Overview
@Leighton started a discussion in Discord about a veToken model for POOL. There was a general back and forth between community members, but I wanted to share my thoughts in a longer format and outline what I believe are the top priorities for the protocol.
Objective for PoolTogether in 2022
At Nexus Mutual, I use OKRs, to drive Mutant Marketing forward, while keeping the marketing working group focused so we can accomplish the objective we set every two quarters. OKRs serve as a framework to keep a group or organization focused with clear, measurable yardsticks to measure yourself by. As my colleague in Mutant Marketing recently reminded me, “Your OKRs should be a daily meditation. When you think about the path to achieving your key results, it should be obvious what is and what is not important. Hitting the metrics that make up your key results gets you closer to realizing your objective.”
So, I’ll pose a question to the community: what is our objective for 2022?
My answer: Establish PoolTogether as critical infrastructure for community engagement in DeFi.
Key Results
- Grow TVL from $27m to $100m within the next six (6) months
- Add three new yield sources that increase underlying APY by 2-3x that of Aave’s
- Increase the number of POOL holders form 7,964 to 20,000
- Generate five (5) conversations with centralized exchanges that could integrate with PoolTogether
- Create a Prize Pool as a Service (PPaaS) product and onboard ten (10) protocols that can provide token emissions via V4 prize pools
Now, these are just some examples that would position PoolTogether as protocol that allows other DeFi protocols to use our infrastructure to drive engagement within their own communities by creating prize pools. Every DeFi marketing working group could use the delegated chance to win feature, token emissions could be done through prize pools, integrations with CEXs help us increase TVL/revenue, etc.
Going back to basics might be the best way to determine where we want to go in the next year.
PT Inc’s roadmap for 2022 has a lot of deliverables, but we lack metrics we can measure in 3-months, 6-months, etc.
This is a larger conversation we should have, but I’ll focus on the proposed vePOOL tokenomics suggested in Discord.
I read the conversation about POOL tokenomics, vesting POOL, having a “vePOOL” model to allow for people to “bribe” or voting in govnernace to direct liquidity to their chain, their yield source. Here’s my long thread response.
Let’s ignore the correlation to equities markets, as buybacks, etc., are often applied in DeFi, but the time to market for an IPO is much different than the launch of a token in DeFi.
Current POOL tokenomics
POOL is a pure governance token that can be used for voting on mainnet. We’re looking at gPOOL, which will allow for cross-chain governace. This will be a big step, as our current governance process isn’t accessible to small fish.
Potential Tokenomics Models
In the Discord thread, we’ve talked about using a veToken model, which allows users to lock up their POOL to participate in governance and extract value from the protocol in some way. Leighton suggested we allow networks and/or protocols to buy vePOOL and direct POOL emissions to their protocol’s prize pool on a specific chain. This provides a potential benefit for a network/protocol.
Leighton also highlighted the two top priorities for PT and any protocol:
Growth
Network effect
There was also an idea to allow users the option to receive their prize in POOL tokens. I’m fairly certain there are regulatory implications for allowing swaps directly at the frontend level, but I’m not a lawyer, so I’ll refrain from saying any more about that.
I’ll break down my review of the proposed model below.
Reserves and POOL Emissions
The narrative behind PoolTogether is the power of the flywheel, or the perpetual growth machine that powers the protocol foward, earning more revenue for the treasury, increasing the size of prizes, and driving growth in reserve earnings. Our current issue is that we haven’t yet achieved a level of growth in V4 that makes PT profitable, given we’re subsidizing current prizes.
Growth is still very important, but we should consider, in the short term, what we need to do to achieve growth and become profitable.
I think this proposed token model could potentially help us in the future with some modifications, but in the short-term, I think it will slow the flywheel rather than get it spinning faster.
CRV Tokenomics
If you head to the Curve Fi docs, they clearly state the purpose CRV serves:
The main purposes of the Curve DAO token are to incentivise liquidity providers on the Curve Finance platform as well as getting as many users involved as possible in the governance of the protocol.
