Decreasing C-Ratio Vs Decreasing SNX Rewards

Lower Curve Rewards or Lower C-Ratio:

Motivation:

I had promised to some that I would be proposing an SCCP to lower SNX rewards paid on curve every other week in order to take advantage of the increase in the price of SNX, the announcement of the distribution of the CRV tokens. The final objective being to decrease these incentives to the minimum possible that achieve a stable peg. However, incoming data need more careful analysis, so below I lay out the pros and cons of each action for discussion:

Lower Rewards on Curve:

Pros:

  • We will be better equipped in the medium and long-run, to increase SNX rewards to defend the peg, if we start from a lower rewards level.
  • The gradual decrease in weekly SNX inflation requires that rewards paid to maintain the peg are decreased to the minimum possible in order for SNX staking to be sustainable.
  • In case the peg is oversold as a result of a decision to further decrease SNX rewards, historical data has shown that the size of the pool is very responsive to incentives offered. Therefore, we have a fair amount of flexibility to push back rewards up in we need to.

Cons:

  • The negative impact on $APY of Curve is 3.3% (to around 10%), assuming the pool size and snx price are both stable. Given the farming rewards offered by competing platforms and factoring in the uncertainty on the state of Curve distribution the decline in $APY is considered to be steep.

Lower Collateralization Ratio:

Pros:

  • The impact on APY is less steep, as a decrease in the c-ratio of 50% will allow current SNX stakers to mint around 4.3 million of extra synths. Assuming this entirely goes to Curve as a worst case scenario. The impact on $APY is much lower (-1.3%), taking into account the current network collateralization ratio.
  • Decreasing the c-ratio increases the size of the pool on Curve and this is often reflected positively on the price of SNX due to the deepness of the Curve pool.
  • Finally, it’s important to note that with a lower c-ratio minters can take advantage of other farming opportunities by selling their synths. Therefore this helps spread more coins into new wallets and spurs more adoption.

Cons:

  • Lowering the c-ratio eats up from our flexibility to lower curve rewards in the future, since both c-ratio adjustments and SNX rewards changes impact the peg, although not by the same extent.
  • Increasing the amount of synths in circulation increases the instability of the network in general and opens the system up for more risks in case of a steep price decline in SNX.
  • The c-ratio is often laggy, and therefore any effect might be delayed, especially due to the high price of gas. If we overshoot on the c-ratio and the peg is negatively impacted, raising the c-ratio back up might not automatically correct sUSD discount observed.

Status Quo:

Pros:

  • Keeping the system with the current parameters would provide us with more information on the value of the CRV token distribution and the willingness of LP providers on curve to stake on that platform in anticipation of these tokens.
  • The current stability of the peg, which has been hovering at a 1% premium and 1% discount provides us with some confidence on the current parameters.

Cons:

  • Delaying the inevitable of having a lower c-ratio and lower rewards pushes these important matters to the future. Eventually we will need to lower both Curve rewards and C-ratio, in the in order to put the project on a more sustainable footing in the long-run.

Status of the Peg:

Status of Staked Curve Tokens:

2 Likes

Not so sure we should buy this point. More circulating sUSD builds network effects. There’s many use cases for sUSD in DeFi. A sharp price decline occurred in March on so-called Black Thursday. Minters responded by burning sUSD debt. Losing out on SNX staking rewards backstops this response as an incentive to burn sUSD or buy more SNX collateral in order to claim rewards.

Many good points here. I support flatlining Curve pool incentives and decreasing the target c-ratio at least 50%.

  • sUSD trades at premium to other stablecoins. Buying synths at a premium is not good for the marginal trader. Synths trading at a premium suppresses present demand for synths and discourages new traders because prospective holders are more rational to wait until they don’t have to pay a premium for a synth. Reducing and eliminating the premium is the primary reason for reducing the c-ratio post haste.

  • There is currently 8,491,450.03 sUSD in the CurvePool while there are 31.5M sUSD circulating. Extrapolating current trends, only about 26.9% of new sUSD will go to the CurvePool. The impact on APY for being a Curve LP is likely to be much less pronounced than than the worst-case scenario of a -1.3%.

4 Likes

True agree with you, my point was that decreasing c-ratio, is a more leveraged system which increases the risk, but given that we are at 750% and we have the liquidation mechanism at play. The severity of that risk is minimal compared to other points mentioned (both yours and mine). But nevertheless, to provide a complete picture, had to include it.

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So lets lower to 700%
Then we must come back to this every 2 weeks and decided whether to reduce further 25%
Maybe even make a automatic voting every Wednesday every two weeks reducing c-ratio vs reducing rewards

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For the record i don’t love the framing of change c-ratio, change rewards, or do nothing.

There is merit to discussing whether to change c-ratio or not, without including rewards, necessarily, especially when many of the rewards initiatives are foundation-determined at this point and not necessarily drawn from inflation.
By contrast, the c-ratio is always voted on by the community. Some of the rewards programs are fresh innovations from the team working on fresh partnerships, so its false equivalency to put both of these policies on the same plane. The either/or framing doesn’t sit well for some reason.

In short i absolutely favor decreasing the c-ratio and don’t see why one would oppose this view if the sUSD is trading at premium to other stablecoin like USDT or USDC, which it has been.

By decreasing rewards, I was pointing towards decreasing the ones that are paid from minters, not from the foundation. Again, it’s still the same argument, that you can’t do both at the same time by a large extent and not have negative consequences.
The only reason the last vote was undecided, was the community was split between those that favor rewards cut before cutting the c-ratio cut (like me) and those that want to cut that ratio, as if it’s the only thing worth considering.

It helps to define the problem statement. The sUSD is trading above $1. The price of the sUSD is determined by the total supply of sUSD and the market demand. Holding demand constant at present level, the only way to relieve the shortage signaled by the premium above $1 is to decrease the c-ratio, which effectively is a sUSD supply increase, or an outward shift of the supply curve.

When relaxing the assumption by introducing potential demand side changes, the problem statement of the sUSD trading above $1, solving for the premium becomes needlessly more complex.

At this point in the bootstrapping of the network I am with Kain that no actions should be taken to reduce demand for sUSD, so the assumption that demand be held constant in the analysis is appropriate. The conclusion is that the only way to deal with the premium is to increase supply, i.e. reduce the c-ratio.

2 Likes

I understand the dilemma here is either to increase supply of synths or decrease demand for synths. This as clear of a problem statement as is the title of this post :slight_smile:. I see no reason to raise supply, if most of it is being held cold wallets with little to no rotation, for farming purposes. So if you have some special product that is going to enter our eco-system soon (such as more binaries and dHedge) then might as well reduce idle leakage of SNX rewards.
That being said, I do not oppose myself a c-ratio cut, as I have a feeling that because of CRV, that demand is not as elastic to SNX reward changes. But I would also push for lowering SNX rewards soon after.

This is a straw man argument built low enough to kick down. I support 50-75% c-ratio reduction.

“A straw man fallacy occurs when someone takes another person’s argument or point, distorts it or exaggerates it in some kind of extreme way, and then attacks the extreme distortion, as if that is really the claim the first person is making.” https://owl.excelsior.edu/argument-and-critical-thinking/logical-fallacies/logical-fallacies-straw-man/

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Just Saying that something is a bad argument, doesn’t make it a bad argument :smile:.
Maybe I should have included context thought, rewards need to go down asap, because we don’t have the luxury of time, because of impending defi bubble pop or inflation going down… So prioritizing decrease of rewards should take precedent over c-ratio cut…