Problem: Incentives program causing STAB upper depeg

Governance ILIS DAO
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Hi all, da mighty squid here.

We’ve all noticed STAB trading around 3-5% over its peg at all times. Now, this might seem like a good thing - a pumping stablecoin - but I can assure you it’s not… :grin:

Why?
So, why is this happening? It’s fairly simple actually, and many have alluded to it already: the incentives program is creating artificial demand for STAB, even when it is above its peg. Because of the STAB/XRD LP rewards being so high, it’s still profitable to just buy STAB of the open market when it’s above peg and provide LP, even when one doesn’t want to use the borrow functionality. This shouldn’t be the case.

Solution
Whatcha gonna do about it then? Well, we could of course rework the incentives program so we are not creating such artificial demand for STAB. We’d mainly accomplish this by incentivizing borrowing STAB. We should then leave what the user does with their newly acquired STAB up to them mainly. They could either LP, or sell it to leverage their collateral (or whatever else STAB can be used for).

Tentative proposal
I already have a tentative proposal for how exactly we could rework the Incentives program.

I don’t think completely disregarding STAB/XRD LP rewards is the way to go, so I’ve not done chosen to. I’ve also added an extra incentive to STAB/xUSDC LP, and ILIS/XRD LP, as I think those were sensible to incentivize as well. And of course, the main incentivized action is the borrowing of STAB.

Because some of the pools I propose to become incentivized are concentrated liquidity pools, I propose to move the Incentives program from being managed by the incentives smart contract (through an Incentives ID), to a central party (me, for instance). An additional advantage to this approach is that it doesn’t require the LP tokens / receipts to be locked up in an Incentives ID. The only downside to this would be that the process is not anymore trustless, but the maximum amount of risk we take on by moving the program to a central entity is so low, I think it’s not a problem, as the manager of the program will hold at most 1 week of rewards at a time. Small detail: the proposal should also allow for instant unstaking of now staked LPSTAB tokens if the Incentives IDs are no longer necessary.

It’s important to decide on which liquidity provision is being rewarded if we’re dealing with concentrated liquidity pools. For pegged assets, I propose a very simple measure: liquidity from 95-110% of STAB’s peg will be rewarded (redemption rate to liquidation penalty), all equally. Non-pegged assets I haven’t completely thought through yet, but I reckon rewarding the actively-traded bin and some below and above would make sense? As you will see, the proposal doesn’t include incentivization of concentrated liquidity provision for non-pegged assets though.

So now for the big reveal! I propose to keep the ILIS incentives at 200K ILIS/week, divided over STAB and ILIS like so:

STAB:

Action Weekly reward
Borrowing STAB 100.000 ILIS
STAB/xUSDC LP on C9 25.000 ILIS
Native STAB/XRD LP (LPSTAB) 25.000 ILIS

ILIS:

Action Weekly reward
ILIS/XRD BasicPool Oci LP 50.000 ILIS

Which DEXes and which specific pools we incentivize is still very much open to discussion though.

Feedback
I’d appreciate any feedback on the reworked Incentives program. Literally… anything! Don’t be afraid to tell me what you think should be done.

Let’s get talking.

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Not sure about incentivizing ILIS/XRD LP, because it doesn’t serve a goal other than boosting liquidity, which, while nice, doesn’t really help STAB move to its peg again.

The CaviarNine pool also provides a decent APY on its own atm. Not sure if we need incentives for that atm.

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The ILIS/XRD LP incentivizes aren’t really meant to move STAB’s peg, I just thought that we could add them if we were going to overhaul the incentives anyways. Maybe it indeed makes more sense to make leave ILIS/XRD LP incentivizes for a future proposal and keep this proposal’s aim to be purely restoring STAB’s peg?

C9 STAB/USDC LP’ing is indeed quite attractive already. You’d suggest not incentivizing this either, but are still in favour of the STAB/XRD LP incentives, because this one’s not attractive enough on its own?

That’d mean we’d only incentivize borrowing STAB and STAB/XRD LP’ing? I think it’s definitely possible, and would also allow us to not take sides in the which DEX do we pick debate yet :). Also, it would even allow us to keep using the Incentives ID system. Though we could also still transition to centralized rewards, thoughts on this?

Edit: and if we only incentivize the 2 categories mentioned. The question remains: how much should we? Talking raw ILIS/week figures here hehe.

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I would indeed suggest making this proposal focused on restoring the peg. And also to not incentivize the C9 pool for now.

STAB/XRD LP incentives would help reduce price impact and improve arb opportunities I guess? So probably good to incentivize that.

So basically would come down to incentivzing:

  • Borrowing STAB
  • Native STAB/XRD pool

As to how much… No idea tbh :laughing: If borrowing STAB is expected to help the most, I’d probably give that the most weight. At the same time the STAB/XRD incentives probably need to outweigh IL from to-be-expected XRD price increase to make it attractive.

Probably not do the whole 200k/week yet for now. If the effects are unsatisfactory, incentives could be increased a bit.

