Final discussion for the LP staking implementation for IDLE

The voting window here has shown us that the IDLE community wants both, LP staking and Idle staking! :rocket:

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. :money_with_wings:

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Making sure I understand your proposal correctly:

  • For LP staking, we will not choose which platform to incentivize yet. The program will last 6 months. You would like to use funds from the LP reward program and the unclaimed early LP fund. There should be a time lock component, and penalty for early withdrawal. And we should plan to shift rewards away from LP staking and towards idle staking when we reach desired market liquidity.

Is that correct?

If so I think it is good. I am fine to take from the LP reward program (confusing name?) As long as it will last another year. That’s all the time either of these programs really need to work for. Afterwards, it is better to stay burning idle to reduce supply while maintaining liquidity (thus shifting rewards to idle staking is good.

Do we have an understanding of our minimum desired liquidity in each of the major platforms?

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This is great! Thanks for putting it altogether @Salome

Instead of a ‘early withdraw penalty’, I’d propose not allowing an early withdrawal altogether.

IMO we should have both shorter interval lock periods (ie. 2 weeks or/and 1 month) and mid/long interval lock periods, with a specific reward allocation for each of the lock periods.

If stakers aren’t comfortable locking for a long period of time, they can opt for one of the shorter interval lock periods for a lower rewards allocation but I dont think it makes sense to allow a withdrawal at any point in time, as we want to have a clear forecast of at minimum how much liquidity we’ll have across the staking intervals at any point in time

4 Likes

Thanks for the feedback.

@tom yes you summarized my thoughts correctly. Regarding reducing supply , I also considered burning IDLE as an option during my research but following the footsteps also of previous research I came to the conclusion that I am in favour of moving funds to the Smart Treasury instead. Personally, I would like to see an increase of liquidity of 10x.

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Thanks for your input @wlamhk! I definitely agree with having different timeframes for locking periods. Keep in mind that by not having an early withdrawal option there won’t be a possibility to add rewards to the treasury fund via a “early penalty fee”. The rationale behind this for me was that IDLE as a protocol can also benefit form the LP program and not only benefit the LP stakers.

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Understood, thanks for the explanation @Salome! It’s not a big issue either way but thought it’d be rather strange to allow an early withdrawal option as the goal of the LP program is to maximize liquidity levels as much as possible. By having an early withdrawal option, the protocol will likely face higher levels of volatility in terms of liquidity available and I’m just not too sure if the IDLE protocol needs to benefit from this (in $IDLE tokens) when they’re the ones issuing it to promote liquidity in the first place.

Anyhow, if the community thinks it’s better to have an early withdrawal option available, I’m ok with it! At the EOD, this is not a make or break feature and I think we’ll do fine either way.

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@Salome thanks for response.
10x liquidity across all providers, or total?

Uniswap currently has 29,099 IDLE. This means our target allocation is ~300k idle on uniswap.

Sushiswap currently has 35k Idle in idle-eth, so 10x is 350k.

Are we targeting equal amounts across sushiswap and balancer?

If so that means ~1M idle sitting in DEX. What % of total circulating supply is that?

Do we think our current plan will allow us to achieve that goal?

1 Like

Personally, I disagree. If someone personal circumstances become dire, they should be able to remove their funds. Sacrificing their earnings.

It’s already been suggested that longer locking periods would be incentivised by higher payouts and so be treated more favourably than shorter locking periods. The penalty should be high enough that unstaking before the locking period expires is beneficial to the protocol. If that means 100% of earnings are sacrificed, so be it, but I do not agree with withholding peoples funds simply because we can.

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I agree with @Stealthbird97 here but can also understand the points @wlamhk makes in trying to optimize for sustained liquidity.

In these types of systems, I believe users having optionality (choice) is important: you shouldn’t force a certain outcome, rather design the incentives related to those choices to optimize for the most beneficial outcome for the protocol/community.

I believe the happy medium is essentially what @Stealthbird97 proposes: you don’t force liquidity, but you create a system of incentives that results in most liquidity staying in the system.

I think the best way to accomplish this is by having users vest their rewards over time (can be backloaded or linear) with early withdrawal forfeiting any unvested rewards (which can be diverted to other LPs, The Smart Treasury, or another place where they can be used to incentivize value-additive actions in the protocol).

