PSP Staking Model Upgrade

[tokenbrice]

Hello swappers!

Here is a proposal implementing some revisions to the PSP staking model to better align it with ParaSwap’s best interest. I’m sharing it as research for now, with several polls to gauge the community feedback.

Feel free to take your time and read the proposal carefully, and of course ask questions! The polls are open for a week so there’s no rush to produce an opinion.

Implementation details are to be specified for now, but if there is community support such as a proposal could be implemented for the 4th epoch.

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Keywords

PSP staking policy

Simple summary

Adjust PSP staking rewards to better account for the market makers’ individual performance and align the rewards with ParaSwap’s best interest.

Context

PSP-IPΔ1 adjusted the staking lockup period for depositors. With 2 epochs concluded, we now have enough data to adjust the model on the market maker side too.

During the first two epochs, we saw some market makers stepping up their game and achieving decent volumes. Yet they are also getting sizeable PSP rewards, with some netting over 1M PSP per epoch. The top market maker (Pool3) currently processes around $15M daily volume.

They are currently about 5M PSP distributed at each epoch, with an even split between stakers who are not vested and market makers vested for 1 year (6 + 6 months). The staking system was launched with an attractive budget to attract initial interest, and it definitely succeeded in doing so. It feels like now is a good time to further finetune it.

Goals

While there are no issues with given market makers accruing a significant share of the PSP rewards, we need to ensure that the top PSP-earner market makers are also contributing sustainability to the overall volume and consistently help ParaSwap beat the market for its users.

The goal of this proposal is to adjust the current default and set a 50% / 50% split for the PSP rewards on a given pool, between the market maker and the stakers. The proposal suggests the split ratio evolves dynamically depending on the market maker’s daily average volume over the epoch.

With a better allocation of the staking reward, the DAO could also consider adjusting the overall PSP budget for each epoch, currently set at 5M PSP distributed per epoch. Instead of it being a set budget, it could adjust based on an epoch overall total volume objective.

Means

We think it’s time to lift the guardrails for market makers too and start accounting for the daily average volume provided by a market maker in the MM/staker split for any given pool.

A/ MM-Volume-based adjustment of the MM-staker split

Instead, of the current set 50/50 split, the share of PSP allocated to the market maker will change depending on the daily average volume over the epoch. We suggest these values, aligned with the contributions expected from market makers:

• If below $1M average daily volume over the epoch: 0%
• $1 - 10M: 10%
• $10 - 20M: 20%
• $20 - 30M: 30%
• $30 - 40M: 40%
• $> 40M: 50%

This change will also help make PSP staking more attractive, by delivering a neat premium to early stakers of pools that do provide consistent volume.

Do you support the revised model to adjust the MM/staker split dynamically?

• Yes
• No

B/ Overall volume-based adjustment of the total PSP budget for the epoch

To make sure the PSP budget is serving both the best interest of ParaSwap and that of DeFi, we suggest indexing it over the total volume processed by ParaSwap during the epoch (that is the volume on the ParaSwapPools + regular aggregation).

Instead of having a set budget, the budget will instead be the maximum achievable if the epoch target total volume objective is met. Starting once the epoch target total minimal volume is reached, at least 1/3 of the total PSP budget will be allocated for the epoch rewards, increasing proportionately as the epoch target total volume objective is approached, with 100% of the PSP allocated once it’s reached.

Do you support the revised model to adjust the overall PSP epoch budget dynamically?

• Yes
• No

C/ Reduce PSP budget

The initial budget set is quite generous, and now that incentivized liquidity providing opportunities are available on PSP, the staking rewards should be adjusted. To better align the risk and reward of each activity, both actively contributing to ParaSwap, I’d suggest lowering the budget to a total of 2M PSP per epoch to get started with this adjusted model, which can be of course further adjusted by governance vote. The proposed reduction could be enforced over the next 3 epochs, with for instance a reduction of 1M per epoch.

Should the overall PSP staking rewards budget be reduced?