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Oh and just to confirm: these changes would mean staking and locking LPSTAB would no longer be incentivized? Or is staking LPSTAB what you mean by incentivzing the XRD/STAB pool?

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In the tentative proposal you responded to I was indeed suggesting to not reward locking / staking LPSTAB anymore, and move this to a central entity as well. So just reward holding LPSTAB is what I mean by incentivizing STAB/XRD LP. Just to ensure all incentives function in a similar way.

And to make it more confusing (sorry): in my first reaction to you I then implied that we might be able to keep the incentives the way they are right now if we only add incentivizing borrowing STAB, but I want to take back those words :joy:. That would require staking Loan Receipts which, if not handled by some advanced proxy smart contract, would mean that these loan receipts aren’t usable anymore before unstaking them (so you’d need to unstake before adding collateral for instance, not very safe).

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You may have lost me a bit there :upside_down_face:

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No big deal I think haha. Last paragraph not that important, I think that’s where I lost you.

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Incentives on the ILIS/XRD pool should help to at least maintain and possibly boost the price of ILIS. People will be more likely to hold on to there ILIS and provide liquidity. This will help maintain the price of ILIS and absorb some of the increasing supply and any dumpy farmers. A higher ILIS price boosts all the other pools being given ILIS incentives.

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Fair point. But can we incentivize it enough to move people to provide liquidity?

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It’s worked for WEFT, HUG, CAVIAR etc. Just off the top of my head. Shouldn’t be a problem.

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Yeah but those were quite generous rewards I think? :sweat_smile:

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It’s proven to be a good idea to incentive the pool while distribution is going on (increasing supply) or the whole farming incentives can just collapse defeating the purpose of all of it.

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Yes they were in some cases (CAViAR/WEFT). Seems to have worked well for hug. Have to figure out the right balance.

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@octo how much do we have available to throw at this?

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Whatever our hearts desire :joy:

We got a shit ton of ILIS in the treasury. But probably good to not spend too much as to not dilute current holders.

As Tali says, I think we should find the right balance. Might be good to start on the low side and increase incentives if we think it’s not working?

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To add maybe:

Current circulating supply is around 18% of total supply (7% beta testers, 8% presale/lbp, I can access around 3%).

The current weekly rewards were set to 200.000 ILIS/week as this would translate to 10.000.000 a year, which would be 10% of total supply. I thought that was alright.

Maybe keep total rewards around that level? Though I’m open to go lower/higher if anybody comes with a particularly convincing argument.

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ILIS/XRD incentives support the ILIS price with the other on going airdrops. Indirectly, this is important for keeping the STAB peg as the price of ILIS determines the market effect of the other incentives. Additionally, growing STAB liquidity to critical mass is of vital importance for both maintaining the current STAB peg, and the long term success of the protocol. I believe incentivizing concentrated STAB/xUSDC liquidity is the cheapest and quickest way to achieve critical mass. Concentrated liquidity offers much higher capital efficiency and STAB/xUSDC is naturally more attractive for LPs as there is minimal risk of impermanent loss. When incentivizing XRD/STAB you are offsetting the risk of XRD/USD impermanent loss which is both expensive, and doesn’t benefit the ILIS protocol. I don’t think the goal here should be to make all actions equally attractive based on the current state, but rather to boost actions that maximumly benefit ILIS.

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Concerning the ILIS/XRD incentives I think you’re right. As for me, this is a guaranteed addition to the incentives program.

Regarding incentivizing STAB/xUSDC, I think you make a solid point that this is probably the most cost-effective way to achieve sufficient STAB liquidity. This is the liquidity that we REALLY want to incentivize.

Still, I suggest we start out with a relatively small incentive for STAB/xUSDC LP, coupled with incentives for STAB/XRD LP (small) and borrowing (bigger). My reasoning for this is:

  1. Currently it’s important to have at least some incentive for STAB/XRD LP, as the protocol would be exploitable if liquidity is low in that pool, as that’s where it gets its price data from. Not a bad idea to change this up in a future proposal though. There should be some baseline of incentives for this pool, which I don’t think needs to increase in the future, but would serve as a guarantee for at least some liquidity.
  2. I don’t want to start out with huge incentives immediately, as this really messes with the interest rate / demand for STAB. We could then increase STAB/xUSDC LP incentives over time, after supply/demand have had time to stabilize. We could even take some of the borrowing incentives, that start out big, and transfer them to incentivizing STAB/xUSDC LP, if we don’t want to mess with the total rewards given out weekly.

Funny thing is, that this would basically boil down to my first tentative proposal.

Interested to hear whether you think this makes sense.

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I think your original proposal makes a lot of sense. With the borrowing incentivized it becomes attractive to take the route: LSULP → STAB → xUSDC → LP into Surge or Root, so we should see STAB expand and repeg. Incentivizing STAB/xUSDC provides foundational liquidity, and as you said, incentivizing STAB/XRD is necessary to protect the protocol. Incentivizing ILIS/XRD supports the rest of the incentive program as a whole.

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