PoolTogether

Improving Incentives

There has recently been a lot of discussion on how to best optimize the protocol incentives. I wanted to create a forum post to gather a few points all in one place and propose some concrete next steps.

First I want to address Yearn specifically. Part of this discussion has been prompted by the growing number of deposits Yearn has in PoolTogether. For context, Yearn currently has ~$54 million deposited between the Dai and USDC prize pools. In the USDC prize pool their deposits only represent about ~22% of the total deposits, in the Dai prize pool their deposits represent ~60% of the total deposits. This has resulted in a narrative that Yearn always wins or is somehow taking advantage of PoolTogether. Although I do think things can be optimized, this narrative is not correct and the benefits of the Yearn deposits are being ignored. So let’s start by summarizing the benefits of the Yearn deposits:

Yearn Benefits PoolTogether and POOL hodlers by:

  • 50% of the interest accrued on yearn deposits is kept in the protocol and deposited into the prize pool sponsorship. This value helps build a long term protocol moat and also is controlled by POOL holders (see here for details)
  • Deposits from Yearn are a positive signal to the ecosystem. It means Yearn views PoolTogether as a secure place to store their funds and one of the best places to earn yield on them.
  • Yearn’s deposits make the prizes much larger which enable smaller depositors to have a chance for larger prizes. Yes, Yearn also has a high chance to win but like all other depositors it is proportional to their deposits.
  • Yearn does sell 90% of the POOL they accrue and at face value this is seen as negative but a few points to consider. 1) POOL distribution rates are fixed, if Yearn withdraws all their deposits it does not necessarily mean less selling of POOL it just means current depositors would get more. 2). The rate at which Yearn is selling is decreasing because POOL emissions are slowing. This means the protocol is getting more value for less POOL. 3). Yearn selling enables those that want to accumulate POOL to do so at lower cost while emissions are high.

As a thought exercise, let’s assume Yearn removed all of their Dai deposits right now. The amount of Dai in the prize pool would drop from $50.8 million to $20 million. The weekly prize would drop from $26,000 to $10,400. The weekly amount of money going to the protocol reserves for Dai would drop from $12,400 to $4,900.

On the upside, the effective APR to the remaining depositors would increase from 8.19% to 20.7% and presumably that high APR would bring new depositors in but there is no guarantee on how fast those deposits come and those new depositors may also be selling POOL. So potentially we end up in the same net situation.

Of course, Yearn would not be winning prizes but this isn’t as good as it first sounds. The second largest depositor in the Dai prize pool would now have 35% of all deposits and therefore still have a very high chance to win and unlike when Yearn wins, the prize wouldn’t be split among all their vault depositors!

This analysis is simply to support my opinion that Yearn’s participation in the protocol is net positive. However, as I stated in the intro, I also think there is room to make this even better:

Improving Incentives
The core value proposition of PoolTogether is offering depositors a chance to win large multiples of their deposited value without risk. This is what PoolTogether uniquely offers that no other DeFi protocol does. The best story of this is the depositor who put in $73 and $43,000. Some level of APR on a PoolTogether deposit is important but ultimately there are TONS of protocols that focus on this and PoolTogether is in a much stronger position by integrating and not competing with those protocols.

Given this is our core value proposition, there are two things we can do to strengthen it 1) get higher yield on deposits which leads to larger prizes on the same amount of capital and 2) improve the odds of winning for small depositors.

The good news on point 1 is there is some low hanging fruit to improve yield. If we integrate with Yearn for yield on Dai we will be getting 2x the yield we are currently earning via Compound. Our Yearn yield source integration is done and is being audited.

On the second point the most powerful tool we have is to use POOL distribution to incentives sponsorship instead of normal deposits. This would should mean that a lot of capital would move to “sponsorship” and still contribute interest to the prizes without being eligible to win.

Additionally, we also now have pods which enable users to group their deposits and improve their odds while still having a chance for small prizes (assuming a pod doesn’t grow to large).

Improving Optics
I also want to note a big problem here is simply optics. We need to get out the stories about the small depositors winning and also share how the large depositors are contributing long term value to the protocol.

Next Steps

  1. Continue rigorous audit of yearn integration and when complete, deploy DAI powered yearn prize pool
  2. Pilot incentiving “sponsorship” on the polygon prize pool and use learnings to inform changes to POOL distribution on Ethereum
  3. Continue work on educating users that not only whales win and the long term benefit of whales depositing. Let users who want a higher chance to win know about pods.

In addition to these steps we can also consider introducing vesting into POOL distribution.

These are good problems to have! I am looking forward to optimizing incentives so we can reach our goal of $1 million weekly prize more quickly!

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Something I’d like to point out to people who are fearful of losing tvl with a move to a sponsorship drip, that creates an arbitrage opportunity. If people leave then the apy will spike and my feeling is that will be quickly be filled until we reach a similar apy to current rates. There may be people on the sidelines who know of PoolTogether but did not get in early enough. They are waiting for a better opportunity to enter the pool so they don’t dilute their own yield. There are a ton of places to earn yield in defi. Right now we’ve reached a bit of a plateau due to opportunity cost of yield elsewhere. But if we switch to sponsorship drip and people leave the yield will go up. Leighton has mentioned this and I want to emphasize this point. If our apy spike to 30% then we will attract users who see not being in pt as an opportunity cost. In other words I am confident in the free market, therefore, I see zero downside in moving to a sponsorship drip. If we get a string of small fish winners after the switch we can market the hell out of that. It is by far the best marketing angle we have to attract unique retail and non crypto people to the protocol.

