TLDR: Reducing the treasury subsidy of prizes can be achieved by reducing the total prize distribution AND from deposit growth. This post looks to do both, targeting a ~35% reduction in total prize distribution to $4,732 and a goal of growing TVL by $20 million. Growth can be unlocked with the upcoming Optimism deployment, welcoming depositors to Ethereum, and tiering prizes specific to each chain. The post asks the community if Ethereum should be accommodated and if we should change the prize cap to one per day to move away from a yield farming mindset.
There is strong sentiment in the community that we should further reduce our effective subsidization of prizes. However, the mechanics of V4 do not make this as straightforward as people might expect. With PTIP-66 we looked to reduce the subsidy per day, from $6k to $2k, by reducing the total value of prizes distributed. Note that
subsidy = treasury spend - yield generated by deposits. If the treasury spend remains constant and yield generated by deposits decreases the subsidy subsequently increases. Our yield generated depends both on the total amount of deposits (TVL) and lending rates from our yield source (currently Aave). Since our last update the yield from Aave for lending USDC has unfortunately decreased. Right now the majority of our deposits are earning 1.2%. In addition to lower yield, depositors have withdrawn from the prize pool (less TVL). Both changes are not directed by us, but have a direct impact on our bottom line.
Example for illustrative purposes
- We have 30 million TVL, and are earning 2% while distributing 3.3 million in prizes per year (11%), our subsidy is 9% on 30 million, or 2.7 million per year.
- We reduce prize distribution to 2.1 million per year (7%), and with TVL and yield consistent our subsidy becomes 5% on 30 million => 1.5 million (a 44% reduction in treasury spend!)
- But depositors withdraw in reaction to the lessened prizes taking TVL to 21 million (prize yield moves to 10%) and Aave yield drops to 1.2%. Now our subsidy is 8.8% on 22 million deposited, or 1.94 million per year, and most notably our growth is going in the wrong direction.
This is all to say, that simply reducing the prize distribution value is not a guarantee of reducing the subsidy in tandem. Both TVL and yield generated are inherent to the equation. We should be careful not to simply reduce the prize distribution and watch Poolers leave until the average prize return (APR) rebalances to the previous market demand based rate. Fortunately on our yield side the current Aave yield environment can only go so much lower, and while we should explore other yield sources we can leave that for another post.
A new goal for growth
We can effectively reduce subsidy spend by growing deposits and thus growing the yield generated by deposits that is used to payout prizes. Where can we grow? Optimism! With our plan to deploy on Optimism, using Aave V3 as a yield source, we have a unique opportunity to see new growth in the protocol. We also can expect Aave on Optimism to be bootstrapped with OP token, boosting the yield from current abysmal levels. On Avalanche, for example, Aave V3 yields around 3% currently inclusive of AVAX incentives.
So, let’s have a goal. In 8 weeks time from deployment we will strive to see a growth of $20 million in deposits to the protocol.
How will this impact our effective subsidy?
Current TVL: 26.5 million
Current Yield Generated Per Year: 331,250 (@ 1.25% with majority of TVL on Polygon Aave V2)
Prize Value Awarded: (7,180 * 365) = 2,620,700 per year
Dropped Prizes: -13% (341k)
Net Prize Distribution: 2,280,000
Annual Subsidy Cost: 1,948,750
Growth Goal TVL: 46.5 million
Growth Yield Generated Per Year: 331,250 on current deposits + 600,000 from 20 million @ 3%
Net Prize Distribution: 2,280,000 (the same)
Annual Subsidy Cost: 1,348,750 (30% reduction)
Having achieved the growth, we can look at reducing USDC subsidy further in tandem with the addition of TWAB rewards of OP and/or POOL
How will we get there?
- Presenting a unique opportunity for deposits on Optimism where apps are limited but interest in using the L2 is high
- Reconnecting with our Ethereum centric audience who may have opted-out of PoolTogether since V4 launch on Mainnet. Though these Poolers still align with our values and find Optimism to be an inviting place to give PT another try with magnitudes lower gas cost and inherited security guarantees
- Marketing this opportunity as an extremely low risk fun way to use Optimism and win.
