@Steel.Key thank you kindly for the extensive write-up on here & Discord! I have been playing with a similar idea in my head, actually, but without the LP token component. IMO this kind of tokenomics has the potential to incentivize TVL growth, distribute voting power among the most active users of the protocol, and help combat some potential issues with the peg (i.e. protect against premium on osETH). Personally, I really like it, and consensus within the team is that it is (at least) very interesting to explore.
Below I will summarize the mechanics and the changes that would be required for the implementation of this tokenomics design, so that other SWISE holders (for whom crypto is not full-time) could better understand the merits of the proposal and potential implications. I will also present some questions that I would like for us to have answered collectively before we move to the temperature check stage.
Mechanics: put SWISE and/or ETH into the SWISE/ETH liquidity pool on Balancer (single-sided addition possible if you don’t have both) → receive LP tokens → stake LP tokens alongside your ETH stake in Vaults → mint osETH → receive SWISE rewards. Participation in the mechanism is meant to be optional.
Conditions: value of LP tokens (i.e. value of liquidity position) must be >5% of the value of your liquid stake in Vault(s)
Where rewards come from: proposal suggests establishing a reserve of X SWISE in the DAO Treasury that would be periodically distributed among everyone who meets the criteria. The idea is to commit to the release of tokens from the reserve based on a specific emission schedule, i.e. 7-year release period with more tokens released in the beginning of the period than in the end (“the emissions curve”). For example, this could be split into the following chunks (in terms of % from the total reserve paid in a given year): 25/20/15/15/10/10/5. Or it could be 20/20/20/10/10/10/10, or anything else really. The crux is that the emissions schedule is known in advance and the DAO commits to it long-term so that anyone who stakes LP tokens alongside their ETH can have a relatively predictable yield.
Benefits: increases the attractiveness of staking ETH & minting osETH with StakeWise due to offering additional incentives to choose it vs the competition, distributes protocol voting rights to arguably the most active users, improves liquidity for SWISE, creates buying pressure for SWISE.
Risks: introduces potentially too high a token emission schedule (vs amount of liquidity available), reduces protocol’s runway for liquidity incentives, maintaining >5% of ETH stake’s value in LP tokens may be clunky and/or expensive.
Some napkin math: if we allocated 200M of the 350M SWISE currently remaining in the DAO Treasury towards this initiative and went with the 25/20/15/15/10/10/5 emission schedule, here is what the yield could look like at different levels of participation (essentially % of circulating supply participating in the tokenomics):
|Yield from emissions
Note that these figures are based on emissions alone (ie quantity growth) and do not factor in any potential SWISE price changes. Here’s the link if you want to play around with this simple model: dLP Tokenomics napkin math - Google Sheets
Desired effect from this mechanism: increased demand for staking with StakeWise owing to ~0.5-5% boost to ETH yield (from 10-100% yield received in SWISE) and increased demand for SWISE to take advantage of the opportunity. Increases in TVL and demand for the token can potentially lead to higher returns than mentioned in the table above if the token price appreciates (ie total return = emissions yield + price appreciation), further fueling the demand for both. A flywheel effect is possible whereby increases in TVL could lead to increased demand for the token, leading to price appreciation, leading to increased yield from staking with StakeWise, leading to more demand to stake and growth in TVL, and so on. Note this is purely hypethetical and should not be treated as investment advice - I am just voicing opinions.
Important considerations: I believe we should add some conditions like amount of osETH minted relative to one’s stake in a Vault, limits to how much emissions one should be able to claim based on the size of SWISE LP position, and methods of distributing the emissions so as to simplify participation in the tokenomics.
Condition about osETH minted: within the V3 model, StakeWise DAO earns fees based on the volume of osETH minted, and distributing SWISE to incentivize simply staking ETH in Vaults wouldn’t necessarily convert token emissions into more revenue for the protocol. To ensure that it does, I suggest that minting osETH should be a requirement to start receiving one’s share of emissions. Because every user has a certain max amount of osETH they can mint, I suggest that emissions are tied to how much they minted vs their maximum, with those who max out receiving the full emissions they’re eligible for, and those who only minted a small amount receiving proportionately less.
