Reward Locking Parameter Changes: Increase Base Emissions, Decrease Max Multiplier

Proposals
1

Title: Reward Locking Parameter Changes: Increase Base Emissions, Decrease Max Multiplier

Author: Kevin Chan

Status: Proposal

Submission Date: August 23, 2023

Summary:
Recent data shows Across’ Reward Locking program does well in retaining loyal liquidity providers (LPs); however, the growth of new LPs has been stagnant. As Across volumes grow, the total liquidity pool size is starting to become a constraint. The Across DAO should make modifications to the Reward Locking program to increase base emissions by 50% and decrease the max reward locking multiplier to 2x (from 3x). This should help attract new LPs without negatively impacting existing LPs nor increasing total protocol emissions.

Motivation:
Recent data shows Across’ Reward Locking program does well in retaining loyal liquidity providers (LPs). The Risk Labs data team found that of all existing LPs, 99% of them have earned a 100 day NFT and 91% of ETH LPs, which accounts for 70% of TVL, have never unstaked and claimed their rewards (for over 250 days!). This affirms reward locking is succeeding in its objective of accumulating a set of loyal LPs. However, the flip side to this is the growth of new LPs has been stagnant. Volumes on Across continue to grow as it steadily gains market share and expands to new destinations such as zkSync and Base. This has led to more frequent bursts of high utilization of the liquidity pools which increases bridging fees and dampens volumes. In order to ensure Across has the capacity to continue growing I propose making modifications to the emissions and parameters of the Reward Locking program. There are three objectives:

  1. Attract new LPs to increase the total TVL of the liquidity pool to facilitate higher volumes
  2. Reduce any negative impact to existing loyal LPs
  3. Ensure total ACX emissions do not increase

I propose making the following changes:

  1. Increase base emissions by 50%
  2. Decrease the max reward locking multiplier to 2x (from 3x)

The resulting higher base APY would attract new LPs and help to increase TVL. Yield hunting LPs who look at websites like DeFiLlama and Nanoly (which currently does not include Across) would notice the opportunity more easily. Some of this may be mercenary capital, but the goal is to expose Across to more people in our ecosystem and capture new sticky capital.

Existing loyal LPs would initially see their APY unaffected (ie. 150% x 2 / 3 = 1). However, as the number of LPs and TVL increases, existing LPs could see their total APY decrease as they share emissions with new LPs. On the other hand, the higher TVL will help to increase bridging volumes and the attention from new entrants could bring more awareness to the bridge. Both would act to add more value to the protocol and ultimately help the ACX token (what LPs earn).

The net result could be positive for everybody involved with Across as people “share a bigger pie”.

Specification & Implementation:
The Across DAO wallet controlled by ACX holders has admin rights to change the parameters of the Accelerating Distributor contract that powers the Reward Locking program. The exact transactions to make these modifications can be put to a vote and executed on Snapshot via the oSnap module which is already implemented.

There is one complication regarding the decrease in multiplier. Base emissions for each LP are accumulated as each block builds; however, the multiplier for each individual LP is applied only when a LP claims rewards. This means a long time LP with a 3x multiplier who claims rewards immediately before the modification would have a much higher payout compared to the LP claiming after the modification. To work around this, I propose taking a snapshot of total accumulated rewards for all LPs before the modification and comparing it to their total rewards after the modification. The difference can be stored in a merkle root distributor for LPs to claim.

This makes all existing LPs “whole” and has an added perk of allowing LPs to claim some ACX rewards without having to lose their multiplier.

The Risk Labs foundation can help with queuing up these parameter changes for oSnap execution, creating and running scripts to figure out the impact to existing LPs, and implementing any necessary front-end changes.

Downside (Cons):
There are a couple potential downsides to these parameter changes:

  1. Existing loyal LPs may feel that losing their 3x multiplier is unfair even though higher base emissions compensate for this decrease. This could lead to some existing LPs exiting the protocol all together. On the other hand, the anticipated growth of Across protocol and the ability to claim some ACX without affecting their max multiplier may appease these loyal LPs.
  2. The higher APY attracts a lot of mercenary capital that could immediately dump any farmed tokens. If the community believes the protocol has a lot of value this higher APY may also attract new community members and any selling pressure will be absorbed by willing buyers.

Voting:

Should the Across DAO increase base emissions by 50% and decrease the max reward locking multiplier to 2x (from 3x)? This would also mean a one time distribution of ACX is needed to ensure all existing LPs are compensated for the drop in their multiplier due to the way payout calculations are implemented.
  • Yes
  • No
  • Abstain
0 voters
4 Likes
2

This strategy seems smart for attracting new liquidity providers, expanding our ecosystem, and help boost trading volumes, super cool

While the changes might initially attract LPs with short-term interest , I’m optimistic that our strong community and the value Across has to offer will turn them into committed, long-term participants. This sorta reflects the dynamic nature of DeFi in general
Kudos to the team for their strategic thinking. I’m excited to see how this plays out.

