It’s time to grow!
This post outlines a framework for how we can think about scaling prizes and what we’ll need to do to get to billions of dollars in deposits. To do this, I want to introduce two key metrics:
- Effective prize APR
- Underlying APR
Effective Prize APR = measures what APR would be needed to create the current prize. This is a proxy for what return depositors should expect. It measures how large prizes are relative to deposits.
Underlying APR = what yield is being earned on deposited funds.
If there are no additional incentives then underlying APR and effective prize APR would be the exact same. All things being equal, a higher effective prize APR means deposits will grow faster because it’s a better return for depositors.
Early on, subsidies will be needed to increase the effective prize APR. Why? Because in absolute numbers, the prizes will not be large. As total deposits grow and prizes get bigger and bigger. Less subsidies will be needed because the prizes will be large enough to be more enticing. This is how the protocol becomes self-perpetuating (our growth flywheel).
The image below showcases a possible path for us to reach $2 billion in total deposits. Assuming an underlying APR of 6% the system would become self-sustaining at about $600 million in total deposits. Up until then, it would need some incentives to boost the effective prize APR. After that point, we would actually be adding MORE to the reserves than being distributed (when the effective prize APR is less than underlying APR).
We can use this to give us a rough guide for when we will want to adjust prize distributions upward. In the chart above, I’m proposing we boost prizes at $20 million in deposits ($5 million more than today). Of course this also means we want to get to that size as fast as possible because that reduces the time subsidies are needed!
These numbers might be too conservative or too aggressive. That’s not super important right now, mostly what is important is being able to track them and understand how they impact growth. And understanding that having the highest effective prize APR, distributed in the most engaging way, will drive the fastest growth.
So how do we get a high effective prize APR?
- Having more money in the reserves (contributing interest without winning)
- Adding value directly to the prizes (in the form of any tokens)
- Increase the underlying APR (i.e new yield sources with higher APRs)
- Adjusting the Prize Cap
Figuring out the most effectively use the tools at our disposal (i.e. POOL tokens, treasury, third party incentives, partnerships, etc.) to boost and optimize effective prize APR is a key role the community needs to take right now. You can view the full chart here.
Key Take-aways & Next Steps:
- We should boost prizes to keep effective prize APR high in early growth. Having pre-set boost levels will help us rally the community around reaching TVL goals.
- We should monitor the “effective prize APR” to better understand what it needs to be at to grow fast
- We should expect effective prize APR to exceed underlying APR at least until we reach $100,000 in daily prizes
- POOL tokenomics and any other incentives should be designed to help us increase effective prize APR (note in V3 POOL distribution did NOT do this and thus was not largely effective). This point is super important, more thinking on it soon.
- We should experiment with the most effective ways to distribute the prizes (i.e. what tiers, larger infrequent prizes, etc.).
Doing these things well give us a clear path to get the growth flywheel going! And of course, this is simply the economic framework, many other things like marketing, partnerships, integrations, etc. will feed growth!