SIP-11 Implement dynamic LP rewards

Siren is currently spending 17,857 SI per day (125k per week) to incentivize liquidity which is working well within its desired bounds. However, only the SUSHI Call options seem to have sufficient open interest.

Every liquidity pool currently earns 2.976 SI, but only one pool (SUSHI Call) is appropriately used. Therefore Siren is now overpaying almost 15,000 SI per day to liquidity pools with little traction. That’s more than 80%.

Therefore, we suggest implementing a dynamic reward scheme that takes the pool utilization, current SI price, and default interest rate across DeFi into consideration.

Pool utilization: How many percent of the pool liquidity is currently sold. Calculated as Open Interest across strike prices/liquidity.

Default interest rate: The base rate we would have to outbid to attract liquidity - Curve 3pool for stablecoins and Aave interest rates for UNI and YFI. The SUSHI interest rate would be XSUSHI and can be obtained from Sushi. To incentivize liquidity beyond this base rate, we suggest adding a further 5%. We call this the incentivized base rate.

Current base rates would be:

  • USDC: 15% (from Curve 3pool)
  • UNI: 0.04% (from Aave)
  • YFI: 0.74% (from Aave)
  • SUSHI: 4% (from xSUSHI staking)

Other parameters:

  • Max SI per day per pool: 3,000 (slightly more than what is currently being paid)
  • Minimum liquidity per pool: 1,000,000 USD (if we have less than this amount in any liquidity pool, we have to increase our rewards)

Given these parameters, we suggest the following distribution of rewards:

Notebook: https://gesis.mybinder.org/binder/v2/gh/HeyChristopher/siren-rewards-sip/52bcaaa8aa23aff121eac8701cfdfa5564a8b2b9

Source: https://github.com/HeyChristopher/siren-rewards-sip

Explanation:

  1. When total liquidity per pool is below our minimum liquidity (0%), the rewards should reach their maximum. Or to say it in another way: The APY should be very high when there is not a lot of capital in the pool so that we attract more capital quickly
  2. Once we have enough liquidity, we start to look at the utilization of the pool. We are suggesting to approximately pay the incentivized base rate between 20% and 50% utilization. Above 50% utilization, the rewards quickly increase towards their maximum to ensure that we always have enough capacity. The rewards drop below the base rate when the utilization is very low (<20%)

With this model, we can increase the current liquidity mining program’s duration by a few times, even with increased utilization.

Open questions:

  1. Are the curves too steep? The APY could jump from 300% to 10% quickly for certain pairs with just 100k USD added, resulting in too many people hopping in and out of the pool.
  2. Is the base rate + 5% appropriate? Is this too much, or is this too low?
  3. What is an appropriate minimum liquidity amount we want to make sure is always in the pool? Is $1m too much or too little?
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Drawing attention away from one token and dispersing it across other tokens is a pretty good idea. It would let these exchange tokens to scale quickly and prevent the chance of monopoly. It aligns well with Siren’s main goal decentralizing and rebalancing governance. I think that alone is a good incentive.

The steady income is nice. Scaling the other tokens could mean a healthy market growth with the APY favoring the upper-end.

Overall I think this is a great idea!

A few thoughts:

  1. Are the curves too steep? The APY could jump from 300% to 10% quickly for certain pairs with just 100k USD added, resulting in too many people hopping in and out of the pool.
    Yes, I think they are too steep. It should be more gradual given that you don’t want people jumping in and out. If anything they ought to recalculate on some regular cadence, rather than immediately. Otherwise, yes, you will have upset LP who contributed a bunch and immediately the rate became terrible. It’s not really the LPs fault if Siren cannot attract enough option buyers.
  2. Is the base rate + 5% appropriate? Is this too much, or is this too low?
    This is MUCH too low. Given that you are taking on significant risk as an LP (potentially losing all of your capital) the rewards should be MUCH higher than other platforms are offering. It’s not fair to compare being a USDC LP to the 3pool on Curve given what is at stake on Siren. I would suggest a floor of 50% APY. Even that may not be sufficient to attract capital when you can get 80-100% on stables quite regularly
  3. What is an appropriate minimum liquidity amount we want to make sure is always in the pool? Is $1m too much or too little?
    I don’t think there is an answer to this. I think you want as much as possible
  • It’s not really appropriate to compare supplying capital that is used to write options versus AAVE, SUSHI etc lending rates. There are much better options out there if you’re comparing against those rates, and again, this is much higher risk. You could potentially lose all of your capital on Siren, that would never happen on any of those other platforms.

