Should liquidity rewards change based on time staked in the pool?

In the past weeks, we have seen significant volatility in both sUSD price and the size/liquidity of the sUSD pool. Much of this can likely be attributed to other yield farming opportunities popping up with substantially higher rewards such as YFI, MTA, YFII, etc. It is not likely possible for us to outbid all short term yield farming rates without incurring substantial dilution for SNX holders.

In my view, these situations are likely to continue to occur even more often in the future. More YFI copycats will appear, and more opportunistic farmers will constantly rotate between the various protocols in search of the best yield. Once automated farming systems become more widespread, we may even see very short term rotation going on based on small deviations in yield.

This is probably undesirable for our goals of liquidity and synth peg maintenance.


I believe we should implement additional rewards based on how long one remains staked in a liquidity pool. This will incentivize farmers to stay in the pool rather than chasing short term opportunities elsewhere. It will also tend to produce a more stable configuration of pool size and synth demand that makes it easier to set other parameters (such as c-ratio, total reward payouts, etc.)

Some possibilities would be gradually ramping up rewards (up to a cap) or a hard cutoff (e.g., withdraw within 7 days after staking and you forfeit your rewards).


Questions:

  1. Should we implement such a system of incentives?

  2. If so, what specific incentives should be chosen to maximize stability?

2 Likes

You make a good point about the rapid movement of liquidity across protocols. To further illustrate this, I think there has been something like a 97% reduction in the capital on YFI since reward emission ceased. I can also see why maintenance of liquidity on the protocol is important, and something that is only going to become more important as the protocol begins to fulfill its potential as an alternative to highly-used CeFi systems and infrastructure.

  • Question 1:
    I would be in favor of beginning discussion of implementing additional incentives but think it’s also worth considering a stick approach in addition to that of the carrot. This is just one quickly thought of idea but one could, instead of a reward, consider something like a waiting period wherein staked SNX doesn’t begin accruing rewards for a set period of time. Such an approach, while not in keeping with the brrrrrrr of recent times, might result in more reliable and less capricious minters, creating a foundation for a more stable liquidity pool.

  • Question 2:
    My answer to Question 1 has bled into this one but, as for rewards, the use of tiered rewards systems for capital commitment has obviously got a long and successful history in retail finance. This is purely spit-balling but it might be worth pondering other token models that have had success with locking tokens. Right now I’m talking in particular about the practices of Crypto.com, who reward token locking with tiered debit cards, airdropped tokens, and a variety of other incentives. The advantage of this non-purely numeric rewards system is that it is attractive to retail and can help foster partnerships, and could therefore bootstrap a huge number of users in a bullmarket. Whether Synthetix, as a more “high level” product/service wants to or is in a position to take on the complexity of appealing to retail through “trinket” rewards is another matter.

Speaking personally, I would personally give serious thought to locking a few thousand SNX for 6 months to a year if it meant I could get a classy, SNX co-branded, black, metal Monolith card. That might just be superficial me though…

Due to the high degree of SNX price volatility SOME mint management seems to always be required. It may be worth investigating a two tiered approach? Up to a maximum of 50% of SNX staked gets allocated more lucrative system rewards with the requirement it is staked for a longer period (4-8 weeks, for example)? It could also go toward improving system stability WHILE giving stakers the flexibility to actively manage their stacks.

Tier 2 rewards may also have different vesting requirements. Higher rewards could be better voting rights for governance purposes versus straight monetary incentive.

I think this rewards contract changes must be implemented by third-parties, to avoid distracting Synthetix core contributors from other important stuff. The way I look at it is that liquidity rewards must be given according to time that LP stayed in the pool. Lets say if I deposit 1000 stablecoins:

  • 1 month ago, I might have rewards multiplier set at 1.1
  • 6 months ago, I might have rewards multiplier set at 1.6
  • 12 months ago, multiplier is set at 2.0

All these are arbitrary numbers, but we must come up with a way to rewards oldest LPs for not chasing high yield in other pools by offering higher rewards to him.

Lets say if person removes > 1% of liquidity, then this multiplier will be reset and must be earned with passing time again.

1 Like

I very much agree with Spreek & SynthaMan on this one.

This last week for me has been very reminiscent to the 2017 ICO bubble, but instead of people chasing the latest ICO people are chasing Yield & mainly Governance Tokens.

Although great for bootstrapping projects (Synthetix actually being the original father for this approach in the crypto space), I don’t this is aligned with the direction and current stage that the Syntehtix project is at.

Maintaining the synth pegs are paramount for this project, and incentivising people to remain in the currently rewarded pools will help achieve this.