2 Likes
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Hey Kevin.

How has the non-ACX interest rate changed as pool usage has increased? If usage is going up a lot why arent participants being paid much more (giving incentive for more depositors)?

1 Like
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IE: If pool utilisation hit 100% shouldnt the APY be almost infinity and the cost to bridge incredibly expensive? Or are they not on curves that take that into consideration?

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I believe the pros outweigh the cons in this scenario. Yes, some LPs may exit but most might not bother because of all the steps required to unstake and exit their positions. In addition I believe that it might make it more attractive for existing LPs to claim rewards and add to their existing positions.

2 Likes
6

Reflecting on your comments, I realize that concerns like yours might indeed arise among our community members. It’s crucial that we address these concerns comprehensively to ensure that any adjustments we make truly benefit all stakeholders.

In light of your insights, I’d like to suggest potential solutions that MIGHT address the balance between liquidity providers’ interests and the protocol’s objectives:

Dynamic Reward Adjustment: One way to address the concern you raised is by implementing a dynamic reward adjustment mechanism. This means that rewards would be adjusted based on the utilization of the liquidity pool. As demand and usage increase, rewards would automatically rise to attract more liquidity providers. This approach aligns rewards more closely with the value being generated by the system.
(Also I was thinking there could actually be a potential marketing strategy here maybe With rewards increasing as more users participate, we could indeed create a small-scale marketing effect within the LP community. This could naturally attract more liquidity providers, adding value to our ecosystem, it might also attract new LP’s seeing the amount of users we have that they could indeed benefit from this)

Utilization-Weighted Rewards: Another approach could involve distributing rewards in proportion to the utilization of the pool. When the pool is highly utilized, rewards increase, and when utilization is lower, rewards decrease. This method encourages liquidity providers to contribute more when demand is high, while still offering incentives during quieter periods, now This one’s a little tricky although frankly the same, I think it actual gives a sense of belonging and sense of growth to the community and the LPs, people’s hearts are usually where their treasure is. :sweat_smile:

I think these solutions aim to achieve several objectives that were central to the initial proposal, I’m open to corrections and thoughts as I’m just a creative thinker with a nose for growth and marketing lol still growing and learning myself.

7

This is a smart change even though it reduces the rates of loyal stakers. I think this plan assumes that LPs are loyal to across and not the 3x Liquidity rewards. In effect, this move would prioritize LPs that are not here over those that are.

I agree with this motion, but I would just like to acknowledge the risk of this motion. We are reducing the rates of current LPs for new ones. Someone might get offended by that & it is worth gauging.

1 Like
8

This is a very well written proposal, multipliers can be very complex. I am in favor of this proposal because it considers existing, long standing LP’s into the equation. I think it is important to maintain these long term assets, but not at the cost of stifling growth within the ACX ecosystem.

9

The proposal is good. However I am not sure this is what Across liquidity providers need. There is no precise financial analysis on how exactly the current utilization stands. Is it close to full utilization all the time, or much less frequent. I don’t believe the Across capacity is fully utilized yet, especially in current market conditions. Also increasing base rate will definitely attract some fresh capital seeking higher yield, but this capital can be not so loyal and fly easily. Also it doesn’t incentivize that much new loyal capital to stick for the long run. After all the 3X multiplier is one of the unique feature which distinguish Across from other Bridges and Liquidity pools. So I really would like to see that this step is needed before saying it should be done.

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Yes Across uses a fee model similar to borrow and lending protocols. Calculations here: Fee Model - Across Docs

The “Pool” APY does go up, but majority of rewards is driven by ACX emissions. As utilization approaches 100% there is a max rate that can be charged. (in the formula it is r0+r1+r2). I don’t remember the exact numbers for each asset though.

When utilization does get high bridge users will go to competitors instead. That’s why a larger TVL would be beneficial to the protocol. Across has been doing a lot of volume with relatively small pool TVL, but the bridge is growing.

11

I think these are great ideas. I think the community wanted the reward system to be simple at first, but as we grow and develop these mechanism could be useful. We love to see some more details in this and maybe even a proposal to get further disucssion.

1 Like
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It’s definitely not close to full utilization all the time and it depends on the asset. However, at times of stress in the market we have seen Across pool assets close to being exhausted and resulting in much higher bridge fees. More TVL would ensure that we avoid these scenarios and continue to remain the fastest and cheapest bridge.

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Sure thing! I’m willing to collaborate with the community if this is something they’d be interested in along the lines of our growth, glad you like the idea!

2 Likes
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It’s great to see the positive outlook towards potential changes in the multiplier. I think this is a great proposal in that it provides a solution to a pressing liquidity issue that makes strategic use of protocol incentives, while retaining the multiplier function, which I agree is a highly praised innovation of Across.

Especially with our recent and upcoming deployments to new chains, I think it’s a great time to capture a new group of LP capital while we have the attention of a wider audience.

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