PSP-IPΔ5: Adjust incentive budgets

Sharing this proposal for the community to review. Expected date of voting start: Dec 21 or 22

5 minutes AUDIO recap

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Keywords

PSP staking policy

Simple summary

Lower the PSP budget allocated to staking reward progressively to rebalance the risk/reward model of staking vs liquidity providing on PSP.

Context

This proposal is the first leg of a rebalance of the staking model, currently discussed in research:

PSP Staking Reward Research

We now have two entire epochs of data on the PSP staking model, which gives us hindsight to finetune it further.

They are currently 5M PSP distributed at each epoch, with an even split between stakers who are not vested and market makers vested for six months. The current level of rewards proves very generous to market makers and stakers alike.

The staking system was launched with an attractive budget to attract initial interest, and it succeeded in doing so. Yet, staking provides very high returns for stakers, who assume minimal risks, making providing liquidity on the PSP token less compelling.

Goals

To rebalance the risk and reward ratio between stakers and liquidity providers, we suggest starting with a progressive reduction of the budget allocated to PSP staking rewards to 3M PSP.

Means

Current PSP liquidity budgets:

  • PSP-IPΔ3 - Bancor: a total of 1.5M PSP committed. PSP-IPΔ3’s budget is not used for liquidity incentives. Instead, it’s been used to supply liquidity single-sided, with Bancor’s BNT as counterpart.
  • PSP-IPΔ2 - SushiSwap: 5M PSP over three months, or about 833 K per epoch.
  • Safety Module - Liquidity Component (Balancer 80%PSP / 20%ETH): 1.25M PSP over three months, or about 208K PSP per epoch.
Before PSP-IPΔ5 With PSP-IPΔ5
Total PSP Liquidity Budget 1,041M per epoch 1,041M per epoch
Total PSP Staking Reward Budget 5M per epoch 3M per epoch

As shown in the table above, the staking incentive budget is currently five times greater than the liquidity incentive budget. While this calls for more significant liquidity incentives, the balance will happen with a meeting halfway between.

With the current staking incentives, if we wanted to have liquidity incentives matching them, it would require 30M PSP per 3 months (5M PSP per epoch). Matching the stakers side only (MM are vested six months) would require half that amount: 2.5M PSP per epoch.

Rationale

To begin with, the team set the rewards at a generous threshold to attract early traction: to sustain the system in the long run, we need to drive significant liquidity to the PSP liquidity pools on decentralized exchanges. The staking rewards should be adjusted now that incentivized liquidity-providing opportunities are available on PSP.

It will help rebalance the risk/reward ratio over the different activities for PSP. With the addition of the Unslashed insurance, the risk for stakers is now even more manageable. Meanwhile, liquidity providers, who assume IL risks, need appropriate incentives.

Lowering the staking budget will make it much easier to achieve a sustainable structure for liquidity incentives. With this proposal, the spread between staking and liquidity budget goes from 5x to 3x. Further liquidity incentives will help rebalance this ratio closer to the 2x range, a figure at which the incentives should be balanced enough to sustain sufficient liquidity.

Forward-thinking considerations

Short/mid-term further adjustments to the staking model: This proposal is the first stemming out of the PSP-IPΔX: PSP Staking Model Upgrade Research. Another proposal adjusting the staking model will follow shortly, proposing a switch to a dynamic MM/staker split and a PSP budget indexed on the share of the total ParaSwap volume ParaSwappools accounted for during the epoch.

Adjusting liquidity providing incentives: While PSP-IPΔ5 will help make liquidity more attractive on PSP and help grow the token’s liquidity, it might not be enough to bring it to the level we need. Additional liquidity incentives program or budget increase to existing ones could be considered.

Long-term evolutions: Community members have been discussing long-term improvements of the model, such as Archivist Nolan envisioning an RFQ-based model where PSP holders could direct on the liquidity provided by ParaSwapPools to specific tokens.

Implementation overview

Epoch 2 concluded and we’re now at 1/3 of Epoch 3, which concludes on December 27, 2021.

This proposal will be submitted to a vote closing before the end of Epoch 3.

If accepted, its implementation will begin one epoch after the vote, which is progressive. Post-proposal budgets:

  • Epoch 3 = 5M PSP
  • Epoch 4 = 4M PSP
  • Epoch 5 = 3M PSP

Voting options

For (=lower to 3M progressively), Against (=keep 5M), Abstain.

8 Likes

Here is my analysis of the situation without and with IP-5.

Staking in the PSP pool is low risk, requires little involvement, and is liquid (only 7 days lock).

This means that the return of providing liquidity on SushiSwap(La Seine) or Balancer (Safety module) must be at least equal and even 2 to 3 times higher if we consider the risk of IL.


If the amount in the staking pool remains the same, we can expect to have between $0.87M to $1.75M in the Balancer pool and between $3.5M to $7M in the SushiSwap pool.


With the IP5 adjustment, we are up to $1.45M to $3M for Balancer and $5.85M to $11.65M for SushiSwap.


