Sharing this proposal for the community to review. Expected date of voting start: Dec 21 or 22
PSP staking policy
Lower the PSP budget allocated to staking reward progressively to rebalance the risk/reward model of staking vs liquidity providing on PSP.
This proposal is the first leg of a rebalance of the staking model, currently discussed in 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.
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.
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.
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.
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.
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
For (=lower to 3M progressively), Against (=keep 5M), Abstain.