12 Likes

Awesome work @Salome , I am generally inline with most other comments so far but I decided to give my 2 gwei about some of the questions that you raised in the hope that it can help us getting closer to the final configuration of the LP staking programme ASAP.

I will favour Sushi exclusively and exclude Uni from the initial LP program, for all the reasons other community members already mentioned.

+1

My opinion is that I don’t care if it’s a “fixed split” or a “dynamic split” as long as it works increasing the liquidity in Sushi.
One point that I want to raise is that the code of the initial LP staking reward should be as straightforward as possible to reduce costs in new audits and even more crucial higher programming time frames. KISS !

The community voted for LP rewards first so imho that’s what we need to setup right now.
After its up and running for a while we can use the new data to shape the single $IDLE staking programme and fine tune LP staking furthermore.

On that note, I also looked at some other DeFi projects and came up with some napkin calculations of my own, where I created a
rewards/(marketcal/TVL)
ratio of other DeFi protocols that I track, to try to come around with my initial rationale for a possible LP reward number.

As @Salome pointed out, its the wild wild west in DeFi, everything is new and no-one has final answers. The “napkin” calculations in my spreadsheet seem to go on same direction.
Yearn, Saffron finance and barnbridge rewards/(marketcap/tvl)ratio, on column F2, are skewed from the others because the LP rewards were also a part of their “fair launch”. For that reason, I decided to ignore them.

That being said:
700 $IDLE/daily would be in line, in my opinion, with staking rewards from other DeFi protocols.

+1
I voiced my reasons about this before and I would support a very high “early unstaking fee” from 80% up to 100% loss of all LP rewards only to the smart treasury (instead of burning). This very high % is based on the fact that the rest of the community seems to be in favour of a smaller time frame LP programme (6 months).

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What are those reasons exactly? I don’t see anything in this thread.

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I am aligned to your proposed approach @unicorn.

I think having LPs with a long term commitment to the project and therefore losing rewards if they remove liquidity is a good way of ensuring rewards go to those committed long term to the protocol.

I’d also support a tiered model where the amount of rewards lost decreases each month (the longer you hold the more rewards you get). But I agree I would prefer to keep the model simple to drive agile execution from a dev perspective.

Regarding the rewards, I think I would increase from 700 per day proposed to 1000 IDLE P/D

This would require a budget of 180k IDLE over the 6 month program, however based on your benchmarks I think this is reasonable and I believe is more compelling to encourage a strong upward shift in liquidity which I see as being very important to the protocol.

Overall, I’m supportive and would like to see a snap vote soon to gauge community opinion. Perhaps a snapshot with options of;

  1. uniswap, uni or both
  2. rewards of 700 or 1000 per day

Look forward to getting this program moving

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Shall we vote? Let’s get LP staking rolling!!!

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I am preparing a snap vote for the following days🚀

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Two points I would like to mention here before preparing the snap vote.

It seems important to me to also make the community aware that the more complex the implementation for the LP staking model the more time we will need to implement and audit the code.
Another very important point to remember is that IDLE tokens that are locked for LP staking can NOT be used for on-chain voting.

6 Likes

Based on the discussions we have had here, I feel better informed about the value of idle staking vs LP staking for the good of the protocol.
As a result, I basically feel like IDLE staking is only valuable once we have achieved target liquidity values.
As such, it seems like a waste of developer time and liquid idle to stake them at present.
Unless we have a really good explanation for how idle staking will increase TVL, I would now vote against it.

Hi everyone,

Wanted to make you aware of GYSR, which is an open platform for on-chain incentives. It is commonly used for yield farming, liquidity mining, and token distribution. Based on the above discussions, it should suit your needs.

The mechanics are highly configurable, and will easily support both your LP staking and your IDLE staking use cases. They can be configured with a time bonus to reward longer term staking. And most importantly, it is a no-code deployment, contracts are audited and battle-tested, all saving you development time.

You can learn more on our website and can check out our latest newsletter. Please feel free to reach out with any questions.

– Devin (founder at GYSR)

6 Likes

Hey guys, it’s amazing to see so many people involved in this topic!

I have some points to discuss with you, as I would like to think about possible consequences of some features.