• No
• Lower to 3M PSP/epoch
• Lower to 2M PSP/epoch

D/ Account for the volume on all chains

Currently, only the volume on the Ethereum network impacts the PSP staking reward. With the introduction of B & C, it seems like the perfect timing to fix this debt too and make the whole system more efficient and fairer. It will also make the target volume easier to reach for MM, by including their presence and activity on other chains like Polygon or BSC.

Rationale

The two changes suggested help further adjust the PSP staking model to make it more competitive.B could translate into a decrease of the overall total PSP reward budget if the epoch target total volume objective is not met, yet A will help compensate by increasing the stakers’ share if that was to happen.

Overall, the two changes together help ensure the most well-paid market makers are also delivering sizeable and consistent volume, helping ParaSwap deliver the best prices to its users. The introduction of the epoch target total volume objective will help the DAO track and manage the actual contribution of MMs to the growth of ParaSwap’s total volume.

Forward-thinking considerations

This proposal introduces two new sets of parameters governance can adjust with further votes:

A/ MM-Volume-based adjustment of the MM-staker split

1. The objective for market makers’ daily average volume over an epoch, where they get their full share of the PSP rewards (50%) initially set at $40M.

Do you agree with the proposed objective for market makers’ daily average volume over an epoch default value: $40M?

• Yes
• It should be higher
• It should be lower

2. The minimal market makers’ daily average volume over an epoch, to get be included in the first minimal requirement for PSP rewards for MM, initially set a $1M.

Do you agree with the proposed minimal market makers’ daily average volume over an epoch** default value: $1M?

• Yes
• It should be higher
• It should be lower

B/ Overall Volume-based adjustment of the total PSP budget for the epoch

3. The epoch target total volume objective: if reached, the full epoch budget will be allocated for the rewards, initially set at $3B.

Do you agree with the proposed epoch target total volume objective default value: $3B?

• Yes
• It should be higher
• It should be lower

4. The epoch target total minimal volume: below this threshold, only one-third of the total PSP budget is allocated for the epoch’s rewards, initially set at $1B.

Do you agree with the proposed epoch target total minimal volume default value: $1B?

• Yes
• It should be higher
• It should be lower

Implementation overview

To be specified once a community consensus has been reached on the above.

[Lup]

Thanks, Brice for this amazing proposal!

ParaSwapPool objective is to align ParaSwap’s success to stakers & Market Makers. The latter should deliver the best prices, which should attract more traders… in order to create a virtuous cycle. The current 5M PSP/ epoch corresponds to the 6% total supply yearly budget, which is quite significant for an early stage DAO. I think it’s worth it only if the volume growth follows & ParaSwap attacts more traders to use it.

Having said that, I propose to connect volume with ParaSwapPool straking rewards:

• Epoch budget targets by daily overall volume (all chains + all DEXs):

  • 5M PSP / epoch: if avg min daily volume >= 500M USD
  • 3M PSP / epoch: if avg min daily volume >= 300M USD
  • 2M PSP / epoch: if avg min daily volume >= 200M USD
  • 1M PSP / epoch: if avg min daily volume >= 100M USD
  • 500k PSP / epoch: if avg min daily volume > 50M USD

• To make it fair, we need to also incentivise volume with few improvements:

  • Ethereum mainnet Gas refund for stakers (Rules TBD but I think it should scale up to 100% for the top ParaSwapPool & Safety Module stakers)
  • Referral program with fee sharing mechanisms where the referrer will earn the other 50% slippage that was supposed to be returned to the trader (if it occurs), that way there is no way to game the system…
  • Counting MMs volumes in all chains
  • Developer incentive programs with KPIs on volumes (it should be carefully crafted in order to avoid wash trading)
  • Accelerating the integration of new chains (Fantom, Arbitrum, Optimism…)

Do you support the epoch budget dynamically by volume targets?

• Yes
• No

[Pelerin_Prospere]

Hi,

1- I purpose that is only one pool for staker (Or one for each BlockChain), cause :

• I don’t want to bet on MM
• No want more unstake and restake between pool.
• I just want that Paraswap have the best performance for user.
• No matter that is one or other MM.

