The following is a proposal for a PoolTogether V5 incentive structure. This structure is intended to harmonize stakeholder behaviour. Readers may wish to read the Big Head Growth Strategy for additional context.
We need tokenomics that:
- Align stakeholder behaviour to the benefit of everyone
- Are sustainable.
- Can be communicated as a meme.
We want to encourage behaviours that support the desired core stakeholder behaviours:
- Users swap into prize tokens (PUSDC, PWETH)
- Users hold their POOL prizes
- Users swap their POOL prizes into more prize tokens to compound their chances of winning
- Liquidators arbitrage yield by swapping POOL for prize tokens
The two behaviours that support the above are:
- Providing prize token liquidity: USDC/PUSDC, WETH/PWETH etc
- Providing POOL liquidity: POOL/WETH, POOL/USDC, etc
Let’s go into more detail.
The Big Head Growth strategy emphasizes distribution channels via AMMs. This allows users to swap into prize tokens from any aggregator, wallet, etc.
This means we need liquidity routes from large-cap tokens to prize tokens. I.e. for Prize USDC we need a path from USDC → PUSDC.
Supporting behaviour: encourage prize token LPs for pairs such as USDC/PUSDC
When users win POOL, they should hold the POOL token. This reduces the circulating supply, meaning there is more yield volume per-POOL token.
We can further encourage holding by making POOL deflationary.
Supporting behaviour: POOL is burned
When a user wins POOL, they may wish to swap it for more prize tokens. This increases TVL and the volume of yield moving through the protocol.
This means we’ll need a liquidity route from POOL to prize tokens (i.e. PUSDC). We can both support the swap from POOL and drive more volume to the above LP position by encouraging users to LP POOL against a large-cap asset such as WETH or USDC.
Supporting behaviour: encourage LPs for pairs such as POOL/WETH
Yield is consolidated into POOL by liquidators. Liquidators can employ several strategies to arbitrage yield:
- Liquidators may want to hold POOL and spend it to acquire prize tokens. This lowers arbitrage gas costs.
- Liquidators may want to flash swap for the prize tokens, so that they don’t need to hold anything other than ETH.
Either way, Liquidators will need to acquire POOL. Fortunately the above supporting POOL/WETH behaviour will streamline this path, making it easy to swap into POOL from any large-cap asset.
Good tokenomics align stakeholder behaviour by distributing value. Sustainable tokenomics means the value distribution can continue in perpetuity.
Value is represented by the POOL token, so we need to identify where POOL tokens are captured so that we can redistribute it.
Once we’ve captured the POOL tokens, we need to decide how to distribute them.
PoolTogether V5 captures POOL in two important ways: prizes and the reserve.
Prizes in V5 are auto-claimed; any address that holds prize tokens will automatically receive any prizes that it wins.
If a smart contract wins prizes and cannot access them, then the POOL tokens are effectively burned.
The reserve is a portion of prize liquidity that the Prize Pool retains in order to cover RNG costs and to backstop prize liquidity in the event of statistical variance in prizes.
Over a long enough timeframe the variances average out and the expected value of the reserve will increase. This means that tokens held in the reserve become inaccessible.
Liquidity is split across the prize tiers and reserve using simple “shares” math. Each tier has a certain number of shares of the liquidity and the reserve has a certain number of shares. As the number of tiers increase, the portion that is allocated to the reserve decreases. This means at low volumes the reserve fills aggressively to ensure there is sufficient liquidity for the RNG. At higher volumes, the portion going to the reserve decreases.
Let’s chart the number of POOL tokens captured by the reserve per year given:
- TVL of $100m
- APR of 2.5%
- POOL market cap of $2m
- Each prize tier has 100 shares and the reserve has 200 shares
- Number of tiers is 6
You can see how after about eight years nearly the entire circulating supply of POOL is captured. Of course, in reality TVL and APR will fluctuate, and the POOL market cap will likely more closely reflect the TVL.
Regardless, this illustrates the potential token sink that the reserve offers.
Above we identified two supporting behaviours that we want to encourage:
- Prize token liquidity providers: USDC/PUSDC, WETH/PWETH etc
- POOL liquidity providers: POOL/WETH, POOL/USDC, etc
We can sustainably incentivize the above behaviours by:
- Allow prize token LPs to stake their LP tokens and earn the POOL that is accrued by the underlying prize token
- Allow POOL LPs to stake their POOL and receive a portion of the POOL captured by the reserve.
Prize token LPs are users who supply like-asset pairs to an AMM such as Uniswap or Curve. The user would supply a pair like USDC/PUSDC so that it’s easy to swap in and out of prize tokens.
The user would not incur impermanent loss due to the similar nature of the assets, and they would accrue swapping fees. However, in many AMMs the POOL tokens that are won by the LP pair would become inaccessible forever; they would effectively be burned.
We can encourage LPs further by rewarding them with the POOL tokens that were burned by the LP position. The users would then earn POOL in addition to swapping fees.
Incentive: Prize Token LPs could stake their LP tokens and earn the POOL that is burned by the LP position
Users who LP a POOL token pair such as POOL/WETH would capture fees from the swapping volume, but would be subject to impermanent loss.
We can encourage these LPs by rewarding them with POOL proportional to the amount captured by the Prize Pool reserve. Technically the reserve isn’t burned because there is a chance it will be used as a backstop for prizes, but long-term it will likely grow and become inaccessible.
Incentive: POOL LPs could stake their LP tokens and earn POOL in proportion to the POOL that is captured by the reserve.
Note that this does not have to equal 100% of the reserve; it might only be a fraction.
Let’s look at an example. Assume:
- $100m TVL
- 2.5% APR
- LPs receive 30% of what is captured by the reserve
Then we see that:
- There is $2,500,000 of yield per year.
- $714,286 is held in reserve (assuming 5 tiers and 100 shares per prize tier and 200 shares for reserve)
- 30% of $714,286 is $214,286
If the LP stakers stabilize at around 10% APR, then that means this incentivizes $2,142,857 in POOL/WETH liquidity.
In a nutshell, the core protocol is burning(ish) POOL in several ways. The redistribution of that value is externalized; this affords governance the opportunity to evolve the incentives as needed. While the incentives may change due to changing flavours of AMMs or strategies, one thing will remain the same:
The core protocol burns POOL. When POOL is burned, everyone wins!!
The core protocol burns POOL through prizes and the reserve. We can offset the burn with emissions that encourage the user behaviour that we desire, but ensure that the system is still net deflationary to encourage holding POOL.
Give your feedback and thoughts!
The plan is to design the Reward system so that we can support the above incentives. If people have any feedback, we’ll be glad to fold it in.