If the PSP reaches $1, we would have $64M in the Staking pool, between $4M to $7.5M in the Balancer pool and between $15.15M to $27.7M in the SushiSwap pool.

I think that the staking is still much too generous, considering the risks, it should target between 5% and 20% of annual return at most.
I am afraid that the liquidity contribution is not attractive compared to staking.

The proposal goes in the right direction but is still insufficient.

(src: Desmos graph)

5 Likes

Thx for these figures. Don’t u think the model aiming to signal PMM would be difficult to sustain with such returns ?

Inflation just defines who loses money.

So we can put 10,000%APY on staking, that would be “sustainable”, but it means that all PSP must be in the staking pool to not get diluted.

The problem here is that in addition to staking we want PSP elsewhere, so we have to find a balance.

2 Likes

I agree on lowering the budget to 3M PSP per epoch and increase it for liquidity providers in this proposal. Our token definitely needs deep liquidity. I just would like to urge a less aggressive approach when it comes to covering IL risks going forward. You can never be fully out IL risk when providing liquidity, it is part of the game. We can watch the volume of staking following implementation of this proposal, see if there is any reduction and following the data, try to strike the right balance between staking and LP.

2 Likes

I’m ok to have more rewards as LP :smiley: hahah

people who think that 5-20% would be too little, are people who look short term …

let’s imagine that the $PSP goes to $ 5 (more than x10) …
the 20% farm would be as if you had farmed more than 200% …
currently it’s 100% … it’s like farmed for more than 1000% when $PSP will reach 3-5$ …

and, you have $PSP staked that will earn you even more!

while the LPs will STRONGLY underperformed compared to the stakers

(sorry for my english)

1 Like

I also agree on lowering staking rewards and increasing liquidity rewards since having a good liquidity is important for projects , that’s why it should be incentivized more than staking since there are risks such as IL whereas in staking there is no risks.

1 Like

I think we all realize and agree (and that’s clearly stated in your charts) that PSP rewards for stacking should be decreased. I just feel confused on the consequences it might have on the signalling system. Will people still do it for a few % APY more ? I personally probably won’t, but maybe this is pure shrimp consideration :wink:

I think you have a valid concern regarding signaling in the staking system.

For this reason I suggest to implement this proposal with the reduction to 3M and take the next step with this in mind too and not just the IL risks. I assume it will take a bit time for us to have the right balance, but I have total confidence that we can do it as a DAO. :slight_smile:

1 Like

If you want to be exposed to the increase of PSP price, you have two choices right now.
The first one is to buy and hold the PSP in your wallet. If you do that, you only get the upside of the price.

The second option is to buy them and stake them in a pool. You add a small additional risk, the smart contract, knowing that it is insured against hacking.
In this case, in addition to the price increase, you avoid a large part of the dilution due to the inflation of the currency.
Even at 5% or 10%, it will always be more interesting to stake than to simply hold.

The only reason that could make you stop staking in the PSP pool is the ethereum gas fees, but you understand that we can’t calibrate a system based on the smallest holders.

2 Likes

Yes sure, I am not denying that. Staking in a pool is definitely a better option than just holding.
What I am trying to point out here is the side effect it might have on the signaling mechanism itself.
Staying in a pool indefinitely and doing nothing is not the same thing than betting on an AMM, change pool regularly, hoping to get a significant bigger APY and thus participating actively to the signalling feature.
This proposal will not only reduce APY per pool but the spread between the different ones too.
That could lead to a very static staking and change the initial idea of signalling into a very basic locking of $psp. This being said, I am clearly in favor of that proposal and maybe that is more a discussion to have on the upcoming PSP6 proposal on PSP rewarding upgrade …

Hi. I can see that this led to a signal proposal here: Snapshot

However I don’t understand why the proposal doesn’t scope the liquidity mining budget in. In my view, the goal of a reduction of the staking rewards is to rebalance it against liquidity provision rewards.
Since the snapshot vote doesn’t give any figures about what the future liquidity provision rewards will be, should I assume that reducing staking rewards is considered as sufficient for the said rebalancing ?
If not - ie: if we plan to change the numbers of LP rewards soon - why not consolidate everything in a single proposal ?

Hi @neozaru, the proposal is currently being voted on yes.

To keep the votes as focused as possible, we went forward with a first proposal addressing the staking budget. Another one, inspired by the research below will be shared for community review shortly

Finally, if needed, a final proposal could further adjust liquidity budgets. So far we have voted on three proposals related to liquidity (Safety Module, IP3, IP2 “La Seine”): not all are fully implemented yet.

With progressive and step-by-step adjustments, we can carefully adjust the model and fine-tune it. In my perspective, voting on a proposal that would include staking budget adjustment + LM budget would be confusing.

1 Like

hi all, happy holiday. I guess is abit early to reduce single staking pools, many of us didn’t get the airdrop and bought in to show support. I think the people will definitely vote pass at least after 2poch 9-12. thanks and all the best.

1 Like