[reWARDS] July '22 Budget

[jbeezy]

July Budget Post

Welcome to the July budget.

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.

The sections are as follows:

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

Operational Updates

Due to the ongoing operational complexity we have increased the approved LDO in the budget by ~300K. The reason is to provide a buffer between monthly budget updates until we can get additional resources to streamline the process.

We will be updating the monthly process a bit for August and beyond. Some of the rewards pools operate on a 28 day cycle which makes monthly top ups increasingly complex. So at the end of each month we will be providing actual spend against budget for each of the pools plus the remaining balance in each multi sig. Due to timing delays this had to be deprioritized for the July budget.

We will also be completing an updated reWARDS committee goal and KPI adjustment with the new bear market dynamics. The goal is to have this completed by EOM along with V2 of optimization modeling. The first part of V2 is exploring the multiple paths through the Curve ecosystem as it is both our largest cost center and has an ever growing ecosystem of protocols. We welcome any community members to either put up a proposal or volunteer to join a working group on this initiative as the work has already begun.

There will also be the addition of txn tracking on a public site with addresses for the community to track on chain if they are so inclined.

Budget and Breakdown

The July budget calls for 4,200,000 LDO.

3,835,000 LDO distributed across the following pools and networks with the remaining held for unaccounted needs during the month.

UniV3 pools were delayed to this month for testing. Again

The colors correspond to an increase or decrease of LDO for the month.

An easier to view PDF is provided:

reWARDS July Budget.pdf

Reasoning and Analysis

We are continuing to experiment with bribes and indirect incentives to increase capital efficiency.

Solana

Solana has been experiencing an increase in arbitrage activity and has resulted in net outflows. We are actively monitoring the situation and continuing to test new pools / platforms.

Notable changes

• New Launches: Crema stSOL-USDC

Ethereum

Curve bribes have been discovered to not be as efficient as we’ve expected. We will most likely need to migrate between the 2 strategies on an ongoing basis. This is the focus of Optimization V2.

Notable changes

• No bribes for Curve this month due to being less effective than direct incentives via Votium.

L2

• No official announcements yet but hoping to deploy pools towards the end of the month.

Kusama (KSM)

No updates.

Polkadot (DOT)

Curve pool is officially ready!

Polygon (MATIC)

Chainlink oracles were approved and have unblocked work on Aave.

New Experiments

The focus is on optimization models this month with a focus on Curve and Balancer ecosystems.

Operational Goals

We are holding off on new st-asset-non-stable pools while the market is still choppy. The hope is to open this up next month if the market settles down. Non-stable pools will increase trading volume but are multiples more expensive to incentivize due to IL.

[adcv]

@jbeezy

Due to the ongoing operational complexity we have increased the approved LDO in the budget by ~300K

Thank you jbeezy

Do you have variance details behind this increase?

[Chuck]

1/3 How much liquidity is required to match the core demands?

1-For stETH trade

Let’s take a look at the historical(since 2021-07-01, to present) stETH trade on DEXs.

Dune

From the above chart, we can find out that 98.2% of 62,464 transactions has a less than 1,000 stETH volume. While raising the volume benchmark to 5,000 stETH, it will cover 99.7% of all transactions.

2- For liquidation
Liquidation demands are mainly determined by Aave & Marker. Here is the liquidation data overall.

We can see that, despite a huge market volatility in the past couple of months, the max liquidation of stETH on Aave & Maker is less than 1000 stETH.

Let us calculate how much liquidity is required for a 1,000 stETH swap based on different conditions.

Liquidity(in ETH)	Price Slippage	Price Slippage	Price Slippage
	1:1 weight(steth-weth)	3:1 weight(steth-weth)	5:1 weight(steth-weth)
50,000	0.04%	0.073%	0.15%
100,000	0.02%	0.04%	0.076%
150,000	0.015%	0.02%	0.054%

Set 5,000 stETH as the benchmark, we will have the following result.

Liquidity(in ETH)	Price Slippage	Price Slippage	Price Slippage
	1:1 weight(steth-weth)	3:1 weight(steth-weth)	5:1 weight(steth-weth)
50,000	0.2%	0.43%	0.79%
100,000	0.1%	0.21%	0.38%
150,000	0.06%	0.1%	0.24%

Note: Calculator JS is available here. A=50

Summary
On current condition(1:3 WETH-stETH Curve pool weight), 99.7% of all transactions can be done with less than 0.5% price slippage even if there is only 50K ETH in the pool. Even on the more tough condition(1:5 weight), the price slippage will not surpass 1%.

[Chuck]

2/3 How to manage the LPs APR without setting a promised number?

For LPs, there are 3 main factors in their minds: APR, assets value volatility and IL.