2- I think it’s better if volume targets is not a fixed value but calculated value that can evoluate automaticly.

Congrats for your job.

[Ethorian]

@tokenbrice @Lup

lower performers will get lower rewards e.g 10% and the rest will be allocated to stackers e.g 90%

is my understanding correct ?

If so, this is a good step however I would prefer to get some flexibility i.e

• I don’t mind to get vested reward, remove the 2 days lock
• Give a possibility to re-allocate to different pool and / or move to L2

I am stuck with 2 underperforming pools

[tokenbrice]

Hello @Pelerin_Prospere and thanks for sharing your input!

Your feedback makes total sense from a user perspective - why bother with several pools right? All you want is probably to stake your PSP, earn some more and forget about it until you need them.

However, the staking decisions also influence the incentives model of the system: it’s a way to fine-tune it using the staker’s input to incorporate a qualitative evaluation of the MM on top of the quantitative made by the staking formula.

My point is that getting rid of the pools would actually make ParaSwap much less competitive. However, I understand that the pool system comes with additional restrictions on the user sides: the gas costs, the timelock, and the several operations required to change pools.

There are several ways we can address this:

• At the system level, we’re already discussing a staking V2 that could incorporate a “pool hopping” feature enabling users to easily and efficiently (gas-wise) change pools.
• Your wish for a passive PSP staking product could also be delivered through third-party integrations. We’re looking into what’s possible to offer another more passive option to PSP stakers that want it while preserving the signaling/betting component of the system.

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Now for your questions @Ethorian:
Your understanding is indeed correct, the split between market makers and stakers would evolve depending on the market maker epoch average daily volume.

This proposal is more about adjusting the reward systems on the market maker side to make it more efficient and synergistic. There’s more we can do to ease the burden on the stakers and it’s being considered, see above.

[Ethorian]

Thanks @tokenbrice

Should you start the vote before we enter into the core of the christmas period.

the participation will probably be low from the 20th of December until early January

[elisafly]

This sounds very sensible!

[elisafly]

I like the general direction here. If this proposal passes, I’ll be very curious to study what it does to volumes and other KPIs that we should track. Can you propose some KPIs for the DAO to track or can we sponsor someone to build a dune dashboard for this (maybe it already exists?).

[weehowe]

@tokenbrice a couple of suggestions:

1. while the dynamic MM/staker is a good idea, the proposed setup might end up incentivizing stakers to pick a lower performing in return of getting a larger share of PSP tokens
2. instead of a two-way split between MM/staker, we can introduce a community chest for the purpose of accumulating PSP token rewards that are not paid out to MMs in each epoch because they didn’t hit the average daily volume (ADV) targets. the funds in the community chest can be used to provide bonus rewards in subsequent epochs for pools that hit bonus KPIs (e.g. achieving 50M ADV in a single epoch will grant an additional 500k PSP for the pool) at no extra cost to the community. bonus KPIs should be voted on the DAO for every epoch, adding more reasons to hold onto our PSP
3. most of the MMs are going to end up in the 10% or 20% bucket if we set each step at 10M. this is a pretty steep reduction in PSP for them and might end up disincentivizing them because increasing the ADV by 10M is no mean feat. Instead of +10% for every 10M, we can adopt a more gentle step of +1% for every additional 1M ADV to incentivize the MMs to make improvements every single epoch
4. similarly, the undistributed PSP budget for each epoch should be accumulated in the community chest to fund bonus KPIs in future epochs

[lilian]

Hello everyone,

I have an observation concerning the impact of the PSP-IPΔ1 implementation on the PSP stacking model (only for stakers). It’s not directly linked to these proposals but could be discussed at the same time to potentially be integrate in the PSP stacking model upgrade.

As it was mentioned on the PSP-IPΔ1 description “the staking system was initially designed with a lockup period similar to an epoch length” and I am not sure it can stay unchanged with a lockup period of 7 days.

