RFC: Prize Distribution

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 In addition to lower yield, depositors have withdrawn from the prize pool (less TVL).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

0 voters

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.

Proposed Tiers

Polygon
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)

Ethereum
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

0 voters

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

0 voters

6 Likes

Until we are deployed on Optimism, I think we need to stay on Ethereum.

Having whale-appropriate prize tiers on Ethereum makes total sense to me.

2 Likes

Great post @underthesea !!

One question and two comments:

  1. I don’t fully grasp how prizes work with different tiers on different chains. In your “proposed tiers” you outline what $4,732 USDC could look like on each chain. But the reality is we won’t be distributing that much on each chain right? So it will be a bit different than today because today we show the amount of prizes projected and that roughly occurs every day. But with this, we would show the daily amount of prizes on Ethereum but they wouldn’t actually be awarded on most days right? I’m trying to understand how that plays out…

  2. I love the idea of rallying the community around prize INCREASES that happen as we unlock TVL goals. I think that should be explicit – “we are lowering prizes to this and increases prizes when we hit this”

  3. Overall, I think our potential on Optimism is huge!

2 Likes

Great read! I just thought I’d explain my thought process on the first two votes:

As for building purposefully for Ethereum, I personally don’t find a need to appeal to what will essentially (from my perspective) become the settlement layer for L2s. That being said, until L2s gain more popularity and PoolTogether has gained traction on such L2s, I think the proposed Ethereum tiers make sense. I guess my vote is for short-term yes, medium-long-term no.

As for the proposed prize tiers, I’m not particularly a fan of $1 prizes, even on a chain with gas as cheap as Polygon. Especially if we are to limit prizes to 1 a day. I think a minimum of $3 or $5 still makes sense. On Optimism and Avalanche, I feel like there could be more prizes given out per day by varying the amounts somewhat. An example would be the following:

1 Prize: $1000
28 Prizes: $69
90 Prizes: $20
Total Daily Prizes: 119 ($4732 USDC)

This more than doubles the number of prizes per day, keeps gas costs below 5-10% of prizes and maintains the $69 prizes (I removed the 420, I had to at least let you keep this).

Just my 2 sats <3

4 Likes

I think it’s more of a UI thing than the prize distribution itself. For example it shows 1 grand prize per day currently but daily results have a variance between 0 and 5. Previously, when we had $1 prizes, it would show 3,000+ per day being awarded, but more than half of them were dropped.

On the prize-tier popup in the app it could show all of the different prizes aggregated on one page. Or it could have icons to flip between the different chains. Aggregated it doesn’t add up to the total, but if it’s presented as = total prize / 3 or 4 chains then I think it still makes sense.

Yes! This is a very good idea for messaging. We can work on some numbers. If anyone else is interested in building out this idea => moving forward from the growth goal of this proposal that unlock would start happening at say $50 million TVL.

Being that this vote is for the present moment, are you voting yes or no? It looks like you voted no, but this sounds like yes. Just wanted to clarify.

I’m personally not a fan of them either, but keep in mind they are designed for depositors on Polygon where the median deposit is 23 USDC. Looking at the average deposit of 1,867, and simulating that with the proposed tiering the average depositor is not impacted by the prizecap in a meaninful way. And with the Optimism deployment we expect the average deposit size to go down on Polygon.

It’s a tough balancing act to make the prize pool fun for all sizes of users. If you look back at previous prize tiering discussions there is a clear demand for $1 prizes. Those make most sense on Polygon. By opening Optimism we offer a nice alternative for “dolphin” Poolers.

Let’s riff on this a bit more on the discord if you have time!

1 Like

I agree it is ultimately a UI thing but it’s still a pretty big departure from how it works today. We do have some variance today but the variance we will see with this would be much higher. It’s possible if there is not much money deposited on Ethereum then it could be weeks with zero prizes awarded. That’s quite different from today where it averages out to roughly the daily amount displayed.

CC @dylan on this as well to think about.

That’s exactly the purpose: to have less frequent but larger prizes.

The average APR will be the same, but the time window needs to be much larger.

Right! I understand that and the benefits it offers.

