Looking Ahead - Reward Allocation Suggestions

dr00shie

Hello All,

With the recent movement of the SLP Farming to Sushi's "Yield" page & the notoriety of being the first "Double Yield Farm", we are bound to pick up more deposits and thus staked SLP in the farm. As a direct result, this will dilute the returns for those staked in the ALCX/WETH SLP. It will have the benefit of strengthening the pair and reducing chance of slippage on large trades, which is great.

If we safely assume upon ending the 2x rewards that we see APR slashed around 50%, this puts SLP's APR at parity with the single-sided ALCX farm. Once the APR of the SLP drop lower than the single sided stake, investors will weigh the opportunity cost of IL more heavily than they do now. Of course many investors in the project are often bullish on ALCX and seek to preserve some exposure to ETH as well (me included), so these folks will likely stay in the SLP.

My suggestion that I'd like to put up for discussion is that we slowly re-balance the allocation of rewards between the SLP and the single-side ALCX farms over time. Perhaps something like 5% every 2 weeks until we find an equilibrium. As the protocol matures, this will help alleviate sell pressure on ALCX as well and encourage more accumulation of ALCX in anticipation of the release of the AlchemixDAO.

It could look something like this:

Current
58% ETH/ALCX SLP
18% ALCX only
18% alUSD3CRV LP
6% alETH/ETH LP

First Adjustment
53% ETH/ALCX SLP
23% ALCX only
18% alUSD3CRV LP
6% alETH/ETH LP

Second Adjustment (2 weeks)
48% ETH/ALCX SLP
28% ALCX only
18% alUSD3CRV LP
6% alETH/ETH LP

Would love to hear more thoughts on this idea!

-dr00shie

mistertodd

Too hypothetical and too soon to worry about this.

dr00shie

mistertodd I prefer to be proactive rather than reactive. DeFi is filled with too much reactivity. Do you have any meaningful thoughts about it?

hellomoon

If I'm understanding correctly you're suggesting we increase the allocation to the ALCX only pool? Which would increase the APY for it, at the cost of the APY in the ETH/ALCX SLP pool?

That doesn't makes sense to me as the stakers who provide liquidity and that are exposed to IL should be rewarded more than stakers in the ALCX only no?

dr00shie

hellomoon This is why I said looking ahead. Over time as more people support the liquidity between ALCX/ETH, the rewards are diluted enough that the APR will not offset and IL experienced.

The longer we keep REALLY high allocation on ALCX/ETH SLP, the more longer we encourage sell pressure on ALCX. As people compound their ALCX, they are dumping 50% of it on the market. This behavior can be curbed by incentivizing hodling of ALCX through more appealing APRs.

I'm not suggesting changing it a crazy amount, but we should begin to move some allocation points towards ALCX only at some point in my opinion and gauge the affects on willingness for LP'ers to continue vs removing liquidity and going single-sided.

PhiMarHal

I'm really enjoying this thread. Sort of a different thought, but I'm starting to wonder: do we need to incentivise the SLP?

There is $254M of value locked in the Sushi farm right now. And, interestingly enough, $264M of value locked in the SLP, period. So there's $10M floating around getting no rewards, or ₄% of the total value locked.

As I understand it, the role of the SLP is to offer liquidity with minimal slippage for ALCX. Incentivizing some liquidity makes sense. But perhaps we have reached a point where incentives are no longer required - or at least, where it might make sense to consider whether the current level of incentives is necessary.

Let's start with the most extreme scenario: no more rewards of any kind for ETH/ALCX. What would happen then? There is always inertia in LP behavior. That $10M of ETH/ALCX SLP earning no rewards, beyond the microscopic LP fees, gives us a hint of that.

Granted, the Sushi migration took place only one week ago. Some of the remaining LPers would likely move to the Sushi farm given enough time. Nonetheless it might be interesting to see how long that move takes.

$250M TVL is massive. The most popular pairs, involving stablecoins, BTC and/or ETH, are in that range. Most "blue chip" tokens from established DeFi projects like MKR, SNX, COMP... trade fine with TVL in a $20M-$40M range. So could it be possible the SLP could withstand a 90% drop in liquidity without hurting slippage significantly?

Say we reduce rewards significantly on the SLP, there's also a balancing effect in that LP trading fees start to become meaningful. Right now, LP fees amount to about 3-4%. If we witnessed a 90% drop in liquidity while volume kept the same, remaining LPs could expect 30-40% from fees alone. And that is money earned from traders rather than spent by the protocol, always a plus.

I think it'd make sense to progressively decrease the share of the ETH/ALCX SLP rewards. No matter where those extra rewards go.

Now personally, I'm not sure the ALCX single stakers have any more incentive to not dump their reward tokens than the SLP owners. With either strategy, you can choose to compound for even more rewards or lock in your gains. One can be in the ETH/ALCX and not sell a single ALCX. The popularity of Pickle is proof enough of that behavior. And conservely, one can decide to buy a given amount of ALCX, stake their tokens in the farm, and consider rewards as extras to be sold.

