Introducing Social Escrow, Fee Redistribution, and Fairdrop
What is PSP 2.0?
In summary, PSP 2.0 is a complete overhaul of PSP tokenomics. This proposal radically reduces token emissions and rewards users with protocol fees.
The most significant change in this proposal is the introduction of Social Escrow PSP (sePSP), a novel model in DeFi that rewards users who perform actions beneficial for the protocol and DAO growth.
Why are we introducing it?
The main purpose of the PSP token is to scale and govern the ParaSwap protocol. After one year of observation and community feedback, we believe the current system could be improved by addressing its limitations: staking efficiency, liquidity, and sustainable native token emissions.
What are we proposing?
To achieve these changes, PSP 2.0 proposes the following main ideas:
Overhaul the PSP Staking system
Introduce the Social Escrow and reward boosting system (ParaBoost) to reward users with protocol fees instead of PSP
Implement a pilot period in which a Governance Committee will monitor the new system.
Propose a Fairdrop with vested PSP (vPSP) to include people unfairly excluded from the first airdrop
sePSP1 - PSP Staking
sePSP2 - Liquidity Pool Staking
Introducing the Migration from sPSP/stkPSP
Token List and Wash Trading Prevention
PSP Balance Booster
Fairdrop Revised Criteria
Sybil Hunting Bounties
Gas Refund Adjustments
Governance Committee (GovCo)
PSP 2.0 Pilot
Proposal Procedure Revisions
PSP Participation and Quorum
The actual PSP staking system has turned out to be capital inefficient as signaling, and switching stakes between market makers carries a significant opportunity cost with little upside. Due to the long switching times, we noticed a lower engagement rate from users and market makers within the last six months, leading to its underperformance.
Because of this, we propose the migration towards a new PSP staking system that seeks to maximize the utility of the PSP provided while offering a better staking experience.
We propose to give users two different forms of staking:
Single-sided staking of PSP: the most basic form of staking for those who do not want to risk impermanent loss from asset pooling.
We suggest a cooldown period of 1 epoch (4 weeks) for this form of staking.
In the future, this single-sided token staking option could facilitate the integration of sePSP into other DeFi ecosystems.
Staking Balancer’s PSP/ETH 80-20 BPT: as previously discussed in the community forums, this option incentivizes the growth of PSP liquidity.
To encourage the staking of sePSP2, we propose a cooldown period of 1 epoch, and a 2.5x boost on the value of the PSP staked, meaning a 2x valuation of the total value of the BPT compared to sePSP1.
The process will work as follows:
Deposit either sPSP or stkPSP
Choose if you want to stake PSP only or 80-20 BPT.
a) If you choose to stake the 80-20 BPT, you’ll be invited to deposit 20% of (w)ETH, or the LP token, to the staking contract, and you’ll receive sePSP2.
b) If you choose to stake PSP only, you’ll immediately receive sePSP1 representing your new stake.
To encourage migration towards sePSP2, existing stakers could be eligible for a 6-epoch ParaBoost of 20% on their new stake once they complete the migration to sePSP2, as well as a one-time 100% gas refund for migration if you migrate during the first two epochs. Once the migration starts, sPSP depositing will be paused.
Additionally, to remove the uncertainty of PMMs during this transition period, we propose to ‘smooth’ the yield from each sPSP pool. To do this, we will detach rewards based on the market maker’s performance and replace them with a flat emission of PSP equally distributed among all sPSP pools. Read the section ‘ Migration - PSP 1 Emissions Smoothing’ for more information about this process.
Once the migration system is live, all PSP1 rewards will be stopped, and sPSP cooldowns will be changed to make the sPSP easily able to migrate. A similar cooldown alteration will be given to the stkPSP token used for the ParaSwap Safety Module.
Currently, the ParaSwap protocol accumulates fees that remain under the DAO’s control. This proposal aims to distribute these fees among sePSP system participants. Starting from the day PSP 2.0 begins (more details below), we propose to distribute 80% of the protocol fees to stakers and 20% to the DAO treasury, which will be used for future DAO development.
