reWARDS January 22' Budget

I hope everyone had a great holiday or will be having a great one coming up. This post is the first monthly budget proposal for the reWARDS committee.

This coming month is largely a focus on Solana to increase our coverage of pools, launching the first pools on Terra’s Astroport AMM following the launch of stLUNA, and beginning to optimize Ethereum incentives which have been a pillar in maintaining the stETH peg to ETH.

This post will be broken into a few sections detailed below and will be open for community feedback for 3 days (72 hours). After which, if there is no contention, will be acted upon. Updates for each month will be provided in the corresponding monthly threads (in here for Jan for example).

The sections are as follows:

  • Budget and breakdown
  • Reasoning
  • New experiments
  • Operational Goals

Budget and Breakdown

The January budget calls for 6,000,000LDO.

5,520,000LDO distributed across the following pools and networks with the remaining held for unaccounted needs during the month.

Reasoning

After analysis of the current pools and trends on Solana it is apparent that we need to prioritize a few pools by category. These are broadly stables, native SOL pairs and lending. As there is no clear winner yet in any category we are covering a broader set of protocols and will assess with live data.

Terra is beginning to launch a number of new defi protocols and we intend for Lido to stay in the dominant position as a liquid staking provider. Astroport is the new leading AMM for the Terra ecosystem and has committed to a generous allocation of $ASTRO rewards for 2022. This will also give Lido’s other st-assets additional utility outside of their parent ecosystems which is important in a cross chain world.

New Experiments

Votium Bribes for Convex LPs

In depth analysis

The Curve pool has been one of the most important for Lido in helping hold the stETH peg. It is also the single biggest spend in order to maintain that deep liquidity. Since new incentive mechanisms have emerged, and as new pools have come online we are proposing an experiment to use ~15% of the current Curve spend reallocated to Votium bribes in order to test the effectiveness of this form of incentive.

Votium allows bribing the leveraged governance power of Convex LPs in order to reassign CRV emissions. If successful the result should allow Lido to maintain liquidity, increase APR for LPs while simultaneously lower LDO spend.

The testing size needs to be big enough to measure impact but not so much as to approach diminishing returns. Limit on usage of Convex’s veCRV is 50% per pool. Separately, Curve caps a single pool’s share of the gauge weight at 30%.
https://docs.convexfinance.com/convexfinance/general-information/voting-and-gauge-weights

The potential benefits to Lido:

  • Increase liquidity of Curve pool
  • Increase APY of pool
  • Lower LDO spend

Olympus Bonds

Set up an Olympus Pro Bond to purchase stETH/ETH Curve LP tokens. Initial testing period is 100,000LDO for one month and measure outcomes.

Curve analysis

This would turn our liquidity in the Curve pool from a liability into an asset. It would also allow Lido to guarantee a level of floor liquidity as the LP of last resort in the Curve pool that will not ever be removed. This allows Lido to begin forming a longer term partnership with the Olympus DAO and their community.

Lido would also gain access to governance rights in Curve and potentially Convex as well. Both of which are key DeFi projects.

The potential benefits to Lido:

  • Convert liquidity from a liability into an asset
  • Lower the monthly spend on the liquidity program
  • Partnering with the vibrant Olympus community
  • Combined with Votium bribes, this can become a new revenue stream

Idle Finance

https://idle.finance/

Idle Finance is a risk tranching protocol that can act as indirect insurance for stETH holders. The goal of this experiment is to help bootstrap new liquidity for Idle around stETH Senior and Junior pools. If successful this should be a short term deployment of incentives.

A successful outcome would see measurable growth in TVL to Idle Finance.

The potential benefits to Lido:

  • Offer an alternative to insurance for user’s that want it
  • Becomes a self balancing pool if one tranche becomes over subscribed
  • Short term spend, possible long term benefit

Goals

The primary goal for January is streamlining operations of the reWARDS committee and maximizing coverage for existing protocols. We will be building out our analytics capacity on Solana as we are launching a number of new pools.

By the time we reach the end of January, we hope to have a baseline toolset available to determine impact and effectiveness of LDO spend and begin optimizing going forward.

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I think that now is not the time to engage with Olympus. At the moment the liquidity in the ETH-pairs serve the purpose of providing deep liquidity for stETH until withdrawals are implemented - when that happens, we’ll have an opportunity to reduce the spending on LP.

