DPI/ETH Dynamic Incentive Program

Growth Business Development
1

Situation
DPI/ETH Incentives are ending December 6th - and currently 83% of DPI holders are farming INDEX. With the price increase of DPI, it is currently the 7th largest token in terms of liquidity on Uniswap with $27M.

DPI/ETH liquidity is important in that it allows large purchases and sales of DPI, maintains minimum liquidity for lending protocol integrations (which require liquidity for liquidations), and enables arbitrage opportunities with centralized exchanges that list DPI.

Strategically, maintaining an incentivized DPI/ETH pool allows the Index Coop to retain the current capital (maintaining its meta-governance capabilities and growing its lead as the leading DeFi Index product).

Considerations

  • Minimum Liquidity for Purchases: At a minimum, the minimum DPI/ETH liquidity to be maintained should allow for $100k purchase sizes at 1% slippage. This means ~$10M in DPI that should be locked up.
  • Don’t overpay for liquidity: Although the community needs to pay for liquidity, it is not prudent to pay too much. Currently paying 80%+ APY is considered too much for the liquidity. Given its volatility, numerous funds would say that 30%+ APY would be quite compelling to keep their capital in DPI. For comparison, stablecoin APYs are ~20% and given DPI’s volatility, it should be something higher.
  • Dynamic Variables are $INDEX, $DPI and liquidity requirements: Given that the $INDEX, $DPI, and $WETH prices change based on fluctuations of the market, these variables must be considered in a sensible incentive program to prevent overpaying.

Inspiration from Bitcoin Difficulty
Bitcoin has solved this problem through their difficulty target and adjustment algorithms, where Bitcoin targets a 10 minute block production given a variable network hash rate. A similar approach can be taken to dynamically tune the rewards required to maintain a certain liquidity target.

Parameters
Given these assumptions, we can create a dynamic incentives program that achieves the community’s growth and liquidity goals. A few variables can be kept in mind:

  • Length of epoch: The length the incentive program runs for with a given $INDEX reward and target liquidity. By no means is the epoch length fixed - it can be changed over time as the community sees fit. Some sensible values include 7 days, 14 days, 30 days, or 60 days. The shorter the epoch, the more frequently $INDEX governance is required. That said, the process can eventually be mechanized and automated into smart contracts.
  • Target APY: The target reward rate in APY given to DPI/ETH stakers. Initially, the community may desire to retain 70-80% of the existing DPI farming capital.
  • Target Liquidity: The total $DPI in liquidity pools. In addition to the minimum liquidity to transact, there may be strategic reasons for justifying a particular target liquidity (e.g. growth goals, market share capture goals).
  • $INDEX Price: To avoid whale / short term price manipulation, a 10 day TWAP price of $INDEX can be used for price calculation. Initially, this will be done off-chain and can eventually be moved on-chain.

Implementation
Assuming an off-chain architecture, implementation is relatively simple. All that is required is topping up the staking contract account with the required $INDEX each epoch.

Eventually, smart contracts infrastructure can be assembled to automate this process.

Poll
Given the structure, the main open questions are: What should the initial epoch length be (time of each voting period) and what should the target APY of DPI be?

Epoch length
  • 14 days (More frequent governance required)
  • 30 days (Middle-ish ground)
  • 60 days (Less dynamic, but less governance overhead)

0 voters

Target Liquidity
  • $10M (Conservative - Maintain $100k at 1%)
  • $20M (Moderate - Maintain $200k at 1%)
  • $30M (Growth - Grow and acquire new capital)

0 voters

Target APY
  • 20% (Minimum - same as stablecoin yields)
  • 30% (Moderate)
  • 50% (Aggressive)

0 voters

4 Likes
3

What would the function be for reducing target APY as we exceed target liquidity? Set a max INDEX payout (in $) per block or something more dynamic?

4

Yeah - each epoch, a new $INDEX payout will be defined

5

While APY is tough to exactly target as its dependent on the price of INDEX, I’d agree that looking to aim for a Moderate range of ~30% liquidity feels pretty good.

The more aggressive the APY, the more speculators are invited to farm for the sole intent of dumping for profits.

I’ve voted for 30 day Epochs (frequent but not too overwhelming governance), $10M Target Liquidity (Conservative but still well above the average pool) and 30% Moderate APY.

While there is an argument here that NO liquidity rewards is better for INDEX price (due to a lack of sell pressure) I believe using DPI/ETH as the source to farm feels more organic and will likely lead to a better outcome.

Nice work getting the conversation started in advance @setoshi

3 Likes
6

So how does this work, If the Liquidity was 40M would the target APY be 15%?

7

Yes, if $INDEX provided for that month stayed flat (targeting 30% at 20M) and the liquidity doubled from $20M to $40M, then the resulting APY would be 15%

1 Like
8

And @coopahtroopa @jiecut

The $15 M target means that if we keep the current $45 M, then the INDEX rewards will be closer to 10%. And it looks like the trading fees have dropped over the last week (from ~9% pa to ~4% - that could be thanksgiving, or the bear market)

Personally, I think the DPI:ETH is a good pair (Correlated so less divergence loss and fees) and we will likely keep a decent amount in the pool without INDEX rewards.

We don’t want a mass redemption of DPI on the 7th, and while there is a Cream vault, I think most DPI holders would prefer to use AAVE or Maker (proposals already made). So, INDEX rewards on the DPI:ETH pair keeps AUM up while.

A large uniswap pool makes liquidations of vaults easier, so DPI becomes better collateral for AAVE and Maker. So acting to keep a large pool make the coop look like responsible custodians (and so more likely for DPI to get integrated). Once we get more integrations, there will be more AUM, we get more volume on the market so the uniswap pool grows to capture the fees.

In some ways we are spending INDEX to buy us some time while we build and integrate more.

1 Like
9

Amazing, I love the idea of making this dynamic. What about also adding some flavor so that the stickier accounts get slightly larger share of $INDEX rewards to incentivize maintenance?

10

would make sense but I don’t think there’s an easy way to achieve this. also, I would suspect that, given current lack of options for DPI as a farming/lending asset, most of the Uniswap liquidity is sticky.

11

Guys DODOex can resolve all the liquidity issues, it only needs 10% of current $INDEX & $DPI Uniswap liquidity to run better than Uniswap with less slippage. Contact Diane Dai she is the Co-founder
@BreederDodo @Diane_0320

12

We have been discussing locking LP tokens for 28 days as part of the work to capture intrinsic productivity.

1 Like