SIP-0024: Liquid SOV Incentive Rewards for Staking By Choice

SIP-0024 Liquid SOV Incentive Rewards for Staking By Choice

I am introducing this SIP on behalf of Sovryn Protocol Stewards and The Sovryn Exchequer Committee, in order to address issues raised by community members regarding the imbalance between rewards paid out by the protocol for staking and rewards paid for providing liquidity to the AMM pools.

This SIP was authored by myself and @Ororo, after multiple team discussions how to best address the issue without the need to modify any smart contracts at the protocol level, or introduce additional complexity.

The APR rates for this incentive program were calculated by @maxshapiro23, and approved by The Exchequer Committee.

Motivation:

  1. SOV Incentives, as currently implemented in Liquidity Mining programs rewards users with 10 month vested SOV, with 10% becoming claimable (liquid) per month. Sovryn Protocol Stewards have recognized that rewarding users with vested tokens is not standard in the sector, and that users expect some type of daily / weekly / monthly “return” for investing their assets, in addition to expected future returns.

  2. Sovryn community members have called into question the misaligned financial incentives between providing liquidity to pools, and staking SOV in the early phases of the project when trading volumes are low, resulting in low incentives to Stake SOV, as opposed to using SOV to provide liquidity to pools with Liquidity Mining rewards providing attractive APY’s.

  3. After considering user input, Sovryn Protocol Stewards have searched for a methodology in alignment with user requests which can be implemented rapidly, does not require contract upgrades, and which does not adversely impact the Circulating Supply of SOV. In consultation with the Exchequer committee, an economic model was determined whereby SOV emitted and becoming liquid from the Adoption Fund could be utilized to offset the higher APY’s offered for Liquidity Mining events.

The SIP-0024 text is in its final form, and will go to a vote on Monday, July 11th, 2021.

SIP-0024 Full Text

If approved, SIP-0024 will:

  1. Reward “marginal stakers” (ie, stakers by choice, not by vesting) with liquid SOV at the beginning of each new staking interval.

  2. Grant the Exchequer the authority to utilize liquid SOV from the treasury emitted from the Adoption Fund for this trial incentive program lasting for a period of six staking intervals (approximately three months).

  3. Grant the Exchequer (based on the analysis of user / usage data gathered during the program) the authority to cancel, or extend the incentive program for additional 3 month intervals, until such time as the Exchequer determines such incentives are no longer meaningful.

Reward Eligibility

  1. Wallets with Vested SOV stakes are excluded from these rewards.

  2. Only wallets which have staked by choice (ie, staked previously liquid SOV) are eligible for these rewards.

Economics

  • Current SOV being Staked (user-initiated): ~1m (20% of circulating supply)
  • Current SOV Circulating Supply: ~5m

If we assume that all ~1m stakes for the maximum period to earn 30% per year, 300k SOV would be distributed in interest per year (25k SOV / month) which is less than .5% of the circulating supply per month.

If the amount being staked doubles during the initial period of the reward program utilizing 1% of the circulating supply to continue incentivizing staking by choice would still be relatively insignificant when consdiering the total supply of 100M SOV and the total supply of the SOV Adoption Fund (38.5M).

Technical implementation

  1. A script will be executed at the beginning of each new staking interval every second Friday which will distribute liquid SOV to eligible users.
  2. The liquid SOV will be added to the users’ claimable balances on the lockedSOV contract with an unlockedImmediatelyPercent of 100%. This means the SOV will not be added to a vesting contract like other incentive programs, but will be transferred to the user directly on claiming.

The Formula

The total staking duration, from the start date till the unlocking date, defines the height of the annual interest rate (APR). The formula to compute the APR is:

APR = duration * maxAPR/maxDuration

Where maxDuration is defined as 1092 on the staking contract and maxAPR is suggested to be set to 30%.

Examples: users get 30% APR if staking for approx. 3 years and 10% APR if staking for approx. 1 year.

In the case that a user stakes longer to get a higher APR which is being paid out bi-weekly, without having the intention to actually leave the tokens staked for that long, they would be subject to slashing penalties when withdrawing early according to the quadratic formula which also defines voting power, and the losses due to slashing penalties would outweigh the gains made through the APR of 30%.

Slashing penalty rates are available on the wiki.

20 Likes

I’m glad the team decided to propose this, hopefully it’ll help.

A few thoughts -

Any chance of a one-time retroactive reward drop? For last 3 months or so. :wink:

Instead of linear, I wonder if a decreasing slope equation was considered? Similar to voting power (unless I’m misremembering) which increases with the staking period but at a decreasing rate.

I don’t possess the math skills to verify this, but intuitively it strikes me that there would probably be a point of inflection between the staking period + unstaking penalty + rewards APR where it would still be gameable. i.e. At the right combination of the above, the slashing penalty will be less than the APR gains. e.g. Stake for max period, collect 30% APR for over 1 yr, then unstake and be subjected to a penalty of considerably less than 30% (since you already staked for 1yr+).

I therefore think the penalty needs to be thought through more carefully by someone with better math skills than mine. Though that would require changes to the protocol and would add delays.

6 Likes

As currently written, this SIP confuses the meaning of the word “Vested” and this pull request fixes that confusion. Just to clarify:

Vested means “unlocked” as in “my shares are fully vested, so I can now sell them on the market”
Vesting means “locked” as in “My shares are currently vesting for another three months”
Unvested means “locked” as in “I have 42 unvested shares, can’t wait until they are fully vested”

Vesting and Unvested are synonyms, and Gimp suggested vesting is clearer so I went with that convention.

This is standard terminology for any shares that vest.

8 Likes

We discussed this, and it was decided not to implement. (I was one of those against it).