As stETH is backed by ETH with 1:1 ratio after beacon chain withdraw is available, even there will be a discount before that, the IL of stETH-WETH pair is still quite lower compared to most of ETH paired pool.

Assets value volatility is quite significant in crypto. For most ETH long-term holders, ETH price volatility won’t have much impact on their willingness to hold ETH. And these long-term holders are the bedrock of stETH-WETH LPs.

The final question: How much APR do they expect as an LP? The simple answer is: more!

Ok, let’s say: What is a reasonable APR for the LPs that can incentive their willingness to provide liquidity, other than put their ETH & stETH in other ways.

Let’s take a look at their other options for ETH beside providing stETH-WETH liquidity.

They can lend their ETH to lending protocols(Aave, Compound etc.). Consider that ETH is mostly used as collateral and has less borrowing utility, the lending interest rate is quite low(0.6% APY on Aave & 0.18% APR on Compound).

Another option is swap ETH to stETH with a slit discount and daily rebased reward. Compared with providing stETH-WETH liquidity on DEXs, this option will make ETH holders change all their ETH position to stETH assets, with a little bit higher risk because of the synthetic layer.

So, while LPs APR runs at somewhere upon the interest rate of ETH on money market and below the stETH staking APR, it will be a reasonable return(’Z’) for the LPs.

Let’s be more specific on different conditions by an example. Assuming ETH lending interest is 0.4%(’x’) and stETH staking APR is 4%(’y’).

Z(base line, 3:1 weight) =( x + (y-x)/2 + 3*y) / 4 = 3.55%

Z(bottom line, 3:1 weight) = ( x + 0.382*(y-x)/2 + 3*y) / 4 = 3.27%

Z(cap 3:1 weight) = ( x + 1.618*(y-x)/2 + 3*y) / 4 =3.83%

Note: Base line is settled as the medium line of lending interest rate and staking APR. Bottom line and Cap are Fibonacci lines between Base line and lending interest rate & staking APR.

Summary:
Based on all above, we can find out that a ‘100~200 ETH monthly budget’ can meet the LP incentive demand on Ethereum, which is about 250k~500K LDO based on current exchange rate.

[Marco_CIAN]

@jbeezy

No bribes for Curve this month due to being less effective than direct incentives via Votium

Why Bribes are less effective than incentives via Votium? Will you use Votium in the future?
There were incentives for Curve Bribes before, right?

[GrStepanov]

The wording is a bit confusing in the post, let me add more context here.
There’re two ways how Lido incentivizes the large Curve pool:

• direct incentives via a custom reward contract (based on Synthetix’s StakingRewards contract)
• Bribes deposited via the Votium platform

Obviously, we used to measure the impact made by both types of incentives on the pool size and the APR. The latter turned out to be much more responsive to direct incentives recently.
For the exact number, you can look at our Curve pool dashboard on Dune.

[GrStepanov]

Update to July budget

When considering quitting Curve bribes, the Committee didn’t mean re-allocating assets from the bribes back to direct incentives. Thus, the numbers in the budget are a little bit off: direct Curve pool incentives for July will be 2,500,000 LDO.
The idea here is to save 250,000 LDO without sacrificing much pool APR. For instance, skipping June bribes would have decreased the pool APR by as little as 0,15%.

[Marco_CIAN]

I am not sure if I understand correctly.
Seems that bribes are more efficient, why does LIDO cancel it?

By the way, Crema was hacked, so will LIDO cancel the rewards for them?

[GrStepanov]

Speaking of Curve bribes for stETH pool, the bribes performance only matched the expectations once – it was in February '22 when we got more APR on each LDO spent via bribes rather than directly (not much more though).
Here’s a table of how Curve bribes performed for us over the past few months (put together by the Lido analytics team ). It also shows what the pool APR could have been if we allocate the whole incentives budget directly rather than split into bribes and direct incentives.

[GrStepanov]

For Crema, we are looking closely at the hack, and indeed we will cancel the rewards unless we will be completely sure both Lido’s and LPs’ assets are safe.

[kadmil]

Timing on most non-eth pools is floating + there’s buffer for potential (no official dates, mind you) L2 pools.

[kadmil]

The analysis is awesome, and we’ll be looking there closely. Must note that one of the questions is — unfortunatelly — not “how to cover for most swaps” (the biggest swap size is order of magnitude bigger than median one), but “what size of pool / config of pools is stable enough”, so the price can’t be manipulated on the cheap. That in turn feeds into money markets positions safety & stETH holders expectations.

1. I do feel there’s significant room for juicing more effectiveness from reWARDS as those are now.
2. The setup on ETH is targeted not for median swaps/activity, but for overall price stability (not a single number, but basically making it complex and expensive enough to dramatically drop the price in money market price feeds).
3. We’re working on model covering the q from 2., but can’t share the results just yet.

