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.
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.
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.
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.
Reward “marginal stakers” (ie, stakers by choice, not by vesting) with liquid SOV at the beginning of each new staking interval.
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).
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.
Wallets with Vested SOV stakes are excluded from these rewards.
Only wallets which have staked by choice (ie, staked previously liquid SOV) are eligible for these rewards.
- 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).
- A script will be executed at the beginning of each new staking interval every second Friday which will distribute liquid SOV to eligible users.
- 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 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.