Ethereum Launch Recommended Options

PoolTogether Updates
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Ethereum Mainnet Deployment Options

This post combines learnings from deployment simulations and sentiment from initial discussions to present three different options for configuration and growth that can lead toward a successful PoolTogether V5 launch on Ethereum Mainnet.

These options are not final or entirely comprehensive and alternative deployment strategies are open for discussion.

Evaluation Criteria

The following criteria has been used for evaluating and comparing the different deployment configurations:

  • minimum TVL to function without skipped draws
  • projected prize sizes
  • projected cost of operation as a percentage of yield at min TVL (RNG costs)

Assumed Market Conditions

Yield Sources

We will assume that the TVL will be split evenly between the following yield sources, resulting in an average APR of 5.28%.

Yield Source APR
DSR 8.00%
OETH 3.73%
Aave USDC 6.08%
stETH 3.30%
Avg APR 5.28%

Gas Costs

To ensure the deployment can run smoothly, simulations have been run at a high gas estimate of 100 gwei. According to historical gas prices provided by etherscan over 90% of days had an average gas price of under 100 gwei.

ETH USD Gas
Start Draw Gas Cost 0.044 $149.60 440000
Start Draw ETH Cost 0.02 $68.00 200000
Finish Draw Gas Cost 0.028 $95.20 280000
Total Draw Cost 0.092 $312.80 920000

Primary Parameters and Considerations

Draw Period

A longer draw period is needed compared to L2 deployments due to the higher gas costs for RNG, liquidations, and prize claims. The longer the draw period is, the more capital efficient the prize pool will be. However, if the draw period is too long, the lagging indicators of apps like cabana may fail to entice new depositors and the prize pool may not garner enough attention to properly function.

Reserve Cut

The reserve yield cut is accumulated over the draw period to pay for the RNG costs each draw. It plays a key role in determining the minimum possible TVL for the system to function normally without skipped draws. In addition, any excess yield in the reserve is contributed on behalf of the przPOOL staking vault, earning rewards for protocol stakeholders. If set too low, draws may be skipped; and in the worst case, the prize pool may enter shutdown mode after too many skipped draws. On the other hand, if the reserve cut is set too high, depositors will feel less inclined to contribute yield to the prize pool if not enough of the value is being captured as prizes.

Leveraging POOL

One key aspect to consider is the large liquidity of POOL on mainnet, by both holders and the treasury. The POOL tokens held by the treasury can be leveraged to incentivise deposits in mainnet vaults, thus “giving back” some of the value used to pay for the RNG costs. Depositors could then take their POOL earnings and deposit them into the przPOOL vault to earn a portion of the excess yield back in prizes. If this lever can be adjusted and adapted to market conditions, then a larger reserve cut can be justified by depositors if the rewards outweigh the costs.

The whales on mainnet are unlikely to be swayed by prizes and are much more likely to supply if there are consistent bonus rewards to incentivise their participation. In this sense, a long-term POOL drip could be considered as a way to bootstrap liquidity and prizes.

Deployment Options

Deployment Option Draw Period Share Split (tier/reserve/canary) Treasury Deposit POOL Drip
A 2 weeks 100/100/4 - ~400k / 1st year (long term, halve the amount each year)
B 2 weeks 100/30/4 ~$600k 150k / 1st year (none after)
C 4 weeks 100/30/4 ~$600k -

Option A

This deployment would lean into the relationship between a high reserve cut (which directly relates to a high przPOOL APR) and a POOL drip to compensate. The POOL drip would be set up for the long term (1 year+). The existing TWAB rewards contract would be used at the start and development of a new long term reward contract that specializes in automatically adjusting rewards to the vaults with the most prize pool contribution could be explored for automating the incentives after deployment. The POOL drip would be reduced each year.

Pros:

  • Simple tokenomics: more yield goes to przPOOL, and in return yield contributions are rewarded with POOL.
  • Enticing przPOOL APRs
  • No additional bootstrapping needed
  • Likely to attract large deposits early on
  • Requires a lower minimum TVL to operate since the higher reserve cut provides more value for the RNG
  • Keeps a two-week draw period

Cons

  • TWAB rewards are inefficient on mainnet due to gas and will also have to be 2 week epochs or more
  • Automating the process will require more dev work
  • If the POOL drip stops, the depositors may withdraw due to the high yield cut
  • More yield inefficiency since reserve cut is higher (~30% of yield will go to the reserve at minimum number of tiers)

Option B

This deployment would use moderate bootstrapping from both the treasury deposit and a smaller, temporary POOL drip to kickstart the prize pool into a functioning state. The POOL drip and treasury deposit can be removed at a later date once there are enough deposits in the system.