[Chuck]

“what size of pool / config of pools is stable enough”

Ok, my question is “what’s the definition of 'stable enough”? I don’t have any resources other than 62,464 on-chain actions. If under 5,000 stETH volume can cover 99.7%, does the left 0.3% really that emergency to be swapped in one transaction, which none of them is for liquidation.

Let me finish my comment with the last part.

3/3 Know your LPs

Before making a incentive plan, you should know you LPs.

Let’s use Curve pool as an example.

https://dune.com/queries/996880

Actually, the liquidity pool is dominated by a very small group of LPs. They are purely APR driven. Some of them even compounded their yield more than 3 times a day. So their expectations will always be ‘more’!

Here is the question: Are we keeping high incentive costs(more than 10X than real demand, IMO) constantly just to make this small group of LPs feel happy? As they are purely yield driven, do they have other alternatives?

Summary:
Too much LPs’ concentrated domination is a double-edge sword. They might be helpful for a period of time, but for a long-term view, they may also be a threat and even become a blackmailer.

[Chuck]

@Chuck

Let us calculate how much liquidity is required for a 1,000 stETH swap based on different conditions.

Liquidity(in ETH)	Price Slippage	Price Slippage	Price Slippage
	1:1 weight(steth-weth)	3:1 weight(steth-weth)	5:1 weight(steth-weth)
50,000	0.04%	0.073%	0.15%
100,000	0.02%	0.04%	0.076%
150,000	0.015%	0.02%	0.054%

Set 5,000 stETH as the benchmark, we will have the following result.

Liquidity(in ETH)	Price Slippage	Price Slippage	Price Slippage
	1:1 weight(steth-weth)	3:1 weight(steth-weth)	5:1 weight(steth-weth)
50,000	0.2%	0.43%	0.79%
100,000	0.1%	0.21%	0.38%
150,000	0.06%	0.1%	0.24%

Look through the above tables, we can figure that the unbalance of the pool assets is one of the most influential factors of price slippage. About 4 times of liquidity(ETH and stETH combine) will be needed to keep a 1000 stETH transaction at the same slippage while pool weight went from 1:1(stETH-WETH) to 3:1.

So, keeping the LP APR at a level of more attractive compared to other ETH yield generated options and less attractive compared to the stETH staking yield is very important to build healthier liquidity pools. Fundamentally, our incentive target is to encourage more ETH to join in the pool, not more stETH.

[Ivan]

Due to an accident with Crema Finance:

CremaFinance

• we decided to hold our budgeted incentives 5000LDO for stSOL-SOL pool
• and we do not launch new pool stSOL-USDC with 10 000 LDO as incentives.

We are following the investigation process and will keep you updated.

[Chuck]

@banteg Do you think Yearn has a better option for ETH yield farming than provide liquidity on stETH-WETH Curve pool, if the $LDO incentive decreases 50%? What level of APR do you expect as a liquidity provider?

[jbeezy]

We try to look at the comparison between paths. Which path will give us the most liquidity for each $1 spent. Due to the over competitiveness of bribes via Votium the efficacy has dropped sharply and is less cost effective than direct incentives. We are currently working on analysis for additional options such as buying CRV, CVX, using Paladin, Hidden Hand etc.

[jbeezy]

Chuck, I wanted to say this was great analysis and thank you for the contribution. Would love to ask if you are interested in contributing more directly to rewards processes? Even if not, I would welcome your feedback as we continue to improve process around this.

Candidly this takes time as Lido is conservative and not willing to risk breaking things in a rapid pace. I agree that there is room to significantly lower both emissions to Curve, lower the total amount of liquidity required in the pool (depth), optimize the path between bribe, direct, or buy and greater than most will find with other ETH options.

We are also exploring work with Tokemak/Ondo finance to allow targeting single asset LPs which would increase the granular control we have to target one side of the pool at a time.

[vsh]

@Chuck the important thing to understand here that perception of “what is adequate liquidity” in the my eyes, your eyes or a trader’s eyes does not matter so much here. What matters is - what our integrations consider adequate liquidity. Reducing incentives/liquidity at some point will translate to delisting from AAVE and very low limits on Maker - we need to understand and deduct this point, which can’t be directly sourced from counterparties in practice nor can be calculated just from the swaps amounts. Liquidity pool that can be manipulated to cascade liquidations with a very small amount of money just won’t cut it for them.

[Chuck]

@vsh I get your point. The liquidity pool does not only take the role of utility, it also should be viewed as an insurance, even if the utility is low most of the time. Somehow, the incentive is just the premium of the insurance. I should say that I agree with you on this point and will adopt this factor into my framework.