In fact, with a lockup period similar to an epoch length, it’s not really necessary to distribute rewards to stakers proportionally to their staking length, because it’s not possible to unstake your PSP at the end of an epoch and ape the best APY at the end of the next one (you need to skip an epoch rewards out of 2 if you want to ape the best APY). In this situation, the only one who could ape the best APY are the new stakers and only for their first staking epoch.

In contrast, with a lockup period of 7 days, it’s possible to unstake his PSP after each staking rewards distribution and wait the last day of the next epoch to ape the best APY. To manage this problem it looks necessary to take into account the ratio staking length / epoch length in the calculation of the distributed rewards for each stacker. This parameter permit to avoid APY aping at the end of each epoch and allow in the same time every stacker to enjoy a lockup period of 7 days as voted in the PSP-IPΔ1.

In both situation, it looks fair to slash rewards of stakers who left the pool before the end of an epoch in order to involve stakers for at least an epoch length when they decide to engage their PSP and get rewards.

Could it be discussed and technically integrate in the v2 if the DAO vote for ?

Thanks for your amazing job !

[tokenbrice]

Hey @weehowe thanks for the constructive feedback!

1. Regarding 1/, keep in mind that the share of the overall PSP budget allocated to a given pool depends on the market maker’s performance. So a low-performing MM would get a small budget, most of which is given to the stakers. With the new system, stakers would still get better returns staking on an efficient MM.

2. I like this idea of a chest yet it had evens more complexity to the overall concept. It’s a nice path to explore though at this research stage, but eventually we’ll have to refocus the proposal a bit I think.

3. Keep in mind that the current budget is actually massive: the 6 MMs are sharing 2.5M PSP between themselves at each epoch. Even with the proposed reduction, they will still get attractive returns. But to get insane ones like today, they’ll have to work harder for it.

[tokenbrice]

Hello @elisafly

I agree indeed if we move forward with this logic of objective KPI and minimal KPI like proposed in the opening post, we’ll need a dashboard enabling the community to track the main metrics and their impact on the PSP distributions.

I’ll make sure to include something about this in the implementation details and means of the revised proposal.

[BenYorke]

Hey there @tokenbrice - thanks for the proposal.

Ben here from WOO Network, which works closely with Kronos Research. For reference, Kronos Research is the market-maker for ParaSwapPool9, which is one of ParaSwap’s larger volume pools, and uses WOO Network liquidity to hedge. We’ve spent some time today gathering feedback on this proposal and we appreciate your efforts in driving ParaSwap’s governance forward.

First off, we aren’t against reducing market-maker rewards if it can have the intended effect on ParaSwap’s adoption. That being said, trading volumes are mainly a function of overall market conditions. If industry trading activity remains high across the board, market makers might all hit these fixed volume KPIs. If volumes drop like in May to June, or the Ethereum network gets congested, all the market makers might miss the KPIs. This risk means they may be less incentivized to quote competitively on ParaSwap. For reference, most KPIs in centralized exchanges are relative to other market makers on the platform, rather than a fixed number. Also, since many of these top market makers are quoting elsewhere in DeFi, if the conditions are more favorable then ParaSwap could lose its competitive edge to other DEXes. From the perspective of traders and Paraswap community members, there are too many unknowns to predict how the fixed KPIs will affect adoption.

For ParaSwap, this is a strategic decision. Rewards incentivize MMs to take more risk in order to quote tighter and acquire more flow - this creates positive network effects for ParaSwap. Reducing rewards is good for short-term token confidence, but may result in MMs quoting wider to ensure they don’t lose money. This tradeoff may have long-term implications on the adoption of ParaSwap and its role as a leading DEX in the DeFi ecosystem. Rather than reducing rewards and possibly discouraging some participants, the community could look to expand PSP utility elsewhere to offset inflationary tokenomics.

I’m not an expert in ParaSwap governance (yet), so I look forward to hearing input from other community members. That said, I would caution against hasty decisions, as the long-term implications are hard to assess. If the community would like this proposal to proceed, then we recommend working on establishing KPIs that adjust with market conditions or relative to other MM activity, rather than the fixed KPIs currently proposed.