I’m just pointing out this is a very different user experience than how the current prize distribution functions and is presented in the user interface. I think implementing this would require some rethinking on how we represent what the prizes are, how often they are awarded, and what your odds are.

1 Like

Is this worth the effort? Waiting for the new The Prize Pool Network

1 Like

I didn’t want to read any of the comments before putting votes in and was curious to find i was the solo No for the first vote. I guess I was viewing the question similar to @Ncookie (who i guess maybe voted No first?) . I agree and think its fair enough to tinker the prizes in the short term to cater to existing depositors and maybe a small amount of new/returning deposits, but long term if the goal is to have everybody depositing on L2s the not so great payout to fee ratio/structure would help encourage migration would it not?

I also think perhaps there is also the potential concern that if the payout on L1 moved to these larger prizes may move some small fish towards l1. Which to me due to the fees could give off a bit more of a lottery vibe then a lottery savings vibe as the fees paid to participate could represent some sizeable portion of a small fish’s deposits.

TLDR

Limit variance in prizes across chains to 2 dollar values per chain

  • Have “large prize” and “small prize” dollar values per chain
  • Share the “large prize” dollar value across chains
  • Maximize the number of “small prizes” while keeping them claimable based on gas for that chain
  • 1:3 ratio of “large prize” to “small prizes”
    • Note: 1:2 could also be done easily

I’m a fan of decoupling the distributions and making Ethereum more usable. I support lowering the prize claiming cap to 1. I dislike the variance across the distributions suggested though. With such a drastic change in how the protocol works (no longer having the same prizes across prize pools) I think we need to simplify the distributions and ease into this. Having so many different dollar values for prizes, and so many prize tiers across different chains makes comparing the options across prize pools hard.

The prize distribution dollar values should target the goals of having a chance to win a large dollar amount while maintaining the best possible chance of winning at least 1 prize. Having 2 specific dollar values per chain targets these goals directly. Having a prize claiming cap of 1 pairs nicely with this simplification as well. You either win a large prize, win a small prize or don’t win.

Distributions

Note: I’m open to changing the following numbers. I care more about the structure. These numbers were chosen to target the overall daily value Underthesea proposed. It’d be great to get the “meme” numbers proposed fitting in this structure but I didn’t find any good ones that fit this daily dollar value without going over.

$4505.6 Per Day

Polygon

Prize Count Prize Value Total
1 1126.4 1126.4
3072 1.1 3379.2
Total prizes per day: 3073

Avalanche

Prize Count Prize Value Total
1 1126.4 1126.4
192 17.6 3379.2
Total prizes per day: 193

Optimism

Prize Count Prize Value Total
1 1126.4 1126.4
48 70.4 3379.2
Total prizes per day: 49

Ethereum

Prize Count Prize Value Total
1 1126.4 1126.4
3 1126.4 3379.2
Total prizes per day: 4

Some more data used when calculating these numbers for reference

User Types

User Deposit Size Target Prize
Whale :whale: > $30,000 > $300
Dolphin :dolphin: $6,000 - $30,000 $60 - $300
Fishy :fish: < $6,000 < $60

Gas fees used for determining prize distribution

Chain GWEI Token Token Price Claim Cost
Ethereum ~50 ETH $2k $30 - $40
Optimism ~50 ETH $2k $1 - $2
Avalanche ~50 AVAX $22 < $2
Polygon ~20 MATIC $.57 < $1

Data from June 3rd, deposits < $5 ignored

Users are in X percentile if they have less than Y deposited

Overall Ethereum Polygon Avalanche
25th percentile $20 $100 $19 $24
50th percentile $114 $250 $114 $100
75th percentile $1995 $700 $2000 $344
90th percentile $6427 $7200 $7027 $2109
95th percentile $11746 $16230 $11794 $8892
99th percentile $38542 $100020 $32684 $53982
Number of users 10408 275 9552 581
TVL $32797198 $4723410 $25876501 $2197287
90th percentile TVL $5626049 $124376 $5467256 $112310
95th percentile TVL $10786895 $264954 $10305126 $217366
99th percentile TVL $19019646 $837247 $17608351 $846437
6 Likes

I like the direction this is going!