- Example: I staked 100 ETH in a Vault and added 5 ETH worth of SWISE LP tokens alongside it to participate in the dLP program. If I mint the maximum amount of osETH (90% LTV), then I participate in the dLP to the max extent (essentially claiming 100% of the emissions I am eligible for). If I mint let’s say 50% of my max (45% LTV), then I should only receive 50% of the maximum possible amount of emissions.
Condition about the limits: in order to properly align the emissions of SWISE with the protocol’s power users, I suggest that SWISE LP positions that are larger than 5% of the ETH staked in a Vault are still compensated as if they are exactly 5% of the ETH stake. This would encourage people to maximize their ETH stake in the protocol to take full advantage of the emissions based on their existing SWISE ownership, and allow an average user to effectively compete for emissions against large SWISE holders who are not power users of the protocol.
- Example: I staked 100 ETH in a Vault and added 10 ETH worth of SWISE LP tokens alongside it to participate in the dLP program. I minted 90 osETH to maximize my emissions. However, I will only earn the amount of emissions that 5 ETH worth of SWISE LP tokens would be eligible for, despite having 10 ETH worth. To take full advantage of my 10 ETH liquidity position, I would try selling 90 osETH on the market and restaking the proceeds into one of the Vaults, then minting osETH again. My total stake would be ~190 ETH, total osETH position would be 90 + 81 = 171 osETH, and I would be eligible for almost maximum SWISE emissions because now the value of my SWISE LP tokens is ~5% of my total stake (10 / 190 ~ 5%). This logic is powerful for advanced users.
Condition about the distribution of rewards: I believe that participation in the tokenomics should be seamless, to the extent that if sufficient amount of liquidity (5% of one’s stake) is added to the SWISE liquidity pool from a certain wallet, we should be able to recognize this and make the address eligible for the emissions without requiring to stake LP tokens, for example. Exiting from the tokenomics program should be equally seamless, where withdrawing liquidity would automatically cease the distribution of rewards. I also believe that rewards distribution should be done weekly on a certain day of the week, with the payout for the past <=7 days of participation paid out in two tranches: 50% immediately, and 50% in another week. I recognize this may not be very straightforward, but this is a little similar to the Balancer’s old rewards distribution model which I personally like. I will provide an illustration of the mechanism in a while for everyone’s comprehension, but here’s an example.
- Example: I staked 100 ETH in a Vault and added 5 ETH worth of SWISE LP tokens alongside it to participate in the dLP program. I minted the maximum amount of osETH to be eligible for maximum emissions. After 2 days it is the emissions distribution day, where I get credited 2 days worth of emissions. Of these 50% are immediately claimable and another 50% are claimable after 7 days. In a week’s time, it is the emissions distribution day again, where I get credited 7 days worth of emissions. Of these 50% are immediately claimable (alongside the 50% from the amount credited for the first 2 days) and another 50% are claimable after 7 days. And so on.
If we add these conditions to @Steel.Key 's original proposal, I believe we will create an even fairer tokenomics model with emissions and distribution methods optimized for simple UX and growth.
Perhaps for some parting thoughts, the team has always toyed with the idea of suggesting SWISE incentives to stake with StakeWise, but tying this to liquidity provision for the token itself, and some form of token ownership in order to be eligible for the emissions is a powerful way to create more demand for the token and give more power to the long-term supporters and users of StakeWise.
I look forward to hearing everyone’s thoughts on the topic!
PS. And remember - while I have tried to break down the proposed mechanism and desired effects as well as possible so that even the people without substantial knowledge of tokenomics designs could assess the forces at play, if you have questions or don’t think you understand something well enough, feel free to ask for a clarification. I love this community and want everyone to take part in this discussion. LFG!