Pros:

  • Uses the same share split as other deployments which will cause less confusion and analytics changes
  • Bootstrapping is temporary
  • Keeps a two-week draw period

Cons:

  • Still requires some POOL drip
  • Temporarily locks up a large portion of treasury funds

Option C

This deployment extends the draw period to 4 weeks to lessen the protocol operation costs and removes the need for a POOL drip to kickstart the prize pool. The 4 week period may be considered too long for some depositors, but will also result in larger prizes. A six-month grand prize would be recommended for this deployment.

Pros:

  • Uses the same share split as other deployments which will cause less confusion and analytics changes
  • Bootstrapping is temporary
  • Larger prizes
  • No POOL drip necessary

Cons:

  • Longer draw period may lead to less user engagement
  • Temporarily locks up a large portion of treasury funds

Simulations

Deployment Option Min TVL Cost of RNG at Min TVL Cost of RNG as $10m TVL GP @ $10m TVL Small Prize @ $10m TVL przPOOL Annual Yield @ $10m TVL
A $476k 32.47% of yield 0.77% of yield ~$55k ~$3k $163k
B $1.2m 12.61% of yield 0.77% of yield ~$60k ~$3k $58k
C $613k 12.61% of yield 0.77% of yield ~$120k ~$6k $62k

Note that for all deployment options, there would be no przPOOL yield at the min TVL at assumed market conditions since the entire reserve would be used for RNG.

Note that for options B and C, the min TVL listed does not account for the treasury bootstrapping. Subtract the amount of bootstrapping proposed to see how much would need to be covered by other deposits.

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Which deployment options do you support?

(please select all options that you support)

  • Deployment Option A
  • Deployment Option B
  • Deployment Option C
  • Other (will explain below)
0 voters
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While I’d support A and B (leaning more towards B), my ideal deployment would probably be a mix of the two. Something like this:

Draw Period Share Split Treasury Deposit POOL Drip
2 weeks 100/60/4 ~$600k ~200k+

To dive a little deeper into the reasons behind this preference:

  • I like the 2 weeks draw period. I might even have pushed for 1 week in the past since I really don’t mind skipped draws, but ultimately I think 2 weeks is more future-proof. We don’t know what the state of Ethereum L1 will be in a few years.
  • Without consideration of any POOL drip, I think there is a clear argument to be made for the reserve ratio to be larger on Ethereum L1, be it for gas reasons or that it is the native network of the POOL token, and where majority of it lies. I’d push for at least 2x what is set on other networks.
  • I think regardless of the rest of the parameter descisions we decide on, depositing some of the treasury into the protocol (especially value still in versions 3 and 4 of the protocol) makes absolute sense. We can always retrace this decision, but for the purposes of bootstrapping this network it is invaluable.
  • I think some POOL drip would be great to also aid in the bootstrapping! I like the idea of deploying our own halving schedule. I also agree with somewhat correlating this to what we decide to go with for a reserve ratio. I’d push for at least 200k POOL over the first year, halving its rate either every 6 months or a year.
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I am voting for Option C (And Other because I am not opposed to adding a POOL Drip or changing the Treasury Deposit).
But what needs to stay the same is the 4 weeks Draw Period imo.
I really appreciate your good work here and the older Gov Post presenting all options in detail with numbers and all the info!
Still I think it’s a bit understating the gas problem.
Gas costs are a big big problem. Not only for the RNG but also for claims and liquidations.
I wanna point out/mention to everyone else, that the Min TVL is just rly the absolute minimum and not what is needed to be working well.
These amounts could also drastically increase if ETH price goes up a lot in USD. At $10k ETH gas prices would be much higher in USD.
There is no magic cure to avoid the gas costs unfortunately.
I experienced how much the protocol spent on gas costs for awarding in V3 and V4. Now with V5 we are not spending that funds directly anymore but it means lower prizes for everyone.
I know monthly draws can be very long, especially looking at it from the current daily draws that we have on L2s.
But I personally think it’s a rather mild drawback when looking at the benefits that we get for it.

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@trmid - which of these options do you think best enables other apps/protocols to use the PT mainnet deployment as a primitive?

Or, maybe less pointedly, which factors do you think would most influence other devs (for better or worse) to build on the deployment?

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I think that raising the przPOOL reserve cut too much could hinder other projects to build on the protocol since less yield is going to their prize chance and more is going to przPOOL holders. This creates more of a walled garden where you have to participate in przPOOL to get the most out of the protocol.

Alternatively, if the draw period is too long (maybe a month is too long? I don’t have any prior data on this), then that could also hinder development on the protocol since developers usually rely on tight feedback loops and waiting 1 month to see how depositors feel may not lead to the best product iteration.

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Thanks @trmid for providing this background and highlighting the key points. Choosing the parameters is complex, as there are many inter-related variables to tune. I think it’s easier to make a decision by using an evaluation framework.

I want to lean into your mention of minimum operating TVL, because I think that’s what we should be focusing on.

