Psp-ip: PSP 2.0

Keywords

Tokenomics, staking, fees

Simple Summary

PSP is a utility token meant to scale and govern the ParaSwap Protocol. After 6 months of observing community feedback and actively participating in debates as well as governance discussions, we think that there is room for improvements on the current tokenomics including the incentive mechanisms. The current proposal aims to come up with a new design model that tries to make PSP more efficient.

Curve’s tokenomics have proven to be the most resilient and scalable since 2020, so we think that we can re-use some of the Curve framework as an inspiration, let’s call it vePSP.

vePSP is a general-purpose staking “token” that replaces all sPSPs. Once launched, it will become the only voting and rewards token. vePSP is not an ERC-20, it’s non-transferable and comes with lockups and boosters depending on the lock duration.

Context

There are 3 majors challenges that PSP has faced since its launch:

1- Staking Efficiency:

The current staking system did a good job in making ParaSwap’s prices very competitive compared to other aggregators thanks to the maker-rebate like model, which rewards MMs (Market Makers) for processing trades, but the system came with a few challenges too:

  • Staking on each of the MMs yield turns out to be capital inefficient for the community. The initial idea was to build a signaling system by creating a competition between MMs for votes (stakes) in order to maximize their rewards. Although I think it worked to some extent, but it didn’t deliver the superior results we were hoping for: ParaSwapPool taking the highest possible market share. However, the total volume is still not as significant as we hoped and it remained stagnant on the lower bound the last couple of weeks.

  • Switching stakes to better performing MMs is a pain point because the user has to first unstake, wait for 7 days, withdraw, then stake on the new MM. No rewards are earned during that period, which is an unnecessary loss for the staker. I think this is not attractive to new stakers, which limits our growth.

2- Safety Module performance:

The second staking system is the Safety Module, which is a very novel model invented by Aave and adds a nice layer of safety to ParaSwap but it also came with a few challenges which resulted in a very low TVL:

  • Cooldown period: 14 days, it seems like this is perceived as being quite high. It’s the same configuration on Aave, but since PSP is not as established and mature, the market thinks that this duration is too risky even though the APY is very high (~190%).
  • Risk of Slashing: It’s not activated but it seems like the market hasn’t felt comfortable with it even with the very high APY.

I think we can address this by improving the UX as well as adjusting the safety parameters. We can also think of bonding some PSP (through Olympus Pro) to acquire stables & ETH in order to diversify the insurance fund.

3- High inflation and Mercenary liquidity:

As Olympus team analysis suggested in their proposal, PSP used to have a very high inflation rate which led to attracting too many farmers, which resulted in a significant selling pressure. This problem is being solved by POL thanks to Olympus Pro and the Bancor Program.

Proposal:

In order to address those issues, I propose the following:

  • Introducing vePSP, inspired by Curve veCRV, it will become the new staking model for PSP. This will allow users to commit to the long-term success of ParaSwap and earn rewards in exchange. The rewards will be proportional to the lockup period. I propose to make up to 12 months lockups, with a booster of 4x.
  • Fee sharing: 80% to vePSP stakers & 20% to the DAO treasury. Depending on market prices, ParaSwap generated between $800k and $1M since late November, which is ⅓ of the current TVL ($3.3M as of May 14th 22), which means 66.66% APY if projected on 12months. A recap of all collected fees can be found in this Zapper Tracker. This, obviously, depends on the volume which is very reliant on market conditions, but the good news is that ParaSwap’s volume started to increase significantly with new ATH.

The wallets that generate the fees are shown here and are also accessible onchain (getFeeWallet() on Augustus Swapper: 0xDEF171Fe48CF0115B1d80b88dc8eAB59176FEe57).

The current collected fees are managed by the ParaSwap Foundation and are meant to be used for protocol security and development purposes. If this proposal passes, new funds will be redirected to a new fee collector contract.