I get that there is a 50% dump vs a 0% dump amidst those who do dump. In all honesty, I guess ultimately I'm not too interested in propping up the token price in the short term, through these mechanics. There can be a level of ponzinomics in encouraging people to compound so they can compound so they can compound... and so on.

In the long run, ALCX won't need ponzinomics, as holders will get a share of the protocol fees. So in a way, we could argue NOT incentivizing the single sided farm too much might actually help concentration of the ALCX supply into the hands of those who believe in the long-term vision of the protocol! If token price slumps somewhat until then, that's more opportunities for long-term believers to get a sizeable stake of governance.

I wonder if we might get more mileage out of rewarding the alETH/ETH pair even further. The higher the rewards there, the more incentive to directly exchange ETH for alETH. Which would lock more ETH in the Transmuter forever. Which translates to better yields. Which gives us faster loan repayments.

There is perhaps the opportunity to do something really special here. Everyone wants ETH, and everyone wants yield on their ETH. And getting good yield on your ETH is one of the hardest things to do in this space.

If we manage to get so many people to trade their ETH for alETH the Transmuter yield is boosted to 8%, 10%, 12%... Alchemix will look more and more attractive to all kinds of crypto enthusiasts.

I could see a tipping point where things snowball almost exponentially rather than linearly.

Thoughts?

ButlerAndTheThirdStringers

PhiMarHal I agree there's plenty of room to reduce the SLP rewards, especially on the heels of CEX listings. I also think that the allocation to the alETH/ETH/sETH pool should be raised IF we see APR drop and liquidity their stagnate, but that should be a reactionary measure, not something we do right now. I'm skeptical that a raise to that allocation will be needed at all in the immediate future. Yields on ETH exposure are typically low in DeFi and if it's already the best you'll find it would probably would be a waste of emissions.

I'd also like to dispute your point that selling rewards is just as likely for ALCX farmers. It's entirely possible people could hedge their positions or want to be earning their yield in some other form, but it's still less likely than any of the other farms, because staking in the single-sided ALCX is taking on ALCX price risk and assumes that you're bullish on the ALCX price; and if that's the case than you're more likely to be stacking ALCX and compounding rewards than selling to something else. Consider the following to illustrate this line of thinking:

100 ALCX staked at a price of 1000 per ALCX and an APR of 100% = 100k dollars of value staked and 100k earned at the end of 1 year.
If the price goes from 1000 to 700 over the course of one month, you've now lost 30% of your initial investment over the course of that month. Even if we generously assume that the price was 1000 all the way up until the last day, 1 months worth of rewards would have netted you only (100k/12) or $8.3k earned. Which obviously pales in comparison to your $30k that you've lost on negative price action. Even if the price had fallen to only 900 in that time you would have been better off not farming ALCX at all.

So given the assumption that ALCX farmers are logically bullish on ALCX and more likely to be stacking and compounding than selling, and also given the fact that earning high APR makes holding your ALCX more appealing, I think it's safe to say that the APR on ALCX farm is probably the best driver of positive price action outside of pure speculation.

The only other place to divert those rewards would be the CRV farm. The CRV farm is generally the most important since that pool since helps maintain the peg and curb the need to use the Transmuter, however the peg as been strong and I don't believe additional liquidity is needed at the moment. It also makes the more sense logically for CRV farmers to be selling their farming rewards than farmers who are exposed to the price of ALCX for reasons discussed above.

The price of ALCX has been taking a beating, and the goal of the ALCX farm has always been curbing ALCX price pressure. Clearly the current emissions haven't done a good enough job at that. Combine that with the possibility that some of the treasury ALCX is needed to cover the ETH deficit (in an OTC deal or otherwise) and I think it makes the most sense to divert rewards to the ALCX farm to try to create some positive price action on ALCX.

hellomoon

Personally if APY significantly then I'll stop farming ALCX and move on, I think a lot of people from the SLP are in the same boat.

mario1986

I think this is a good idea, specially taking into account the latest events, currently you have a catch 22 situation were you have increased ALCX sole stalking dumping the APR but on the other hand that does help mitigate the 50% ALCX dumping from the SLP. An increase in the ALCX single stake allocation provided that does not incur in slippage for trades done above the SLP pool would have my support, do we really need to pay 4,2 million a week to avoid slippage? open question

whalegoddess

as an ALCX hodler, I think we need more ALCX buy pressure by incentivizing single stake. Not sure how important it is and what allocation is best

asymrisk

I agree directionally with the proposal. The SLP seems over incentivized now as evidenced by the very high level of liquidity there on a pair that doesn't see that much swap volume. Moving some of that incentive to single stake to encourage HODLing makes sense. How much to do and how quickly to do it is another question. Going relatively slowly makes sense so that impact can be assessed each time the incentive is reduced.

hsnhsyn1

How about a boosting mechanism for SLP? SLP emmisions are reduced and staking ALCX boosts individual SLP positions by some factor? Like Curve's or Badger DAO's approach? I think Curve's boosting mechanism really incentivize curve staking (I'm speaking without considering locking here, does not matter, though).

edit: perhaps different actions on the platform affects the boosting, thus also incentivize using all features on the platform...