The “early withdrawal fee” should reward long-term liquidity providers, reducing the gains for investors that aim for quick profits. Some options propose an 80-100% fee in case of early withdrawal, and here below I would like to brainstorm more on some scenarios:

  • The main concern is the huge barrier to entry for liquidity providers. How can investors be incentivized to provide liquidity, if they get near zero rewards when they redeem funds 1 day before the 6-month expiry date?

  • As a consequence, will the final goal be reached? The idle protocol is deploying funds to foster a 10x liquidity increase, but are we sure that a 100% slashing option would not go in contrast with the target?

  • If the goal is not reached and liquidity is just 2x greater than the current one, this means that the deployed funds have been inefficiently allocated, and few LPs will receive monster APYs.

  • As you know, tokens deposited in LP pools are not entitled to vote. With this incentivization, we are draining $IDLE from the Governance use case. A hostile takeover scenario might happen (e.g. an on-chain proposal that is against LP’s interests) and LPs have to decide if they lose 100% of the rewards or passively accept the decision, with no room for other options.

  • About 120,000 - 180,000 $IDLE might be all unlocked the same day, after the 6-month program ends. With a high withdrawal fee, we can expect a very low bounce rate, so almost every LP will remain till the end. I would advise evaluating what could happen when this liquidity is in their hands, and they can redeem the liquidity.

These points helped me to figure out that lower “early withdrawal fees” might be better aligned with the protocol’s goals.

The GYSR is definitely an interesting solution for LP staking, thanks @devin for presenting it.

Instead of slashing, GYSR proposes bonuses. Communication is much different if you offer “risks” or “opportunities”, and on-top rewards seem to be more attractive than losing potential profits.

This approach might spread the $IDLE distribution over time, also limiting the “one day unlock”.

The GYSR might not fit 100% with the current community needs, but, at first glance, it provides the basic features that the testing phase of LP staking is looking for.

Drop a comment below with your feedback!

8 Likes

Hi Davide,

Great builds, and I think these are fantastic points.

I am a Liquidity Provider, and would look to add more based on this program but I agree that I’d prefer and be more likely to contribute a larger $ amount if I got a time incentive vs a harsh penalty or no rewards for early withdrawal.

Also agree that the communication around rewards or incentive for long term LP’s of vs rewards cut for early withdrawal is a much more compelling proposition.

We all have many options of where to deploy funds for best returns, so given there seems to be broad agreement in the community that liquidity is important, I would strongly favour a program that provides a clear value proposition to LP’s.

The GYSR proposal of bonuses sounds good, and if a solution like this streamlines dev or testing time with a proven configurable solution it seems like a strong option to explore.

4 Likes

Brother I love you, you are amazing but you dropped the ball on this one!
IDLE is a gov token, not tool to speculate price.
Arguing in defense of “investors that aim quick profits” should not be the objective of the LP programme. IMHO the LP program should promote liquidity, loyalty and commitment , not investors looking for quick profits aka make more IDLE to dump more IDLE.

Its not “near zero rewards” yet. It will be as much as the community decides it is. The snapvote should give several options.
Regarding the situation when LP redeem funds 1 day before the expiry day, it feels to me to be a very extreme situation specially taking in consideration that LP are supposed to be sophisticated .My comment to that will be “don’t be greedy”, “don’t risk more than you can afford to loose”.

All being said, reading your post makes me think that you actually are worried that some of the seed investors or big whales/players in IDLE will be left out or unable to “milk” as much as they can from the proposed LP system. IF that could happen then that’s good because IMHO it favours the “little guys”, in the way it is being discussed in here so far.

Actually… now that I think about it, if the LP staking was already on, a lot of vested accounts from seed investors could not participate … but that’s just me …

again… you are standing for sophisticated LP and ignoring the fact that markets are efficients.
“Monster APYs” will attract LP and increase the user base (and community).
Competition in DeFi is brutal and above average APYs will immediately be noticed my market participants. More users and the loyal type, is again, what LP programme should achieve.

Again: "Don’t be greedy "

My answer: IDLE keeps building and LPs will be happy to hold on to their rewards. Don’t give LPs or small investors a reason to sell their IDLE.

1 Like