This inflection point was calculated by @maxshapiro23 and @Ororo.

1 Like

Thanks. I’m not sure I understood how this effectively dissuades people from gaming the staking rewards in a manner such as my example below.

Please go read the slashing penalty rates on the wiki, that were linked in the original post, as well as the SIP.

I did exactly that before I asked my question above. Maybe it’ll help if I expand on my example. Stake for 3 years, collect 30% APR paid out fortnightly. After one year, you’ll have 104 weeks left so your unstaking penalty is 27% and reducing so you’ve effectively gamed the system for a net benefit of 3% p.a. There are probably combinations of such a strategy where it’s even better than 3%.

Thank you to all who contributed to the solution. It seems fair to me. Great job!

As to Aidonaks comments above, I disagree. If you collect 30% APR for a year and pay 27% slashing for a net of 3%, you’ve earned 3% for 1 year of staking, whereas you could’ve earned 10%. Maybe there are very small games that someone can play if they try hard enough, but there is no material flaw that can be exploited. And no solution is 100% perfect/fair to everyone.

Let’s move forward with this!

And while I would love for it to be retroactive, because it would put more SOV in my pocket, I think it is a good precedent to set to not make a change like this retroactive.

5 Likes

It would be nice if this was implemented with backpay for The day 1 stakers. I staked my whole bag (515sov)max length and got $2 for 1.5months… I then unstaked and took the 30% slash. There should of been more transparency implemented before staking was enabled. As in having the rewards ui done before allowing ppl to stake. When i staked i didnt think it was going to be blind for months. Day 1 stakers should get back pay. @exiledsurfer why were you against it?

3 Likes

While I understand the desire for retroactive rewards - I am primarily appreciative of the fact that the team has heard the core of the community’s concerns and is proposing a solution that does not undermine the existing architecture. I am 100% supportive. Would I like more :wink: of course. This proposal - however - seems very solid on its own and demonstrates the community engagement that will make this platform successful! Go SOVRYN!

4 Likes

A 3-5% difference is not an insignificant incentive to game the system. Plus my example was after 1 year, what if someone early unstakes after 2 years vs a 3 yr initial commitment? The difference goes even higher, where they’ve earned 60% total vs an unstaking penalty of only 18%.

This is a good point and if it’s considered by all and then decided that the difference is small enough to not warrant the hassle of changing the contract + delaying the rewards, etc, then that’s perfectly fine. We can leave it as-is.

In this case, the earnings are 60% - 18% = 42%, vs. a 2 year stake of 40%.

However, the SIP as written only approves the incentive for 3 months, with additional 3 month periods at the discretion of the Exchequer. So it is possible that you only earn 15% in the above example. You cannot guarantee the remaining 45%.

I think it’s fine as is.

5 Likes

Your analytical thinking skills are clearly better than mine. :grinning_face_with_smiling_eyes: Point conceded.

Also, @exiledsurfer was the first point of the motivation addressed within this proposal?

[In reply to exiledsurfer NO Private Messages]
I am happy this proposal is being brought up. In my opinion Sip21 needs to be revised and add retroactive rewards for last 3 months for sov stakers. I was someone who staked last 90 days and missed out big on all the different liquidity farming. I would have around 7k usd more in sov if i had not staked and instead added liquidity. The whole time im kicking myself debating if i should unstake and take the 30% fee. Again 30%slashing fee becuase I added stake for over 2 years. Im reading this has already been brought up on this thread, the only reason I see why Sovryn might not want to are further dilution concerns. However I think a good compromise is to have retro active reward be fully vested for 1 year. (or some other form of vested is fine)

1 Like

This proposal is great and thanks for those who pushed it forward based on community discussion. I will be voting to approve with this proposal, pending any new information.

But I do have a selfish curiosity, @exiledsurfer why were you against (or rather what is the argument against providing a retro-active drop?

3 Likes

Yes, this incentive program rewards Stakers on a biweekly basis with LIQUID SOV, not 10 month Vested SOV, as is the case with Liquidity Mining rewards, if you read the technical implementation details:

This was a key part of my argumentation while debating this internally - that Stakers should be rewarded with liquid SOV for the “instant gratification hit” (bi-weekly in this program) that the platform lacks, and which competitor tokens / platforms offer.

The logic is the following:

-liquidity mining rewards are 10 month vested sov which prevents immediate earn / dump behavior, and incentivizes long term thinking / investment in the platform / protocol, and

-staking rewards are liquid sov to compensate for the lockup of capital, foregoing the higher liquidity mining rewards (currently around 100% APR)

This enables Stakers to “take profits” on a biweekly basis by selling into the market if they like, or using that SOV to earn Liquidity Mining rewards, or, to turn around and Stake the earned SOV, and compound their earnings even further.

5 Likes

Very simple: I don’t want to set a precedent that Stakers can retroactively give themselves money by voting.

We, as stewards, recognized that the incentives were out of balance, and want to correct that moving FORWARD from this point in time, as well as to incentivize NEW stakers, who are satisfied with a low-time-preference earning scale of 30% APR when staking for three years as opposed to the higher APR’s offered for Liquidity Mining rewards - again with the benefit of receiving liquid SOV for Staking as opposed to Vested SOV for LM.

Keep in mind that ALL Stakers By Choice will be receiving rewards during this program; they just won’t earn them for the period between when the program starts, and when they originally staked, they’ll only be receiving them on a bi-weekly basis from the point in time forward from when the program starts.

9 Likes

Hmmm…I hate when rational points work against my self-interest.

Thanks for the clarification.

3 Likes

@exiledsurfer that makes perfect sense. Thanks for breaking it down OG