  • Making ParaSwapPool more efficient & fair:
    • Removing staking from MM rewards and making the rewards purely based on volumes with objectives. We can set 2 targets:
      • A minimum threshold of 2% volume share / MM over an epoch in order to qualify.
      • Rewards / epoch = 900k PSP, which is 20% increase.
    • 1-month epoch instead of 2 weeks in order to give MMs time to achieve volume targets.
    • Adding a fairness constraint:
      • Problem: occasionally, MMs have some discrepancy between the quoted price and the final price. It’s not an alarming behavior, but it’s still undesirable for the trader since they could’ve got a better price from another MM.

  • Solution: Limiting this discrepancy to a maximum of 10bps. If the discrepancy is higher than 10bps, the system won’t count the MM volume for the rewards; if the discrepancy = 5bps, the accounted volume will be 50% of the processed volume, … Which translates into:

Effective Volume = Quoted Volume - Quoted Volume * (Discrepancy * 10) / 100

That way, MMs are now incentivized to deliver the best quoted and realized prices.

  • Future improvement: Introducing a flat fee of 10 bps on ParaSwapPool, where 80% will belong to vePSP stakers and 20% will go back to the DAO treasury. This will require building a new protocol in order to make the swaps more gas efficient as the current smart contract structure could reduce the competitiveness of ParaSwapPool. This wil become a 3rd income stream for the DAO.

  • Migration from sPSP to vePSP: To make the experience as smooth as possible, the stakers can deposit their sPSP on a smart contract, they’ll receive an unlocked vePSP, 2 days later which they’ll have to lock by chosing the duration. Those transactions can be part of the gas refund program.

  • Addressing existing sPSP integrations: We can explore StakeDAO Liquid Lockers that address this issue with veTokens as well as facilitating their usage on other protocol, ApWine for instance, as well as other exciting features such as Cross-chain accessibility.

Goals

This proposal’s goal is to add more efficiency into PSP in order to make the ParaSwap Protocol more competitive and fair. Stakers are now directly involved in improving the ParaSwap volume and competitiveness.

Means

As this proposal is cutting the staking PSP emission by half and replacing it with fees generated by the protocol, there won’t be any budget allocation needed on PSP side.

Metrics

I think the key metrics to track here are:

  • Improvement of the MM volume share
  • The vePSP lock duration, the longer the better
  • The checking rate to extend the vePSP lock
  • Increase in overall ParaSwap’s volume and generated income.

Voting Options

  • For
  • Against
  • Abstain.
35 Likes

I still need a bit more time to grasp the whole proposal and articulate proper feedback, but I definitely think this would be a massive improvement over the current staking model indeed.

Right now the only downside I see is maybe the maximum lockup duration: I can understand the wish to go lower than the maximum of 4 years Curve use, but 1 year seems a bit low to me, maybe the sweet spot to better engage and reward users that are willing to commit long-term is actually two years?

Anyway, aside from that it does address much of lacks with the current system and adds additional utility for the PSP token with the fees sharing so I think that would be a massive improvement.

Just to make sure I understood: under this new model, are the stakers still voting on the different MM with their vePSP, or this part of the model is dropped too?

Amazing proposal overall, I’m excited to see ParaSwap evolve towards a ve model, if the community approves of course.

19 Likes

go ahead all the very best

4 Likes

I echo your sentiment and only pain point for me is the 1 year - needs to be higher IMO.

Most importantly it puts more utility into PSP which I think not only helps practically, but also tangibly shows a direction for the token which some feel right now is slightly abstract

Overall super happy with this (pending a couple of tweaks/clarifications)

4 Likes

There are reasons that reason cannot understand because you could have made this proposal a long time ago.
However, I’m sure you have reasons for not having done so before.
Either way, I’m glad it’s finally happening.
The team is incredible and the usefulness of Paraswap is well established.
All that’s missing is a bigger community that believes in the project.
This proposal will help to achieve this goal.

4 Likes

A great proposal! We really need it around here.

As already mentioned above, I believe that the time could be longer, 1 year is little in my opinion.

Would like to see rewards withdrawable to other chains with lower transaction costs

2 Likes

I agree with @tokenbrice
One years seems to low, good spot would be 2 years.