These fees from all the chains ParaSwap is deployed in will be distributed in the gas token of each network where sePSP staking is available (such as ETH now, and in the future MATIC, AVAX, etc.) every epoch and will have to be claimed within two epochs; otherwise, they will go back to the DAO treasury. Currently, only a manual redistribution option is possible, but an automatic smart contract solution could be developed with detail in a separate proposal. These fees will become claimable by users after a grace period of 1 week to ensure the distribution is accurate.
As for the fees accumulated before this period, we propose they be claimed by the ParaSwap foundation and used to support the protocol growth & development as initially planned. This Zapper tracker contains the wallets that accumulate fees until the Fee Claimer module launch on June 13th; no fees have been claimed or sold by the foundation to date as the DAO didn’t give its green light yet. This dashboard contains some useful YTD (Jan-Sep 2022) numbers and covers both fees & revenue.
Finally, In addition to the changes to fee redistribution, the epoch cycle length will also change to 4 weeks instead of 2 weeks. This will be help users accomplish the numbers set out by the ParaBoost easier.
Social Escrow PSP (sePSP) is a novel system designed to allocate the accumulated protocol fees to the users that produce the most positive externalities for the protocol by performing specific actions.
By introducing the Social Escrow concept, the ParaSwap DAO would have an adaptable and modular system capable of rewarding activities that benefit the protocol at any moment. This additional dimension of escrow provides a higher capital efficiency than the standard model, which only considers time.
All in all, stakers that perform some or all actions considered as boosts by the ParaSwap protocol will increase their ParaBoost score and hence get a bigger share of the protocol fee distribution.
Below are some actions we propose to consider for the initial release of sePSP:
Trading will be a major booster for the escrow system: the more volume a user brings to the ParaSwap Protocol, the bigger the boost. Volume is a major indicator of protocol health, thus creating a positive externality by performing trades on the protocol.
Makers, including limit orders participants, OTC, and RFQ (PMMs), are eligible for stake boost depending on filled orders volume, as they also provide health to the protocol without doing direct spot trading. This is valid for both tokens and ERC20 <> NFT trades.
Accounts are a way for users to link multiple wallets for different purposes:
1 wallet for Trading.
1 wallet for Staking.
1 wallet for Making Markets.
The purpose of these accounts is to address the need for separation of concerns from various community members that raised it.
Important: Interactions between those wallets won’t add any boost from each other.
To make Trading & Making a healthy process for the protocol, we propose to count the fees generated by this allowlist. The list will be hosted in IPFS and can be updated through an issue and an Express Snapshot vote.
Strict anti-wash trading rules will be applied, including token allowlists and exclusion lists, excluding the same address for referrals, makers & takers, the connection between addresses (sybils), and any pattern indicating wash trading. Any community member will be invited to submit an issue to add a token here or report a wash-trade case on Snapshot.
In addition to receiving boosted voting power for the sePSP2 token, we want to foster a long and stable user liquidity provision system without forcing very long-term locking of the assets. This gives the DAO flexibility in adjusting incentives in the long-term while also giving users more flexibility.
On top of the x2 power of sePSP2, we propose the following boosters for the amount of time an asset is kept without requesting a withdrawal:
To incentivize significant liquidity and avoid dusting attacks, we suggest a minimum amount of 10k sePSP2 amount for it to be counted for the boost. The boost will be calculated using averages of the stake , and triggering an unstake request will reset the boost timer.
To reward DAO members who chose not to stake all their PSP or hold some on other chains, we propose adding a small boost of 10% by holding a minimum of 100$ worth of PSP in the user’s wallet on a single chain.
We consider referrals a fundamental system to reward members of the community, as well as let people support other ParaSwappers directly. For that reason, we propose that all volume generated by referrals provides a 20% boost for the referrer. Additionally, all referees will get a 10% boost to the volume done using a referral.
sePSP1: Amount of PSP staked in sePSP1
sePSP2: Value staked in PSP on the Balancer Pool
Where the ParaBoost is reset to the initial value (PSP Staked) every epoch.
A user stakes 100k PSP, trades $100M, brings $100M volume through referrals
ParaBoost = 100k *1.6 * 1.2 = 192k, equivalent to staking 192k PSP.
For the PSP airdrop, we applied several filtering criteria to ensure that PSP was distributed to active users and dedicated protocol members and not to sybil attackers. However, after the distribution, we received feedback from the community that the filtering process had also filtered out legitimate users. We consider PSP 2.0 an opportunity to make things right for these users by distributing vested PSP (vPSP) through a PSP Fairdrop. With this fairdrop, we would like to:
Strengthen the community by giving everyone a fair entrance to PSP 2.0, even though initially filtered out.