Both @underthesea and @dylan have the same grand prizes for each chain, which is something I really like. It means we have the same headline prize across the chains.

Having different smaller tiers per chain is critical because of gas costs. In terms of what those smaller tiers should be, I’m not terribly fussed. Except I do want to add one thing:

Eventually I want us to have a prize auto-claimer. The auto claimer will run the claim transaction on behalf of the user. This means that:

  • We want auto-claiming to be worth it for all prizes tiers, so that none are ignored.
  • The autoclaimer’s revenue must be the tx gas cost plus a premium
  • Assume that users don’t want autoclaim to cost more than 10% of the prize.

This means that gas costs shouldn’t exceed more than 10% of any prize.

If Ethereum gas is $50, then the prizes should be $500 at a bare minimum. Prob higher, in fact, for gas variance and to ensure claimers have profit.

While auto-claiming is a ways off (need to write a bounty!), I thought I’d just pop this in here to plant a seed.

2 Likes

Great response, Dylan. Could you elaborate a little more on why the proposed tiering @underthesea had in the initial doc won’t work? It looks like there were 2 prize tiers each targeting the same dollar amount on all chains except for polygon; which would be nice to have a step up from 1$ to 1000$ (personally). Is the polygon chain having 3 tiers instead of 2 the only difference in you and undertheseas concepts?

I also am in full support of getting Ethereum to a usable spot while continuing the trend to the other chains relative to gas (especially if we are forward thinking about an auto claim mechanics as @Brendan suggests).

1 Like

Yes the main difference is simplifying to the 2 amounts. Having that middle amount might be a little more exciting than the $1 but not as exciting as $1000. And every dollar not put into maximizing the number of prizes results in less users winning. So while it’s more “fun” I chose to optimize for the maximum number of people winning. If a user realllly wants exposure to slightly larger prizes they could deposit into a different network relatively easily. I don’t think we should optimize for that middle prize at the moment since we have such large percentages of users in the “fishy” category. If those percentages change then moving to a 3 prize structure with a middle prize targeting the “dolphin” users makes perfect sense.

For more context: My original idea was to have consistent dollar amounts across all networks (ex. $5, $20, $1000) to make it more of a consistent experience across all prize pools but it’s difficult to find a good combination of numbers to build prize distributions around that work well across all of the networks. The 2 prize 1:3 ratio is the second iteration of that idea which aims to simplify prizes, maximize winners and provide a chance to win a big.

Hello Dylan.

First of all, thanks to you and @Ncookie for the suggestions and idea. In fact, we have decided to separate Optimism and Avalanche prize distributions for your ideas. Having more different options can help attract different kind of depositors.

Regarding your last comment, I understand the logic that you’re applying, but have some comments. First, the number of prizes that you’re proposing on Polygon is actually lower than the number of prizes previously proposed by @underthesea. I think we can both agree that Polygon is the best suited blockchain for small fish, which is why maximizing the number of prizes there, is crucial.

In other chains, gas fees make it so that it’s not so much for small fishes, but dolphins we could say. That’s why the importance of having the maximum number of prizes is reduced. Instead, the main objective is to create a higher number of attractive prizes. Those attractive prizes are not the lowest tier, but those in the middle and the top. That’s actually the power of PoolTogether. Having a lot of small prizes makes it so that the experience is similar to yield farming. You have the “security” of getting a prize pretty often, but those prizes are not too exciting (that’s in fact what’s happening to me on Polygon right now).

Our priority should be to find equilibrium between V3 and V4 Polygon. We should not repeat the mistake of having 1 big prize that is won 99% o the times by whales. But we should not also make the mistake of having so many small prizes that the potential of PoolTogether is lost and mistaken with a regular yield farming protocol.

3 Likes

I’m open to changing the following numbers. I care more about the structure.

It is 12 prizes less, the daily $ amount is also 4% less. Numbers could be adjusted accordingly if we want the extra 12 or even more.

That’s why the importance of having the maximum number of prizes is reduced. Instead, the main objective is to create a higher number of attractive prizes.

The definition of an “attractive prize” is very subjective and with 50% of users having < $114 the small prizes are far from a guaranteed win for them. Which is why I’m proposing removing that speculative tier in favour of the two ends of the spectrum for the time being.