4 Likes

Investing in the primary resources of a project, i.e. its contributors, could be a good way to grow the community :wink:

1 Like

Yes also, as a primary investor i agree with you

2 Likes

So there’s no more delegating your PSP to certain MM?

1 Like

Thank you for listening to the Paraswap community’s concerns about the $PSP price. (Finally!)

It’s a great proposal because it values long-term investors and has been proven to be effective with other initiatives (Curve).
However, I believe that several criteria require further study before determining the ideal value.
For example, the locking time and locking weight – epoch timing options.

1 Like

This is a great offer
I’m happy with the formation of this Dao

1 Like

100% agree. innovation always works as a staker. I feel good about it.

1 Like

I agree with that;controling the inflation is necessary.

1 Like

Hello,
I am rather convinced by the proposal that removes the signaling which for me did not work for two reasons:

  • Little information on the PMM to make a choice
  • Too much cost to navigate between ParaSwapPool and really make this signaling for small portfolios.

This new system will be simpler for users and will showcase long term holders more.

Two thoughts:

  • Although PMMs are incentivized on a minimum volume, there is no more “competition” between them to push them to always more volume with rewards changing according to their performance, is that right? The 2% could be an entry fee to the rewards, but rewards that would be progressive according to a ranking between PMM (while trying to keep the increase of rewards per epoch for each of them). Or else in this system it is no longer the volume that is the main criteria but the discrepancy.

  • The difficulties of small portfolios have been highlighted for signaling, we should also think about it so that the transition from sPSP to vePSP is as easy as possible. Good idea to include it in the GRP.
    Maybe we could also take account the need to regularly re-extend the lock duration to get the maximum return and therefore the costs involved (re-extending period probably depending on the maximum lock time, topic under discussion).

Looking forward to seeing this proposal come to fruition.

4 Likes

Keep the 4 year lock but make it liquid in form of pspCVX by partnering with Convex Finance? FRAX has done this with their gov token FXS.

1 Like

This is a great proposal @Mouph.

vePSP would reduce token velocity and increase the weigh of committed token holders in the governance. I tend to agree with @tokenbrice on the need to extend the proposed 1-year lockup period, as it might be too short to differentiate the level of commitment of token holders.
I don’t know if it exists in the DeFi space, but one way to address long-term commitment would be to introduce a re-lock bonus at the end of the 1-year lockup in form of a reward multiplier.
In other words, I can chose to restake for 1 year my PSP at expiry for a X% bonus or unstake them and lose bonus rights if I chose to restake later. And that bonus could be capitalized every year (incl. for governance rights).
I think this would increase the overall staking % of token holders (vs. the longer period lockup) as it offers optionality and flexibility. I have personally locked up my veCRV in 2020 and I find it annoying to constantly push the expiry to avoid being too diluted :sweat_smile:

The price discrepancy solution is smart. Have you done the arbitrage math of the cost of providing discrepancy to gain volume in reward terms vs. fee generated just by volume? That would be a good indicator of the efficiency of the proposal.

One problem that remains to be addressed in the tokenomics is the volume volatility in times of market turmoil. MM tend to pull out liquidity when price volatility increases, and it is precisely in these moments that we need competitive prices. Looking though the 30-day realized volume across the pools, it is staggering to see the difference between the MM. Some make their monthly volumes in a couple of days, while others manage to provide liquidity regularly.
I tend to think that there should a reward bonus for “committed” MM to maximize the chances of having the most competitive prices across market conditions.
A simple way to address this is to measure the market share standard deviation (daily vs. monthly average) and attribute a bonus for low deviation MM.

Happy to hear your thoughts!

3 Likes

This is by far the biggest upgrade to our tokenomics we should see much better value accrual to stakers and our treasury. I’m fully in support of this and appreciate all the thought and effort coming out of the team.

9 Likes

Great proposal :+1: would support it, and hope, it will make PSP more sustainable and attractive for investors and users!

1 Like