Give a way for users to participate in sePSP through vPSP a non-transferable linearly un-vesting token with all the same benefits as staking sePSP.
Open the conversation on what is the best approach to create a good Fairdrop distribution.
We propose all fairdrop eligible users receive an allocation of vPSP with one-year linear vesting. vPSP holders will have access to the same features as sePSP stakers, participating in ParaBoost boosting and protocol fees redistribution. To improve the initial airdrop filtering criteria, we propose to alter these initial criteria in the following ways for the fairdrop:
Remove the minimum gas token requirement: many users did not hold many native chain tokens, especially in low-fee chains, which led to many unfair exclusions.
Remove the 1M volume requirement from tokens: this criteria was applied to exclude bogus tokens but led to low-cap coins being filtered out.
Reduce wallet ‘blob’ strictness and remove minimum balance requirement: this criteria lead to some users legitimately interacting with many addresses accidentally being flagged.
After altering the original criteria, we propose the following new criteria:
Exclusion of addresses that used ParaSwap less than six times
Exclusion of addresses that used ParaSwap only in a seven-day period.
We invite all DAO community members to give feedback on these newly revised criteria and in what ways we could maximize the inclusion of unfairly included addresses while avoiding sybil attackers.
It’s worth noting that the final list and distribution will be done in a separate proposal, and the current proposal only seeks to establish the groundwork for the Fairdrop and its Sibyl Hunting Bounties.
In addition to the revised Fairdrop criteria, we propose to have all community members participate in further crowd-filtering to ensure no legitimate user is filtered out and no sybil attacker is eligible.
Until publishing the final proposal for the Fairdrop, anyone can create an issue proving either misbehavior from addresses or submitting counter-evidence to reports. We will reward those who reported sybil addresses with 50% of the tokens saved in vPSP and distribute the remaining 50% back to the DAO treasury.
All reports must be submitted through the GitHub issue report template. The link for submission of reports will be shared along with the first version of the list of eligible fairdrop addresses.
As PSP 2.0 drastically reduces native token emissions, we propose to distribute PSP only for certain initiatives contributing to the protocol growth and usage.
For all future distributions, we propose the creation of a vested PSP token, similar to previous vesting methods in DeFi. This non-transferable token would be vested towards PSP for a certain period but still carry the benefits of sePSP, such as voting power and boost eligibility.
If the vPSP is not claimed within one epoch, it will be claimed back to the treasury.
Following its success, we propose to align the Gas Refund Program with PSP 2.0 by introducing the following changes:
Consider ParaBoost score instead of staked PSP amount.
Limit the refund to 95% instead of 100% to avoid system gaming.
One challenge we can see from incorporating ParaBoosts is that the number will fluctuate much more than the previous staking levels. If we stay with discrete gas refund levels, similar ParaBoost Scores could result in very different refunds, slightly above or below the threshold.
To solve this, we propose to adopt a proposal from DAO member Bach. We have reached out to him to hear potential feedback on how to best adapt this to the ParaBoost system. In it, an adjustment is made to the reward calculation formula to make it a continuous calculation rather than discrete. To take into account the new ParaBoost system, our current proposed formula formula is:
ABS(0.126506 * LN( 0.335487* [Total PSP Stake Value]+ 1.64295 )- 0.789135)
With this formula, the approximate values (after taking into account, for example, the 2x boost of sePSP2 and the ParaBoost) would be:
*The terms can be revisited depending on the PSP spot price.
For consistency across an epoch, the final ParaBoost score will be applied to the stake level at the end of the epoch. A more granular system of gas refunds could be explored in the future once the core functionalities of PSP 2.0 are implemented.
A committee composed of 5 members from the core team, other DAOs, and the ParaSwap DAO. GovCo will govern the PSP 2.0 reward system and ensure it’s fair and unbiased.
On-chain data and rewards performance will be monitored to ensure everything is done fairly. The committee members will be elected and approved by the DAO for a six-month (3 epochs) term. A separate proposal should be submitted.