In terms of being competitive I would suggest:

  • USDC: 15% (from Curve 3pool) - this should be at least 75%. otherwise you are not going to get anyone supplying it. Even now the rewards ARE already dynamic, and you don’t have a ton of capital supplied with rates at over 100%. I could get 90% on any stable in Alchemix right now
  • UNI: 0.04% (from Aave)
    No comment here other than that it’s possible to supply UNI on a lending platform and borrow a stable against it. Again, could put that in Alchemix
  • YFI: 0.74% (from Aave)
    Same goes for YFI
  • SUSHI: 4% (from xSUSHI staking)
    Sushibar (via xsushi) gives at least 15% APY, and I could stake Xsushi on ONX for an extra 15%. so I’d put this one at a minimum of 30%

In general, I think this proposal is taking the wrong approach. The issue is not on the supply side. I think ADDITIONAL rewards should be allocated to incentivize buyers to purchase options. And I think on the supply side it should be made clear what part of the APY is from selling the options, and what part is from SI rewards. Given that SI rewards will stop at some point, you want to get people interested in supplying capital just based on the option earnings themselves

There is definitely a middle ground between what you’re proposing and what’s currently in place, but I don’t think it’s really an issue at the moment. Shrinking the rewards only hurts Siren in the immediate future, since that is what attracts new people to using the platform. I can’t tell you how many interesting platforms i’ve seen that had bad LP incentives, and I never looked back at them after I saw how bad the rates were.

With high APYs you keep people interested while the team has time to build out the platform more and add additional tokens & strike prices to get new buyers

I fully agree with this proposal!

I like the proposal in general on the principal of dynamic rewards based on utilization. Writers are taking a risk and therefore the pools with high Open interest should be rewarded much more than free-loader pools (those with 0 to negligible open interest). However regrading the actual math and numbers, I don’t support the currents numbers, and believe it needs further modelling and fine tuning.

Great proposal, makes a lot of sense. I believe initial parameters are adequate. Worth trying them and tweaking as we go if needed. Excited to see SI rewards incentivize productive capital!

2 Likes

Thank you for taking the time to respond.

Let me respond to each of your points:

Yes, I think they are too steep. It should be more gradual given that you don’t want people jumping in and out. If anything they ought to recalculate on some regular cadence, rather than immediately. Otherwise, yes, you will have upset LP who contributed a bunch and immediately the rate became terrible. It’s not really the LPs fault if Siren cannot attract enough option buyers.

Hard to argue with that. I have adjusted the steepness from 50 to 10 and following would be the new reward curve. It is much smoother now. Please note its just two dimensional and the utilization formula will kick in separately.

chart (4)

The biggest jump between units of $50k are now 12% in SI rewards vs 42% previously.

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  1. Is the base rate + 5% appropriate? Is this too much, or is this too low?
    This is MUCH too low. Given that you are taking on significant risk as an LP (potentially losing all of your capital) the rewards should be MUCH higher than other platforms are offering. It’s not fair to compare being a USDC LP to the 3pool on Curve given what is at stake on Siren. I would suggest a floor of 50% APY. Even that may not be sufficient to attract capital when you can get 80-100% on stables quite regularly*

I do disagree here. Please remember that with Siren you are not losing capital, but instead act as a buyer or seller at a certain price. Given that and the relatively high premiums, I do think 5% on top of the default rate is a good estimate. Giving away 50% no matter how much utilization we have will just mean all of SI will be owned by a few wealthy accounts.
Our mandate is not to be the highest yielding farm, but to make sure we always have just enough liquidity to serve traders.

With high APYs you keep people interested while the team has time to build out the platform more and add additional tokens & strike prices to get new buyers

This is true, but it comes at an incredible high cost. Everyday a new farm pops up with even higher returns and this is a battle of attrition that no protocol can win, unless your tokens are already worth multiple billions. I don’t think we should pursue this approach. The few people that are just attracted by high APYs will not be here in 12 months from now and are also the ones that dump the quickest. Capital is cheap at the moment and we are currently way overpaying.

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I hate to disagree with you, but if you’re in the curve pool (which is the APY you’re comparing to) there’s basically zero risk to your capital. if you’re writing puts, you could end up losing the entire amount (if the token you wrote against drops by a lot).

Siren is absolutely much riskier than any of those other “farms” you mention. And while I agree that “everyday a new farm pops up”, there’s a base level that’s needed to keep any liquidity on the platform. And it’s much higher than 5%. I can get 30% on pure stables in Harvest, or even higher if I’m in various Curve pools. I can tell you right now that I’m not staying as an LP in Siren if the rate falls below 50%. Just not worth the added risk.

One thing that I think isn’t being taken into account (in the APY calculations) is what’s being earned from writing options. Might want to do something like Unslashed (which is paying 35% on pure eth btw) and show the “farming APY” plus the apy from writing options. I don’t really have a good sense of what that is, though it does seem like a lot
Screen Shot 2021-03-30 at 12.05.18 AM

I think rather than messing with the rewards structure, you should be thinking about how to expand the options buying side. Rather than scaring away capital you’ve already attracted, Siren should focus on how to get people to use that capital and buy options.

I’m all for lowering the rewards at some point, but I don’t think now is an appropriate time, considering how new the platform is and how things are just getting built out. More important (in my opinion) is enabling single asset SI staking / governance / profit sharing so people want to keep the SI they’ve earned. If you can get the price higher than it would make sense to lower the rewards being output, since that would increase APYs anyway