Source: https://resources.curve.fi/faq/the-crv-token
And why has CRV become extremely desirable? Because people build on top of Curve and utlize the deep liquidity in its pools to bootstrap their token’s own liquidity. The majority of CRV rewards are directed at stablecoins like MIM, UST, FRAX, LUSD, etc.
Yearn has accrued a large amount of CRV, but Convex Finance owns the majority of CRV in the market, which is why they are able to offer such high yields on staked crvLP tokens. They build a business by acquiring CRV, building on Curve, and taking a cut of rewards, while providing users a boost.
But let’s not forget that this hasn’t always improved the value of the CRV token due to the inflationary nature of the token. Many protocols that farming crvLP tokens for fees + rewards sell CRV to boost their yield.
vePOOL
While many think the veToken model is applicable to many different protocols, the truth is that it acts as an incentive to attract liquidity to Curve, and veCRV is very, very, very successful in achieving that goal.
But would vePOOL with the stated functionality (i.e., directing rewards to a certain chain, yield source)? I don’t think it would, and I don’t think allowing a protocol to direct emissions to their prize pool would be healthy for PoolTogether.
Directing Emissions to a Chain
If we had $100m to $1b in TVL, this could be a benefit for a network, but we’re likely going to see growth in TVL across chains and, inevitably, users are going to chase yields from network to network. Given our current TVL on the following chains:
- Polygon: $23,976,923 | Polygon has $4.5b in TVL | PT TVL makes up 0.5328% of Polygon TVL
- Avalanche: $2,193,212 | Avalanche has $8.19b in TVL | PT TVL makes up 0.02678% of Avalanche TVL
- Ethereum: $1,315,833 | Ethereum has $114.3b in TVL | PT TVL makes up 0.001151% of Ethereum TVL
While I like the idea, it seems unlikely that a network would buy POOL, stake, and vote to direct incentives to their chain. Large networks that are truly decentralized wouldn’t be able to do this, and smaller networks should be paying us in token subsidies to deploy onto their network. I’d rather PoolTogether do a buyback than some upstart network direct emissions to their chain, which would then create an obligation to deploy the protocol on that chain.
If this is not the intention of the vePOOL tokenomic structure and it’s limited to protocol approved deployments via governance, we’re creating a token model that could be abused in the long-term.
Directing Emissions to a Prize Pool
This is likely the most problematic aspect of a vePOOL model that allows a protocol to direct liquidity to their prize pool. The prize pool network would distribute prizes evenly, regardless of yield source. If we were to use a vePOOL tokenomics that allowed a protocol to direct emissions to their prize pool, we’re now giving a protocol the option to reduce our operating revenue by directing capital to a yield source with lower APY/APR.
Say we had an Aave V2 prize pool and an mStable prize pool:
Aave prize pool: USDC
- Mainnet APY: 2.35% + 0.42% (AAVE rewards)
- Polygon APY: 2.61% + 1.00% (MATIC rewards)
mStable prize pool: USDC
- Mainnet APY: 12.58% + 3.73% (MTA rewards)
- Polygon APY: 5.85% + 4.38% (MTA rewards)
Mainnet Reserves + Rewards
mStable on earns $12,580,000/yr w/ a $100m TVL
Aave on earns $2,350,000/yr w/ a $100m TVL
mStable reserve revenue (assuming 50% reserve): $6,290,000
mStable would earn the protocol $3,730,000 in MTA rewards
Aave reserve revenue (assuming 50% reserve): $1,175,000
Aave would earn the protocol $420,000 in AAVE rewards
Polygon Reserves + Rewards
mStable on earns $5,850,000/yr w/ a $100m TVL
Aave on earns $2,610,000/yr w/ a $100m TVL
mStable reserve revenue (assuming 50% reserve): $2,925,000
mStable would earn the protocol $4,380,000 in MTA rewards
Aave reserve revenue (assuming 50% reserve): $1,305,000
Aave would earn the protocol $1,000,000 in MATIC rewards
Unintended Consequences
Allowing Aave to buy POOL tokens, stake to vePOOL, and add incentives could increase depositors into their prize pool, but reduce reserves for the protocol. This goes against the best interests of the protocol.
