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:
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).
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.
- Continue rigorous audit of yearn integration and when complete, deploy DAI powered yearn prize pool
- Pilot incentiving “sponsorship” on the polygon prize pool and use learnings to inform changes to POOL distribution on Ethereum
- 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!