- Potential for blast-off with Optimism incentives for PT depositors and increased deposit yield with OP incentives from Aave
– Prize Tiering –
Chain specific tiering
With V4 we have been able to distribute tens of thousands of prizes per week instead of the 5 prizes per week our V3 USDC pool saw. We experimented with prizes as small as a dollar, and our biggest grand prize has been $2500. We are exploring a curve of protocol perception and experience where more prizes bring faster results to depositors and less prizes enable bigger amounts per prize. On one side of the curve too many prizes becomes a wonky yield farm and depositors focus on average prize yield and lose sight of a core value proposition of the protocol - a chance to win an outsized return on a deposit. And on the other people feel they never win, or that only the whales win. We are still finding our balance, but different chains enable us to cater different approaches all with one multi-network prize pool.
Consider gas costs of each chain
Gas is an important consideration with prize tiering. It is bad user experience for someone to win $5 and pay $2 to claim it. At ~50gwei on mainnet, and ETH price of ~$2,000 we can estimate that a prize claim on Optimism will cost $1-$2. The effect is net-less prize value to Poolers. $2 gas on a $5 claim is a prize net of $3, compared to $2 gas on a $50 prize netting $47. As a percentage the gas cost is 40% compared to 4%. The varying chains with their respective transaction costs bring different types of depositors that we can expect hope for different outcomes. A $5 depositor happy with winning $5 compared to a $10k depositor winning $5 and having a funky farming experience. We can see how this lands on different networks where the median deposit currently on Avalanche is over 3x that of Polygon. With this in mind we can build prize tiers that reflect the expected transaction cost environment of each chain.
Polygon has lower fees and is optimal for smaller depositors and also smaller prizes. We can lean back into small prizes, bringing back the $1 prize for Polygon Poolers.
On Optimism and Avalanche we expect a higher median deposit. We want excitement in the prize wins and recognize gas to be a cost to prize value. We can follow the Optimism team’s lead and lean into the meme numbers with 48 prizes of 69 USDC and a grand prize of 1420 USDC.
Which brings us to a higher-level question for the community, Should V4 be encouraged for Ethereum users? Poll and considerations below
Gas for claiming one prize can be $10-$100 on Mainnet Ethereum depending on network conditions. This has thwarted our adoption of V4 on mainnet where 60%+ of DeFi TVL still resides (All Chains TVL - DefiLlama). Although other chains are starting to take market share and L2s present a clear solution to Ethereum scaling we should take a more clear direction on Ethereum. Do we want to grow deposits there, or not? We could adjust the prize tiering specifically for Ethereum so the smallest prize is, $1104, which would make all prizes well-worth claiming. Or we could take a more clear public position of not wanting to encourage depositors on mainnet - going as far as closing the pool to new deposits.
- Yes let’s build for Poolers on Ethereum
- No we do not need to support Poolers on Ethereum
Tiering By Network
Prize tiering across networks requires fitting different total values into the defined prize sizes. In our current implementation that is 1, 3, 12, 48, 192, 768, 3072. You can see where we used this spreadsheet to balance the numbers so that the prize pool shares the same value on all networks.
1 prizes: 1420 each
12 prizes: 20 USDC each
3072 prizes: 1 USDC each
Total prizes per day: 3085 prizes (4,732 USDC)
Optimism and Avalanche
1 prizes: 1420 each
48 prizes: 69 USDC each
Total prizes per day: 49 priezs (4,732 USDC)
1 prize: 1420 USDC each
3prizes: 1104 USDC each
Total prizes per day: 4 prizes (4,732 USDC)
While the number of prizes on Optimism, Avalanche, and Ethereum may at first seem surprisingly small it’s important to bear in mind this enables more exciting prize amounts and maintains gas costs to a minimal ratio of prize value. 49 prizes per day is a chance to win 343 per week. Comparing that to the 5 prizes a week in V3 we are still operating in a completely new paradigm.
With tiering specific to each chain, gas as a percentage of a prize claim becomes reasonable on all chains we are deployed on. When the meta-prizepool offers equal opportunity across networks we can encourage different sized depositors to use chains that best fit their needs. For example a $250 depositor on Polygon, a $10,000 depositor on Avalanche or Optimism, and a $50,000 depositor on Mainnet Ethereum.
Do you support the above proposed prize tierings?
- Yes, I support the proposed prize tiers
- No, I want different tiers and will explain
Lastly we can change the prize cap from 2 prizes per day to be 1 prize per day. With less overall prizes this will only impact larger depositors with a farming mindset. With the suggested prize distributions this is most relevant on Polygon. The net result of dropped prizes is less subsidy spend from the treasury. Winning 1 prize every day for depositors is a good problem to have.
Do you support a limit of one prize win per day for Poolers?
- Yes, one prize per day makes sense
- No, I like the current two prize per day limit
- I don’t think there should be a limit of wins per day