The updated version of SIP-24 is now complete, and will be deployed for Bitocracy voting on Monday, July 19th.
Full text:
Liquid SOV Incentive Rewards for Fully Vested Stakers
Description:
If approved, this proposal will:
- Reward “marginal stakers” (ie, stakers by choice, not currently 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 (app. three months).
- Grant the Exchequer (based on the analysis of user / usage data gathered during the program) the authority to cancel, extend, or modify the incentive program for additional 3 month intervals, until such time as the Exchequer determines such incentives are no longer meaningful.The program can be stopped by the Exchequer multisig anytime, but all stakes existing on the contract at the point in time of cancellation continue accruing rewards until the end of the staking period being rewarded. Increases and extensions of stakes, however, will no longer be considered.
Motivation:
- SOV Incentives, as currently implemented in Liquidity Mining programs rewards users with 10 month vesting SOV, with 10% becoming claimable (liquid) per month. Sovryn Protocol Stewards have recognized that rewarding users with vesting 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 Eligibility
- Vesting contract stakes are excluded from these rewards.
- Only wallets which have staked previously liquid SOV are eligible for these rewards.
Technical implementation
- A smart contract will be developed, which allows the user to withdraw liquid SOV at the beginning of each new staking interval every second Friday. Rewards will not need to be claimed immediately, but can remain on the contract until the user decides to withdraw.
- 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 remaining staking duration at any time defines the height of the annual interest rate (APR). The rewards will accrue using the voting weight formula, which means that the APR decreases over time in a quadratic fashion if the stake is not extended. The voting weight formula is explained on the wiki.
The maximum APR will be set to 36.39%. This APR is used for the maximum staking duration of 1092 days. 14 days later the APR decreases to 35.97%, 1 year later to 25.16% until only two weeks are remaining, with an APR of 4.37%.
This setting leads to an average APR of 21% over 3 years, where the return on average is:
- in year one: 33.06%
- in year two: 20.38%
- in year three: 9.57%
Stakes can be extended at any point in time, restoring a higher APR, as long as the rewards program has not yet been cancelled by the Exchequer. After the reward program is stopped by the Exchequer, extensions of the stake will no longer increase the APR.
Game Theoretics
In the case that a user stakes longer to get a higher APR 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 higher APR.
The calculated APR’s are designed to always deliver a higher rate of return than unstaking early and paying a slashing fee would earn, based on this slashing fee table on the wiki.
Example: If a user stakes for 3 years and unstakes after 1 year, they gain 33.06% in interest, but lose 27% through slashing. The user gained 6.06%, but this is less than the the gains for simply staking for one year from the beginning (9.57%).
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 and extend their stake each year to earn 33.06% per year, ~330k SOV would be distributed in interest per year (27.5k 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).