reward ratio between TIN and DROP if I understand your proposal correctly the DROP-ratio should increase at the expense of the TIN-ratio?
To clarify on the DROP/TIN rewards. TIN investors are currently earning a higher reward rate than DROP. I would suggest to turn this on its head where DROP earn a higher rate than TIN. At a minimum they should have the same reward rate,
We rebalance the reward ratio between TIN and DROP.
Can you share, please how will be the new ratio?
If drop token will receive more this will be unfair vs. Tin investors.
I guess that both investors at least should earn the same rewards. Because DROP investors already have better insurance in case of default
Rewards rates increase the longer you are invested in a pool (to the extent this is technically feasible).
This is cool and I completely agree that loyal Investors should receive some more bonus/rewards.
Did you already have in mind how to implement and how this rate will look like?
yeah makes sense - I think the reward rate being the same is likely a good middle ground.
Maybe we could use a multiplier for every 3 months you stay in the pool. I would also suggest that users make a committment when they lock the capital choosing 3mon, 6mon, 1yr etc and get the reward rate based on that committment. That would increase visibility for AO origination pipelines.
This is really make sense and permit to AO to have more clear view in future investment and permit to manage founds in better way if AO could understand when investor could withdraw his founds from pool.
The next step is to let the community decide in a poll about the proposed changes. The poll should be open around a week to give everyone enough time to cast their vote:
Hi Mike, this RFC doesn’t clarify how the rewards should be adjusted (e.g. specific figures).
So either this would need to be discussed first (in this post) or it should be made as an options in the poll so the community can vote on what the numbers should be instead.
@Tjure07 suggests that there could be three options in the poll, which are very clear:
No change (TIN stays higher than DROP)
TIN equals DROP
DROP higher than TIN
But if the community votes for option 3, the numbers would need to be specified.
Thanks for specifying the polls. Poll 1 and 2 are pretty clear.
But poll 3 indicates that further discussion has to take place before the amounts are agreed on (in case the outcome of the vote is yes) - is that correctly understood?
If that’s the case, then I personally think it would be better to clarify what those rewards should be, before taking the proposal on-chain.
Otherwise we would need to go through another governance (RFC → Poll → on-chain proposal) for the amount of the rewards.
If the community decides to give the Centrifuge team the “go-signal” to investigate the rewards structure (yes) no further RFC/poll/proposal should be necessary for the moment.
Yes I think that’s best - I am more implying that the team investigate what is technically possible, then we can think about what the right numbers and go back through the above process to get there.
Ok, in that case, this proposal will only be off-chain (this RFC + the poll) - there will be no on-chain voting on this.
If the community votes in favor of this proposal in the three polls, it means that they agree that the team should proceed with investigating the numbers.
Once the numbers are available, the process should begin all over again with a new proposal first off-chain (RFC + poll) and then an on-chain proposal (if there is enough support) where token holders can vote on it with their CFG.
