Title: Reward Locking Parameter Changes: Increase Base Emissions, Decrease Max Multiplier
Author: Kevin Chan
Submission Date: August 23, 2023
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.
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:
- Attract new LPs to increase the total TVL of the liquidity pool to facilitate higher volumes
- Reduce any negative impact to existing loyal LPs
- Ensure total ACX emissions do not increase
I propose making the following changes:
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.
There are a couple potential downsides to these parameter changes:
- 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.
- 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.