Thanks for the answers, the Vitalik article you linked is very insightful, some paragraphs I had to read them a hundred times but eventually I think I got it haha
For this to happen, the amount of value you can swap your POOL tokens for has to increase over time, and to my understanding, this happens when the revenue by the prize pools goes up over time, meaning that the opposite can happen too:
-Buy POOL at $2 (Currently can be exchanged for 2 USDC)
-Revenue of prize pools decreases (either because of a decrease in TVL, or lower interest rates)
-Meaning less Buybacks
-Now that same POOL can be exchanged for 1 USDC (and you bought it at $2)
So essentially, in this scenario, when you hold POOL, you are betting that TVL is gonna increase over time (good incentive) but that could easily be off-set by a decrease of interest rates at the same time, those being completely outside our control (Say the prize pools have a TVL of 100M earning 4% APR = 4M a year in buybacks, then because the protocol is doing well, TVL increases to 150M, but the interest rates dropped to 2% = We are down to 3M in buybacks, thus POOL value drops)
However, isn’t your point in direct conflict with @Brendan’s response?
He says that whenever prize pool’s revenue goes down, we can reduce the size of prizes (reduce POOL supply) and thus bringing back the price, then when revenue goes up, we increase POOL supply by growing prizes, thus leading to a somewhat stabilized POOL price (assuming that’s the goal of our monetary policy)
So then, what you said would never happen, as the token price would presumably never go up or down in the long term, in this scenario the incentive to hold POOL would be instead to earn a % of liquidations (Resulting in alignment with TVL growth, as other factors would presumably be mitigated by the monetary policy)
That said, responding to Brendan now:
Given the critical impact that adjusting prizes can have in POOL’s price
Who will executing those decisions?
An obvious answer would be simply POOL governance, however given the critical aspect, these adjustments have to be fast and precise, governance is simply too slow for that, so does this mean a new working group has to be formed? Such group would have immense influence over the token’s price (because that’s their goal) and therefore immense trust is required. Governance could somewhat limit what they can do but then that would be counter-productive as it would also limit our ability to quickly respond to market fluctuations.
And what market factors would PT have to consider in it’s monetary policy?
How it would track them?
As I explained earlier, TVL and interest rates are key factors to the prizepool’s revenue, and therefore our monetary policy.
Are we gonna track TVL across this many different blockchains? If we choose to ignore it, then each time our TVL goes down (or up), so does the POOL price (I would be ok with this! Just pointing that it’s an “extra layer” of volatility that wasn’t before present, at least not in such a direct way).
And interest rates? The goal of this strategy is to not rely in price oracles, but wouldn’t we need some kind of “interest oracles” instead? This is basically the same question I had with DPR, but unlike that case, we cannot just “set and forget” this parameter as it’s crucial to the token’s health, it’s data that needs to be constantly pushed if we don’t want it to constantly affect POOL’s price.
On other note:
When we make prizes smaller, we reduce POOL outflows as Brendan says, therefore reducing supply and therefore (one would guess) pushing the price upwards.
So if we start with 10 POOL prizes and then we adjust them to 1 POOL, then 0.1, 0.01, 0.001…
It would seem like we could raise POOL price to infinity.
I believe here is where appears another (crucial) factor that Vitalik describes in the article, it being the velocity of money, or “holding time”.
Basically when we “artificially increase” POOL’s price in this way, nothing really changes for depositors, the amount in US dollars they receive it’s the exact same, it’s just denominated in less POOL, the equilibrium is kept.
However, to POOL holders, they just got big (or weren’t that affected by a downwards price trend) so then, if suddenly many decided to sell, they could deplete the protocol’s liquidity in that moment, pushing the price downwards again, this is because their POOL is now valued above what it “should” be (hopefully I’m being coherent here). Essentially, if for any factor a “POOL run” occurred in moments like those, we would be much more vulnerable. We could require a locking period for staking, but then you have to deal with non-staked holders.
So then, that’s another factor I believe a monetary policy would have to consider when doing prize adjustments, and I’m not sure how we would even measure it.
Overall, I feel like the monetary policy it’s actually the most important part of this new strategy, and I would really like to see that aspect expanded on. Especially to see defined what would be the exact goal of having a monetary policy, if its goal is to keep all these factors from having a direct impact in POOL’s price, then perhaps it would make sense to “off-load” many of these functionalities over to a secondary token minted solely for this purpose, then we can let the market forces act freely on it instead.