I’m going to:

  • Evaluate each option w.r.t. min op TVL.
  • Make some observations and conclusions
  • Propose an adjustment of the options

Minimum Operating TVL

I believe the key evaluation metric is the minimum operating TVL. That is to say, the minimum amount of deposits such that the system continues to operate.

Given a set of assumptions and chosen parameters we can project the minimum operating TVL.

Once we know the minimum operating TVL for a given set of parameters, then we can:

  • Estimate how much POOL would be required to successfully incentivize that TVL
  • Determine the impact of sponsorship from the treasury

Evaluation Framework

I’ve created a Desmos Graph that allows us to calculate the minimum operating TVL for a given set of parameters and assumptions. A legend is included in the graph.

Let’s evaluate the above options by comparing the minimum operating TVL and the portion of yield captured for reserve.

Option Minimum Operating TVL Reserve Portion
A $1.184m 19.7%
B $3.4m 6.8%
C $1.58m 6.8%

Treasury Sponsorship

Each option defines whether treasury will be deposited as sponsorship. This makes it easier to achieve the minimum operating TVL, because sponsorship lessens the required amount of organic deposits.

Option Min Op. TVL Less Sponsorship
A $1.184m
B $2.8m
C $992k

We can see here that the sponsorship hardly makes a dent of Option B! In Option C the min op TVL is reduced significantly.

POOL Incentives

The provided POOL incentives encourage organic deposits by providing a base level APR. Let’s look at each one and how relates to the minimum operating TVL in terms of APR

Option Incentive APR for Min. Op. TVL
A 11% POOL APR
B 7.2% POOL APR
C 0% POOL APR

Observations

Here is a table that summarizes my observations. I explain each one in more detail below.

Option Minimum Operating TVL Reserve Proposed POOL Incentives
A High minimum TVL Very large 20% reserve cut 11% APR in POOL doesn’t seem like enough
B Very high minimum TVL Small 6.8% reserve cut 7.2% APR in POOL is quite low for an illiquid asset
C High minimum TVL Small 6.8% reserve cut no incentives! uh oh :slight_smile:

Option A

Option A lowers the minimum operating TVL by increasing the reserve. However, once the TVL grows beyond the minimum the POOL stakers will capture more and more yield. 20% is excessive. I agree with @trmid in that we should try to keep the reserve as low as possible.

This option requires over a million dollars in organic TVL in order to operate. It took us a long time to get to $1m in the past, this prize pool might not turn over for awhile.

The proposed incentives would equate to about 11% POOL APR, which may not be enticing enough as an illiquid asset.

Option B

This options lowers the reserve significantly, but it means the min op. TVL is nearly as high as our total OP deposits. The sponsorship helps, but hardly makes a dent in the min TVL.

150k POOL per year in incentives would be a very low APR; I don’t think it would lead to us reaching the desired TVL.

Option C

This option extends the draw period to one month. That’s a very long time! There is no game in the world that takes a full month for payoff!

Additionally, without any POOL incentives it’s unclear why we’d gain traction. Reaching $1m will be very difficult.

Conclusions

  • Treasury sponsorship is helpful, but it’s clear we’ll need to lean on POOL incentives.
  • POOL incentives should run for a long time so that:
    • it’s worth the deposit and withdraw transaction costs to depositors
    • there is sufficient time for prizes to build. Otherwise when incentives end there won’t be a reason to stay.
  • Bootstrapping is temporary; so it feels wise to set the reserve and draw period to what we believe is optimal and ignore the minimum operating TVL. However, we’ll need the minimum operating TVL to calculate what we can afford to pay in incentives.

Proposed Adjustment

I think we can combine aspects of each option for a more optional deployment:

  • Increase our reserve slightly to match industry standards. I think 10% is a reasonable maximum reserve portion (note: it decreases as the number of tiers go up). Beefy is 10%, and Yearn is 20%.
  • Use the shorter bi-weekly prize draws.
  • Lean heavily on POOL incentives to bootstrap by having a target POOL APR of 25%. Without a large prize to draw in depositors, we need strong incentives.
Configuration Detail
Draw Period 14 days
Shares 100/46/4 (caps reserve at 10%)
POOL Incentives Target 25% POOL APR with 860k POOL in incentives over six months

The minimum operating TVL is $2.3m for this configuration . A treasury sponsorship would help here, but I don’t think using our operating capital is worth it.

The amount of POOL is eye-watering, but it’s over six months and will help seed POOL to many whales. Having whales hold POOL could align bigger players with the token; they can bridge it themselves natively to L2s to capture staking rewards, among other things.

Closing

I believe we need to make bold moves In order for this deployment to be successful. Distributing POOL on the token’s native chain will make it easier for everyone to push POOL out to L2s and other uses.

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The snapshot vote for the final launch parameters is here:
https://snapshot.org/#/pooltogether.eth

All POOL & przPOOL on any chain can vote.