[Albist]

Hello,
first of all please bear with me as I am a beginner in DEFI and DAO.

On one hand we have users looking for simplicity, and on the other hand, the desire to reward PMMs based on their volume and signaling.
But in the end does the signaling (the number of staker on a PMM) just not correspond to the volume of the PMM because the staker is looking for the best APY (even if the gas fees make it difficult for some to move). And therefore would be duplicating.

If we start from this principle the signaling is not useful anymore (except for the staker to choose the best APY at a particular time).
Can’t we find a compromise where the staker has a simple / unique staking interface with an average APY, but where the PMMs still have rewards according to their volume. And I have the impression that the volumes to be imposed for the rewards would be difficult to measure according to the period, would it not be possible to make it a competition between the PMMs without defining a volume objective? (1st, 2nd, 3rd, etc) with decreasing rewards. This would allow to keep a certain competition and an important volume if the PMMs play the game.

Let’s imagine with the current rewards of 5M (amount that will certainly be revised downwards):
2.5M divided equally among all stakers according to the amount staked.
2.5M distributed among the PMMs according to the volume traded:
1st 800K
2nd 600K
3rd 400K
etc.
The figures are just for the example.

Benefits:

• Simplicity for the basic user who stakes.
• No volume to be defined by the DAO for the PMM rewards at each epoch or regularly.

Disadvantages:

• No gaming / optimization for the most experienced stakers.
• Ranking system instead of a set volume would require PMMs to play the game (maybe impose a minimum volume to avoid the last ones to receive without doing anything)
• Is this technically feasible?

Thank you for taking the time to read me, once again please bear with me and feel free to point out if I’ve said anything wrong.

[weehowe]

@BenYorke brought up a good point: MMs do not control trading volume so pegging their incentives to fixed volume KPIs might not work as expected. Perhaps adjusting MM/staker split based on relative ranking of the MMs or having total PSP budget based on Paraswap achieving a certain share of the overall DEX market would work better?

Anyway, I think the team would need to spend more time to study the potential impact of the proposed before putting it up for a vote. Otherwise we might end up making things worse

[Tenzent]

@Albist

would it not be possible to make it a competition between the PMMs without defining a volume objective? (1st, 2nd, 3rd, etc) with decreasing rewards.

This seems like a very sensible way of getting around the fixed KPI problem Ben brings up. The only thing I would adjust would be to create a volume minimum, perhaps the minimal market makers’ daily average volume over an epoch KPI from brices’ post could be used in combination.

it could also be useful to look at the % of trades that are routed through all the different DEXs on paraswap and factor them in, assuring that PMMs are filling a minimum percent of the total volume ran through the paraswap router.

[tokenbrice]

Loving discussion here, it’s amazing and I’m thrilled to see sensible inputs from all of you including the very first participation of a representative of one of our market makers on the governance forum.

The proposal is bulky, but you did not let this intimidate you, thank you for that! And no worries about the proposal timeline, we do not want to rush such a proposal. I presented it as formalized as possible for clarity, yet it’s still in the research phase for now.

Considering the state of the discussion, I’m thinking about splitting the proposal into two:

1. PSP-IPΔX.A: A first proposal that could get to vote shortly once articulated, to address the reduction of PSP budget per epoch (with the same options as the poll above)
2. PSP-IPΔX.B: A beefier proposal to incorporate the changes proposed to the staking system, once the community aligns.
   Structuring it like this will help to split the votes properly and ensure that someone supportive of the new system but against the PSP budget reduction can express his/her full opinion.

So here is my first attempt at reaching the beginning of a consensus, based on your first wave of feedback to see what this second proposal could look like.

A/ Adjustment of the MM-staker split

Seems like the concept behind this idea is well received and we align on it. The discussion, unless I’m mistaken, focused on how to implement this most efficiently.