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Personally think we can go all in with this similar to the reserve rate change. But imo it’s better to pilot it on the mainnet DAI if you want some evidence of how the change effects user’s interactions. Whatever you learn from polygon can’t gain the nuanced information you’ll get from trailing it with a stablecoin on the ETH mainnet. So in effect, you’ll see something happen and be not much the wiser about what happens when it happens on mainnet.

The biggest difference here is the gas costs. You won’t see the same behaviour of smaller users on ETH compared to polygon since it is relatively expensive to move pools. I think it is obvious what the larger players will do in general. Some will remain or join the main pool because the APY will be quite attractive relative to the sponsorship pool, but in general it’s less optimum if the APYs are similar between both sponsorship and main pools. I don’t think any testing is needed to prove that assumption.

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We should also try some strategy so that the POOL tokens are not automatically sold in the market, but are reinvested in the protocol, perhaps we should improve the POOL insents of POOL and that they are the destination of these tokens to obtain more benefits in a way composite, without getting rid of POOL. Prizes in other tokens, small returns in stablecoins, may be a better idea than just selling POOL.
Granting dividends like traditional finance could be a way to reduce the sale and unincentive the holding company.

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I totally agree with this. i do not think much information will be gained from trialing on polygon. i think the USDC pool is where we should make this change. we want that pool to get to million dollar prizes. per my points above, i do not think this change will result in an overall loss of funds for the protocol.

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Pooltogether has faired very well during this “mini bear” market compared to other protocols. I think it’s easy to look at the recent lack of growth and think something needs to change. The growth will come as we add new pools and the market gets back on track. Growth can also come from improving the utility of the POOL token and thus increasing returns and attracting more depositors. Protocols I am familiar with like Badger and UMA have lost 40+% of TVL whereas we are currently sitting close to our ATH in TVL.

It is understood that we are dependent on whales like yearn to fund our prizes and they deserve to get a fair share of the prizes. What I have been fighting for is just having some kickback to smaller depositors as well, even if it is only 10K USD per week to start. I think knowing that there is a prize that everyone has a good shot at will boost morale and draw in more depositors. While the proposed change improves odds to win it forces small to medium depositors to choose between making a financially responsible decision and earning interest on their money or making the irresponsible but fun choice of gambling on the prize.

Under the current system, even depositors with only $1000 in can make 8% on their deposit and have a chance to win, if we throw in the chance to win a per wallet weekly prize it makes it even more appealing. I want to continue to be modelled as a better bank and no loss lottery and not switch to a system where most small depositors make nothing on their deposits.

Summary:

  • We are in good shape considering the state of the market and this drastic change is risky and unnecessary.
  • Whales are good and have earned their big prizes.
  • We should strive to be a smart and responsible place for all sized depositors to lock their funds.
  • Best way to grow is to improve POOL token utility and add a new prize with equal opportunity for all sizes of depositors.
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Excuse me if that’s already been discussed but I remember reading here or on Discord about an idea to award long-term depositors with higher chances of winning.

For example, person A who deposited $ in a prize pool a year ago and hasn’t withdrawn to have a higher chance of winning compared to person B who deposited $ in the same pool yesterday, last week or last month.

I believe this will motivate small depositors to not withdraw their investments in the long run.

However, I’m not a developer and don’t know if such a mechanism is technically possible.

What do you guys think?

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I think you bring up some excellent points. I’ll respond to the points you summarized.

We are in good shape considering the state of the market and this drastic change is risky and unnecessary.

It’s great to remember that given market conditions and comparable protocols PoolTogether is faring well! However, I do think we can do even better. The fact of the matter is that the largest depositors care very little about winning prizes but have the greatest odds. The smallest depositors care a lot but have the smaller odds. By separating these two incentives we can enable the different users to maximize what they want.

I would also note that although the metrics are good right now I am concerned about the narrative. If a narrative is established that “only whales / yearn win PoolTogether” that will not be good.

Whales are good and have earned their big prizes.

Whales are good but if we can have the whales and not have them winning that is even better!

We should strive to be a smart and responsible place for all sized depositors to lock their funds.

YES! I agree with this 100% and I think long term offering some APR (either in POOL or another token) is important. However, I think right now splitting them completely will give us a more clear baseline to understand.

Best way to grow is to improve POOL token utility and add a new prize with equal opportunity for all sizes of depositors.

I love the equal opportunity prize pool! I think that would also be a good addition and it is a possible solution that should be considered.

Another great idea! This one though would be very difficult to implement technically. I think there are other ways we can achieve the same end goals.

I agree with the ‘sponsorship drip’ idea.

I think we should also consider extending the term of one of the stablecoin pool so that there is no redemption until the prize is >$1M so we can leverage that meme for marketing.

I also agree with @leighton on yearn. It would be no different if Dharma gets us 1m followers who all sell their POOL rewards. Although on second thoughts, the latter option won’t be as efficient as yearn. Think about it this way, if you have $1M in a gift card, you won’t forget. But if 1M people have $1 in a gift card, you can count on a non-trivial number of them forgetting which is a win for the protocol.

I would have thought that the time-weighting idea won’t be hard to implement given that we use something similar to determine when tokens can be withdrawn without penalty.