That means that we need more temporary liquidity than perpetual one at the moment, and for this kind of liquidity it’s much cheaper to rent.

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I agree that once withdrawals are enabled the protocol itself becomes a “market maker of last resort”, reducing the benefit of directly owning liquidity in a pool like Curve. But until that time, and even after, there may be a benefit to owning liquidity (or at least having a mechanism in place to do so). Examples could be seeding new pools on an upstart exchange, boosting TVL for non-Curve pools to improve oracle diversification, or even simply having better insight into APY for the Curve pool.

By running a test case using the Olympus mechanism, Lido can gain a better understanding of all that goes into owning liquidity for its liquid staking tokens and of a proven method for acquiring that liquidity. With that understanding and operational groundwork in place, it would be able to make liquidity-related decisions and deploy liquidity more efficiently in the future if needed. Different rationale than lowering spend, but IMO the downsides of this proposal are limited while the potential benefits could be quite high.

Other minor point would just be that while owning liquidity is a higher upfront cost vs incentivizing/renting liquidity, that is the cost of acquiring productive and durable assets. Curve LP tokens’ value do not go to zero at the end of a rewards period, and the DAO would be able to withdraw this liquidity in the future along with any accumulated LP fees and rewards. The existing incentives provide no residual value to Lido after they are paid out to LPs.

This is the general idea. Even after the merge, the long term expense of renting liquidity will always be a burden. I love the idea that is Lido assets are productive and useful enough themselves, there will be even less need to pay for liquidity. If this is a general blocker I am happy to scrub this from the budget for this month to continue the discussions around it. Any additional feedback would be welcome’d.

It’s not a blocker, just a personal opinion. Check out the analysis that Pool Together have done on their program: Olympus PRO - 30 days analysis - PoolTogether

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This is an update on the Votium bribes for Convex LPs…

Rewards for the Convex bribes (via Votium) will be deployed starting with the voting round that runs from Thurs 20 Jan through Mon 24 Jan. Funds will be transferred to the Votium rewards contract on Thurs 20 Jan in order to ensure there are no delays for this initial transfer and that rewards are reflected appropriately on the Votium website. The bribe amount for the initial round will be 250k LDO. Voting rounds (and bribes) take place bi-weekly.

The most recent Curve LP rewards period ended on 10 January allocated rewards at a pace of 3.55mm LDO per month. Starting with the current period beginning 11 January the Curve LP rewards have been reduced to a pace of 3.0mm per month.

It is expected that once both changes are implemented the combined impact of reducing the Curve LP rewards by roughly 500k LDO per month and allocating that amount towards Votium bribes will result in a net increase in incentive payments for liquidity providers in the Curve stETH/ETH pool. However, a) the composition of these rewards will now change slightly as LPs receive incentives in LDO and CRV+CVX tokens and b) the incentive amounts will decrease temporarily until the Convex bribes begin to impact CRV+CVX emissions to LPs (expected on Thurs 26 Jan).

Current stats for the Curve stETH/ETH pool are $4.0bn TVL and ~2.9% APY in LDO incentives + 0.05% APY in CRV+CVX emissions.
Following the changes in rewards outlined above (initiating 500k LDO per month in bribes), it is expected that the APY will be 2.5% APY in LDO incentives + ~1.1% APY in CRV+CVX emissions assuming the same TVL.

  • Projected CRV+CVX Emission amounts based on recent Votium rounds showing 2.6x multiple of emissions per bribe amount. This ratio may change over time.
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The January rewards budget includes allocating 300k LDO to Balancer wstETH<>WETH liquidity pool, which took place on January 7th.
Unlike the other reward contracts, the reward period of the Balancer reward contract lasts for four weeks and not a full month. Besides, due to development issues, this reward program has been topped up later than expected last time, and we have to proceed with the next Balancer rewards allocation before January 30th, when the next reward period will start.
The reWARDS Committee proposes to continue Balancer LP rewards with the same amount of 300k LDO for the next 4-weeks period. The motivation behind this decision is relatively good pool performance (in fact, it has increased by 25% over the past month) and the fact we want to properly measure the effect of Convex bribes on the Curve pool. That’s why we don’t want extra liquidity moving between these two biggest st-asset pools.
Allocating additional incentives to the Balancer reward program won’t require extending the January budget, since we still have some spare funds within the declared 6,000,000 LDO budget.

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