A separate proposal with the final list of GovCo members will be published shortly before the 6 Epoch initial period for PSP 2.0
The first six epochs of the implementation of the system will be considered a pilot period to assess the effectiveness of the solutions implemented. During this period, the incentives and weights of the boosts can be adjusted if needed, requiring a DAO vote.
The six-month pilot period will have bi-epoch checkpoints where the Governance Committee will discuss PSP 2.0 implementation updates and potential improvements.
Additionally, another call will be set up at the end of each epoch to provide updates on the performance of the points outlined during the last checkpoint.
For both people within and outside GovCo, dashboards will be built for real-time tracking data of PSP 2.0.
The initial participation and quorum proposals established in PSP-IP6 were made, taking into account the PSP1 method of emissions and governance. Considering how we will be altering the PSP staking and emission systems, we propose the following changes to governance:
Change the tokens being used for voting to sePSP and sePSP2
Change the minimum amount of PSP needed for a proposal to 10.000 PSP, to account for the 2x boost given from sePSP2
Change the amount of PSP required for Quorum for PSP-IP proposals to 4M, as the current % of circulating supply will be more difficult to calculate with the altered emissions model.
In the original PSP-IP proposal framework, there is a minimum voting period of 5 days on Snapshot to implement a proposal (see PSP-IP6). When combining this with other steps of governance, such as discord and forum discussion, a proposal can easily take three weeks from the initial proposal stage to its final implementation.
Considering the importance of timing in certain situations, we propose introducing a new type of proposal to prepare the ParaSwap DAO for any potential rapid action that might have to be done. This proposal framework will also help respond to other emergencies related to PSP.
For a proposal to be an Express Proposal, it has about one of the following:
Mitigating any vulnerabilities that might trigger system abuse related to PSP
Addressing events that might lead to critically low amounts of PSP liquidity.
Responding to outside circumstances that affect the PSP systems, such as partners of the PSP system being compromised.
Compared to the standard PSP-IP system, PSP-EP differs on some key aspects
Reduced pre-proposal discussions: Since an emergency proposal seeks to address some key problems surgically, the amount of time expected for forum/discord communications will not be as high. Despite this, clear communications and announcements of a PSP-EP are still compulsory.
Expedited voting time: Since these votes tend to be for urgent matters, the new proposed time for PSP-EP would be 6 to 48 hours as opposed to the usual five days, depending on the urgency of the proposal.
With this system, we expect to introduce a framework for people to be able to address any potential DAO vulnerabilities in the future readily.
Finally, for the sake of clarity, the following proposals that had to address critical issues will be re-classified as PSP-EPs:
Gas refund urgent proposal
Emergency Liquidity Proposal
Recently, ParaSwapPool4’s Market Maker, Wintermute, ceased operations following a hack, leading to stakers receiving no rewards for staking in that pool. This led to many users either not receiving yield or having to spend time switching pools.
As this proposal aims to transition the staking pool away from this existing system, we propose to solve this issue by altering the staking rewards towards a system that will allow for a stable transition to PSP 2.0.
In this system, sPSP pool performance will not depend anymore on Private Market Maker performance. Instead, we propose to cut the emissions for PMMs and distribute a fixed amount of PSP among all pools proportional to the number of stakers in each. This system will allow people to receive a predictable rate for staking, reducing the risks of the sPSP system while we wait for the implementation of PSP 2.0
Actions effective immediately after the vote pass
sPSP Emissions Smoothing for Migration: All emissions for PMMs will be stopped. Meanwhile, a maximum of 1.5M PSP/month will be distributed among each sPSP relative to the number of stakers in each pool.
Budget allocations for Fairdrop and renewal of the Gas Refund
Introduction of Expedite Proposals
Actions effective after 2.0
Epoch length alteration: Extension from 2 weeks to 1 month per individual epoch.
sPSP/Safety Module reward cut: The old emissions will be discontinued once the new system goes live
sPSP deposits pause: Once the new system is out, no more sPSP depositing will be allowed.
Enabling protocol fees for sePSP fee allocation
Voting protocol alternation: Switching from the current tokens to sePSP and sePSP2 as the only voting tokens.
sPSP/stkPSP cooldown modifications: The withdrawal times for both systems are to be altered for the transition to 0 for migration purposes.
Gas refund adjustments: Altering the Gas Refund levels to make them compatible with the new system