CRV drives growth in liquidity, which increases revenue for the protocol. Regardless of CRV’s value, it attracts more liquidity, boosts TVL, and CRV has made Curve the #1 DEX in DeFi. I don’t think this is the right approach for PoolTogether, as we’re looking to grow TVL but requiring protocols that act as a yield source for PoolTogether to buy TVL from PoolTogether would most likely result in unintended consequences, like protocols not wanting to serve as a yield source.
Because we’re building on top of other protocols, we should create strong relationships and find ways to use POOL to attract TVL, drive growth, and increase our operating revenue. But we should find ways for other protocols to build on top of PoolTogether, as the prize savings network we have is a valuable piece of infrastructure for community engagement across DeFi and gives users on a CEX a way to earn yield on small deposits with a minimal cost.
vePOOL and Governance Attacks
Again, assuming we allow vePOOL holders to dictate rewards, we can also assume vePOOL holders could vote on proposals to use new yield sources in a decentralized protocol. Let’s say I’m a protocol who wants to grow my TVL, and I see PoolTogether as an easy way to do that. I can buy a large amount of POOL, stake to get vePOOL, create a proposal, bribe other vePOOL holders and/or launch a proposal during times of voting fatigue to approve a new yield source. Now, I direct emissions to that pool that has a questionable amount of risk in the underlying.
We’ve already seen this play out on Curve with the Mochi bribe that was deemed as a governance attack: https://www.coindesk.com/business/2021/11/11/curve-wars-heat-up-emergency-dao-invoked-after-clear-governance-attack/
How Do We Increase the Value of POOL?
If we’re looking for an adjustment to POOL tokenomics, then we can create gPOOL, incorporate a vesting mechanism, and direct POOL emissions to ve-gPOOL holders if they vest their tokens for a set amount of time. Maybe it’s vesting like Curve does with a 1/2/3/4 year lock time. Maybe it’s voting weight like mStable does with MTA and MTA/WETH BLP: mStable Governance
But a bribe mechanic would lead to bad outcomes in the future, imo.
We need to keep our eye on the prize here. Driving growth and increasing operating revenue should be our only two goals at the moment. The network effect is tied to growth, so that will come with time.
Achieving growth is going to cost us money, but we can’t afford to slow growth. I believe the Marketing Working Group will play a large role in helping us drive growth, and I think we should talk about how we are going to achieve growth rather than trying to amend the tokenomics when we’re providing subsidies for prize pools.
Increasing operating revenue means identifying yield sources that earn us 2-3x the APY we are earning with Aave. Higher APY means a lower TVL requirement to end the subsidies. And this also leads to larger prizes. If we can partner with two yield sources, we can tap them for co-marketing efforts to reach more users. I also think we need to find ways to onboard more users into DeFi, as PoolTogther should be the portal into DeFi for most people.
Partnerships are going to be key for growth in 2022:
- Prize Pools as a Service (PPaaS): creating a prize pool for your governance token would be an easy way to drive community engagement. Hold a weekly call and announce the winners! You can build it across networks and use V4 architecture to level the playing field.
- CEX Integration: identifying a CEX that can connect us with deep liquidity held by exchange users. Coinbase is the white whale for us, but any CEX that allows us to reach users who aren’t active in DeFi would be a boon for PoolTogether
- Delegated Chance to Win as Free Engagement Mining: once we have a distribution contract ready and someone can delegate $50k across multiple wallets, we’ll be able to provide that service to every marketing working group in DeFi. Instead of incentivizing grassroots advertising on social media with governance tokens, do it with a delegated chance to win for a set amount of time. This would save marketing teams money and make engagement mining fun for participants.
Once we determine the best way forward to drive growth, the rest will fall into place. Driving growth and operating revenue is our mission for 2022. I don’t see the benefit of altering existing tokenomics besides the gPOOL initiative in the short-term, as it doesn’t contribute to growth in TVL and revenue, nor does it help us achieve network effect.
I love PoolTogether, and I want 2022 to be the year the prize pool network became the gateway to DeFi and financial freedom for users around the world. I’m hoping we can have a conversation that puts us on that path.