This proposal is the result of research and an attempt to summarize it. I formalized it as closely as I could to a final proposal so we have a decent common ground for discussion. It’s of course still open to input, and need further adjustments and implementation details to be brought to a vote.
PSP staking policy
Adjust the distribution of the PSP staking reward to align them with ParaSwap’s best-sustained interest better and stimulate healthier competition between participating market makers.
Related proposal and researches:
The PSP staking model ran for two entire epochs and attracted significant activity. Yet, the DAO can further optimize the current incentives structure to become more synergistic with ParaSwap’s best interest.
The community has been discussing a potential rework of the staking model, yet meanwhile, we should still optimize the current system. While PSP-IPΔ5 was a straightforward budget adjustment, IPΔ7 focuses on how the budget is allocated.
Currently, there are 5M PSP distributed at each epoch (reduction to 3M refused with IPΔ5):
- Split between the pools depending on their performance + signaling
- Shared 50/50 between stakers and the market maker of a given pool
- Liquid for stakers ( PSP-IPΔ1’s 1-week withdrawal delay), vested for MMs: 50% 6months + 50% 1y.
Currently, the reward calculation formula provides the best returns to the pool with the highest traded volume to PSP staked ratio.
To finalize the picture of the context, keep in mind that the PSP rewards calculation currently accounts for MM volume on Ethereum only. The implementation is ready to recognize the volume on all chains, and it could be delivered by the team along with this proposal.
Recognizing contributions across all networks will help make the reward fairer and enable new strategies for MMs, who can specialize in alternative EMV chains if wanted.
This proposal suggests implementing further modulation of the staking reward on top of the existing formula:
- Review the MM/staker split based on MM’s competitiveness (means A)
- Adjust overall PSP staking incentive budget to MM’s contributions (B)
- Ensure a base level of reward, but preserve the bulk of the budget to recognize performance (means C).
- Recognize the volume provided by MMs on all chains (means D)
Overall, the gist of the proposal is to finetune the staking reward calculation system to account for more context. The core of this proposal is the idea to benchmark the MM contributions over a given epoch against the total volume made on ParaSwap (including regular aggregation).
This allows to further improve the reward system without introducing any assumption based on market conditions.
Switch to a more competitive approach between MM: the budget is allocated with a premium to the three top performers. Every MM is treated the same with a 50% reward split with its stakers. This number could evolve based on the MM relative performance:
- Top MM: 45% stakers / 55% MM
- Top 2 MM: 50% stakers / 50% MM
- Top 3 MM: 55% stakers / 45% MM
- Rest: 60% stakers / 40% MM
The adjustment is slight not to create an incentive to stake on least-performing MM while providing a premium to top-performing MMs. To be explicit: because of the formula calculating the allocation of the reward per pool, the best returns for stakers should still be achieved staking on top-performing MMs even with this adjustment.
Keep in mind that to qualify for ParaSwapPool staking, a MM needs at least $1M in total volume on ParaSwapPool.
B/ Modulation of the overall PSP staking reward budget based on the share of the total epoch volume processed by ParaSwapPools
We can also index the PSP budget expanded on the actual contributions provided by the market makers it incentivizes. To do so without adding unnecessary limits to the system and keeping it fair for the MM, we suggest introducing a new metric that will be used to calculate the rewards.
MM Epoch Volume / Total ParaSwap Volume = MM Share of volume
The “MM Share of volume / MMSoV” is a ratio representing the share of the epoch volume processed by ParaSwapPools (=market makers / MM).
Modulating the staking budget based on the MM share of volume enables a more potent synergy:
- If MMs are overperforming the markets, the MM share of volume will rise ⇒ increased rewards for all stakers and MM.
- If MMs are underperforming the markets: the MM share of volume will lower ⇒ lowered PSP rewards for all stakers and MM.
While we want to avoid any target metric that would add a constraint to the system, introducing minimal values seems relevant. The DAO will define a minimal MMSoV we can use to benchmark MM performance against the markets, with no bias regarding overall market conditions.
50% of the total PSP staking budget is allocated once the minimal MMSoV is met, increasing progressively to 100% at 2x MMSoV. The budgets “saved” on epochs with low performance can be used to fund the mechanism onward and offer bigger budgets if the MM performance is outstanding over a given epoch.
The addition of A and B enables a good balance for the game theory of the system:
- The modulation implemented by A operates at the MM level and is competitive.
- But the overall budget modulation implemented by B+C is protocol-level and collaborative.
Overall the four components together help better balance the system without adding any more restrictions and implement a protocol-level safeguard (MMSoV) to make sure PSP staking is contributing to the overall competitiveness of ParaSwap.
The metric introduced by this proposal, MMSoV, needs to be documented, calculated, and easily accessible to all stakeholders through a dashboard.
If this proposal is enabled, governance will be able to adjust the MMSoV ratio through a parameter change vote.
To be specified if the community supports the proposal.