The voting window here has shown us that the IDLE community wants both, LP staking and Idle staking!
With record participation and clear support for $IDLE staking and prioritization of liquidity provision rewards, the Pilot League committee is already working hard to design new use cases for the $IDLE governance token.
The concept behind LP incentivization is to have more liquidity on AMMs and reduce slippage. Liquidity Providers can have progressively more power over the protocol as they continue to signal their belief in IDLE. Participants who support our vision represent the community and control the IDLE protocol’s long-term evolution.
In order to bring more clarity to LP staking, research has been conducted and is presented below to help support the future Pilot League committee initial LP staking proposal. Specific advantages and disadvantages of several LP reward models are examined, and solutions are provided.
What is Liquidity Staking (LP Staking)?
Liquidity Staking is the process of locking the IDLE assets you deposit on a DEX pool (either ETH pool or stablecoin pool) and earning rewards in return.
As many users already know, when liquidity providers deposit assets (ETH/USDT + native tokens) into a DEX pool, DEXs mint special tokens known as liquidity tokens to the provider’s address. Whenever a trade occurs, a certain % fee is distributed pro-rata to all LPs in the pool at the moment of the trade.
Why is LP staking beneficial from the standpoint of an LP provider and the standpoint of IDLE?
LPs are more likely going to stay around longer, so that being said it follows that any LP programme should reward them for a longer period (when compared with single IDLE staking). LPs are necessary, and they should be compensated for the exposure to impermanent loss (you can learn more about IL here). It’s also more likely that LPs are sitting on higher capital and therefore less inclined to fall prey to market emotions and mood swings. For the IDLE ecosystem, more liquidity means reduced slippage, which will in turn increase stability, market making and borrowing/lending of tokens.
For their long term commitment LP stakers will be able to determine the structure of upcoming projects, shape and grow the protocol. Let me be clear: LPs will have more power over the IDLE protocol.
In the remainder of this post, I will compare some popular LP staking models. Their advantages and limitations will be detailed and in the end, I will propose my vision of a framework for IDLE LP staking, open for community feedback.
Example 1 mStable:
The EARN liquidity providing incentive programme consists of several different reward pools that mStable Governance adjusts weekly. These weekly allocations reflect where, at the eyes of Governance, ecosystem liquidity is the most useful at any given time (see here for more details)
That means mstable, at current prices, is rewarding LPs with around $159,000 USD weekly.
Total Value Locked (TVL) in mstable protocol is $57,116,106 USD. (see here)
mstable Market Cap is around $49 Million USD.
Example 2 Barnbridge:
Epoch Length: 1 Week (at the end of the epoch the user can harvest their $BOND)
Timeframe: Liquidity Pool Incentivization initiative will run for 100 weeks.
Size of the LP initiative: 2,000,000 $BOND (20,000/week, around 1.2 million usd ) which represent 20% of the total token supply. (see here for more details)
BarnBridge has Total Value Locked (TVL) of $388,153,641 (see here)
Barnbridge Market Cap is close to $83 Million USD
Example 3 Curve:
LPs in Curve get their rewards via “gauges”
Locking periods for LP starts at one week up to maximum of 4 years.
A total of 46.44% of all circulating CRV is locked for LP staking and the average lock time is 3.64 years.
62% of the total token supply is distributed to LPs
My Vision of a framework for IDLE LP staking
As seen in the preliminary analysis above, each LP staking model has its own format and the most significant conclusion after researching quite some few examples is how little we understand about managing liquidity in the context of AMMs. This is a market structure that has only been around in its current form for the last year.
There are no definite answers to many of the questions, and the only way to reach a better understanding is through conversations with the IDLE community.
That being said, I would like to share my views about a possible LP staking implementation for IDLE.
Regarding the question of “who” to reward (uni, sushi or both) I came to the conclusion that with Uniswap v3 expected to go live soon and Sushiswap announcing its own B2B referral system, it makes sense to wait for now and make a decision later. If by the time coding implementation starts there are still unanswered questions then either the committee can evaluate the sentiment of the Idle community again about this specific point. Today and in the future my view is that Idle´s LP staking programme must be a win win for all: reward LPs while at the same time strengthen Idle´s position within all DeFi players. Relationships with other actors that mutually value Idle´s contributions must be favored and compared with others than do nothing for the Idle protocol. Each collaboration in practice establishes IDLE’s place in the bigger DeFi ecosystem, creates new avenues for token holders to use their tokens and builds bridges with other communities.
About the duration of IDLE´s LP staking incentives, I feel that we should go for a more concervative approach with a program of 6 months with the possibility of extension (even multiple times if the community decides so). This approach will give us the opportunity to evaluate the situation after a certain period instead of commiting to something that might be outdated in the future or not even work as intended. Another important point brought up by @William and that supports this approach is that the current liquidity mining (LM) programme will go on for less than 2 years and the same timing is true for seed investors locked tokens (and part of the Idle team tokens) so what that means is that there’s gonna be a lot of liquidity already available in November 2022 and at that point it may not be necessary to incentivize LPs anymore.
In regard to the split of rewards between LP staking and Idle staking, I would say it should be 50:50 with a time lock mechanism for staking as a reward boost. Another option, instead of a “fixed” split (like 50/50), is that the distribution could be dynamic, and controlled by governance. The obvious argument for this as @8bitporkchop pointed out is that at the start Idle may want to incentive LP staking over idle staking to get higher TVL on exchanges, but over time pivot to idle staking. @8bitporkchop elaborated that a good possible measure for the performance of the LP reward system can be the TVL of the pool and once the target TVL was hit then Governance could reevaluate the split.
There is also a 2.6 million IDLE LP Reward program (info here) that has been setup initially to reward staked idleTokens (eg idleDAI) to get more IDLE and I would like to have the Idle community opinion about using a part of those funds for staking rewards.
I also support that all unclaimed IDLE from the highlander programme is added to funds available for Idle’s Staking (both LP and single IDLE).
My final thought about Idle’s LP staking programme is that following up on @Unicorn’s post here and insights from @8bitporkchop. I agree that If/when LP’s fail to lock their tokens for the agreed interval, it makes sense to have an “early unstaking” fee and either a part or even all rewards should be moved to the smart treasury.
The Pilot League Committee is looking forward to listening to the feedback from the community in order to start a grant proposal after consensus has been archived.