I do think having prizes targeted at those “dolphins” is very valuable. I think defining what a “dolphin” is is extremely difficult. So I prioritized the simplicity of 2 prizes over discovering and targeting “dolphins”. Using my loose definitions and looking at the numbers below I can easily be convinced that I’m wrong to ignore them. It’s a decent chunk of users providing a lot of TVL.

User % of users % of TVL
Whale :whale: ~1% ~43%
Dolphin :dolphin: ~9% ~40%
Fishy :fish: ~90% ~17%

Our priority should be to find equilibrium between V3 and V4 Polygon.

To me the 2 prizes on the ends of the spectrum achieve that. Having a chance to win the single large prize is the best of V3. Having the maximum amount of winners using small prizes is the best of V4. The next N prizes between the ends of the spectrum can come later.

Overall though I think what I really want is a framework for deciding the prize distributions that:

  • Has specific groups of users defined by the deposit data for each chain with prizes appropriately proportional to them
  • Maximizes the number of claimable prizes for each chain
  • Has a shared “grand prize” dollar value across all networks
  • Minimizes variance in the dollar value of the different prize tiers (1:1 with user types)
1 Like

@dylan’s numbers make me a little more comfortable with the small prizes on Polygon. Realistically, if claiming costs are less than 1% of the claiming amount, I don’t think there’s an issue there.

Could we, with these distributions and approximated TVLs, find out the optimal chain APR-wise for any given deposit size? I think this could be an interesting stat to discuss since ultimately it will direct users to one chain over another. For example, if I had a deposit of $10,000, would I statistically win more on Ethereum or on Polygon? This would also help us to point users to a chain appropriate for their deposit size on the UI.

1 Like

Thx TWG for the great work! (and also thx to @underthesea for the great write up and reminding me to comment ^^ ):

Yeah, it’s definitly time we reduce the Prize Pool subsidy a bit, especially now with AAVE yields being down so much.
The APR-TVL relation is good to keep in mind and nice that you mentioned that. When we lower the prize subsidy, people could leave and the APR goes up again. I like how you bring up Optimism and the potential to growth the TVL that way, definitly agree with that! Cool to also see the Marketing working group playing a part with doing stuff to promote Optimism, that’s great synergy between TWG and MWG. I’m now a Reviewer in the Grants Commitee, so if we can help, feel free to reach out, altough we are technically already doing so when funding MWG initatives!

The part about gas costs is also important, I think we all agree that ETH fees make using it for small to medium depositors impossible. Polygon gas fees were very low for quite some time and hopefully stay that way in the future. When we introduced the 1 Dollar prizes, the Polygon gas fees sometimes spiked up to 0.50$ and that made using Polygon very painful sometimes.

I like the idea of differentiation between the chains and having different prize tiers on the chains.
Personally my favourite prize tier is the ETH one, I would like to win few times or never but then very big and I’m not the biggest fan of the 1$ prizes.
But considering the gas costs and to give people the option to decide themself which prize tiers they would like, I think the different prize tiers make sense. I myself will probably switch from Polygon to Optimism or Avalanche and although I will miss the very low fees on Polygon having the abitlity to choose your favourite prize tier is cool! (Also Optimism and Avalanche fees are still not that high).

The last point about reducing the prize cap from 2 to 1 I also agree with! It’s logical and more “natural” than having two prizes anyway. I think we probably made it two at the beginning because we feared too many dropped prizes and big and medium depositors leaving but as it looks right now, people have no problem with the prize cap. If we go from daily prizes to weekly prizes someday, then we can discuss if a higher prize cap makes sense to avoid too many dropped prizes.

Commenting on @dylan 's prize distribtions. That looks also fine and I personally have no preferance. Booth look very similiar, only the 12x20$ prizes on Polygon and making all ETH prizes the same. I’m not sure if we need different prize tiers on Optimism and Avalanche, in @underthesea 's one they are the same and I think I like that a bit better.

A lot of great discussion in the Discord #governance Channel, I’m linking this here, it’s 200+ Comments but still a great read, Discord

1 Like