My initial suggestion, using “hardcoded” daily average volume objectives for MM was not the most flexible implementation.
Instead, several including @Albist and @Tenzent suggested we use a competitive approach, based on the number of MM and their relative share, for instance with 6 MM (even split = 16.67% each), something that would look like this:

• Top 1: 26%
• Top 2: 21%
• Top 3: 18%
• Top 4: 14%
• Top 5: 11%
• Top 6: 10%

We would need a formula of course; but the gist of the ideas is here: concentrate most of the rewards amongst the top performers to make the staking game more competitive.

I find @weehowe 's idea here pretty interesting too: not all the rewards must go to stakers/holders. We could envision a form of community chest capturing a share of the rewards of the least-performing MM for instance.

B/ Adjustment of the PSP budget for staking rewards

@BenYorke articulated a very necessary point: here again, going for “hardcoded” objectives seems less than ideal considering that the overall volume evolves based on market conditions.

I’m not sure which proxy we can use here to essentially index the overall budget on the contributions brought by MM on ParaSwap, without penalizing them during phases where markets are quiet.

Maybe we could look at the ratio between:

• Total volume processed by MM during the epoch
• Divided by Total volume of trades made on ParaSwap during the epoch (=aggregation + paraswappools)

= Share of ParaSwap’s volume processed by ParaSwapPools/MM

Recap of next steps envisioned for PSP-IPΔX.B

1. The reward budget adjustment will be split into another vote, codename PSP-IPΔX.A
2. We drop the logic of hardcoded objectives: instead the split or distribution are decided based on relative values between MM (->competitive logic).
3. We might maintain the logic of minimal objective; at least for the average daily volume provided by MM.

Thanks again to all of you governance chads for these fruitful contributions, I hope this recap helps!

[Vincent_H]

@Albist

Can’t we find a compromise where the staker has a simple / unique staking interface with an average APY, but where the PMMs still have rewards according to their volume

I wanted to talk about this topic.
Good Job Albist !

• One staking interface for stakers (The staker receives a % according to the volume of all MM ?)
• Market makers receive their reward based on their volume.

Does this keep the competition for paraswap ?

[starny]

Hello Paraswaper
this is my first participation in the forum and even in any DAO … forgive my “incompetence” in advance

I just have one question: why do we have to wait every epoch for the rewards?
can’t we be rewarded every second? (Sorry if I misunderstood how it works)

Because I would have imagined that:
on a basis of maximum $PSP distributed per day (distributed according to which MM provided the most volume)
to this, we add another condition to “boost” the return: if you have locked for 7-14-30 days (or more?) → you get a bonus in APY (the longer you have lock, the more you will receive) BUT also a bonus of vote power (like CRV)

but those who do not want to be locked, they are rewarded every second and can “leave” when they want (but the return will be logically lower)

Why ?

More lock = more efficiency = more confidence in the Protocol
and we also benefit from better voting power which is also important for the confidence of the Protocol
there is also a trust given to the MM
If I strongly believe in the pool7 (for exemple), I can lock it for 1 month, which will be as profitable for the MM as the staker

(forgiven once again my lack of lucidity in DeFi but I am only proposing, we could take my idea and modify it in a better sauce? )

thanks for reading me and I hope I have come up with at least one cool thing for the future

[tokenbrice]

Heya @starny glad to see you made it there! Please, never apologize for getting involved in the shared governance of common DeFi goods!

@starny

I just have one question: why do we have to wait every epoch for the rewards?

That’s a fair question. The epoch is a time convention of our system: it’s necessary because we need to evaluate the contributions of the market makers on a finite time period. However, despite the epoch-based logic, your idea is implementable.

Picture an insurance service for instance: they cannot insure you forever, because the cost of that would be infinite. So to make it practical, they define a time convention (=epoch) to price your insurance onto, for instance, a price per year. It gives a finite bound to the service they provide (= 1year of service) allowing them to price it. It’s a similar logic here expect we’re not pricing an insurance service but evaluating the contributions of market makers over a given epoch.

You could envision a commitment when staking on a MM for a given number of epochs to get more rewards. I wonder what the sweet spot would be: we don’t want the commitment to be years-long neither else it turns into a freeride for the market makers instead of a vote of confidence.