Thanks for putting together this proposal, @Brendan. This is definitely an important discussion, especially as POOL transitions from a governance token to more of a utility token used within the protocol.
I’ll include the TL;DR here, as I know not everyone wants to slog through my long post.
TL:DR
- Proposal adds a lot of unnecessary complexity
- Will be confusing for core users, who tend to be less experienced crypto and DeFi users
- POOL as prize token introduces more risk for savers, since price can fluctuate both up and down, and this introduces downside with sufficient sell pressure
- Burn narrative is largely driven by human intervention [i.e., LPing native tokens/prize tokens (tickets)] and wasn’t a core design of the hyperstructure, as shared before launch: The PoolTogether Prize Savings Hyperstructure
- Not keen to be so largely focused on POOL price and turning POOL into the core product. We’re getting further away from competing with TradFi and just creating an OHM-like structure with all of the advantages and disadvantages that come along with that model.
- Just a year ago, there was a lot of talk about POOL as ownership and that “Bottom line IMO is that it’s too early to enrich POOL token holders,” yet we’re shifting value to POOL token holders at the expense of depositors’ yield and diminishing the ownership component. Source.
Audience
There are two core audiences active within the protocol at this point:
- Depositors. People who deposit into the protocol with the goal of saving money and winning prizes. Not all depositors are POOL holders by default, and not all depositors will choose to hold POOL.
- POOL holders. Community members who have and hold, or may in the future have and hold, the POOL token. These community members can delegate their voting power or choose to self-delegate and vote directly on Ethereum mainnet. In time, governance power will be diminished and deprecated, based on my understanding.
From my perspective, this proposal is designed with POOL holders in mind and future depositors who choose to hold their POOL winnings. There’s a certain balance between these two audiences that should be considered during any tokenomics discussion, imo.
Stakeholder Behaviour
Depositors
Maybe I’m reading this incorrectly, but don’t points 3 and 4 conflict with one another?
- I can’t both hold POOL and swap POOL for more prize tokens. I can hold some POOL and swap some POOL for prize tokens, but one of these is the opposite of the other. Maybe the intent was for depositors who win to hold some POOL and use some POOL to swap for prize tokens.
- If I do choose to primarily hold POOL, my unified prize asset is now disconnected from my chance to win, which removes utility and requires me to perform a swap to get the necessary prize token to increase my chances to win. More steps = more complexity for the end user. You can automate this, but I believe this would require a user to opt-in, which means going to a frontend somewhere and agreeing to have your POOL swapped for more prize assets. I think this isn’t accounted for in the native token/prize token LP scheme.
And if depositors who win choose to swap POOL for prize tokens (tickets), it still results in POOL sell pressure. If an annual grand prize is awarded, it’s likely that the winner incurs a larger-than-average price impact and they are exposed to the risk of POOL volatility. Much of this proposal assumes that POOL price only increases as more of the supply is either removed from circulation or burned (by design).
- This either provides upside or downside for depositors, but if the goal is to build a global prize savings network, then introducing downside risk moves the protocol further away from No Loss–it becomes no loss on principal (depending how you enter and exit the protocol) but you could suffer loss depending on the time between winning a POOL prize and swapping it for your desired asset OR if you hold POOL. I imagine many users will either deposit or swap into a vault and then not check back in for a while since the whole thing is automated.
- If I’m primarily interested in saving, as a user I am unlikely to LP prize tokens. I’d assume a lower fee tier for a like-kind pair. We haven’t specified that detail, but let’s say it’s 1 bps (0.01% fee tier). You halve your chance to win because you’re not fully deposited in PT v5, and the yield you earn from the pair likely won’t make up for the potential winnings, espeically as the grand prize rises higher. I see this more of a public good rather than a yield opportunity. Larger fee tiers add a greater fee to enter and exit the system, which moves further from no loss ethos.
I think a lot of this complexity comes from the use of POOL as the unified prize asset, which doesn’t have much liquidity on Ethereum mainnet and barely any on other networks. Moving POOL to other networks and locking up more POOL (e.g., removing from circulating in reserve contract or through burns) also introduces greater governance risks because governance becomes more centralized and if a malicious proposal were put through, it is likely that the votes necessary to vote it down won’t be there.
- This primarily impacts the treasury, but as treasury holdings diminish, this risk lessens, as POOL holders control the treasury and not the protocol, a change introduced with v5.
If another token that had deep existing liquidity on chain (e.g., USDC, DAI, etc.) were used as the unified prize asset, you avoid much of the liquidity problem. As it was outlined in the The PoolTogether Prize Savings Hyperstructure:
Any token can serve as the prize token, but using POOL has certain advantages: most notably it allows us to leverage the protocol’s existing treasury, it aligns incentives between existing POOL token holders and prize winners, and intrinsically ties the POOL token to total protocol yield.
While POOL as the unified prize asset presents certain advantages, it also provides certain disadvantages (e.g., on-chain liquidity, difficult to understand for less experienced crypto users, potential downside risk, etc.).
- Some users have already raised concerns about POOL as the unified prize asset. Some examples here and here and here. And Leighton also shared this thought in the past “My working assumption is most people will want to receive their prizes in an asset other than POOL. Perhaps the asset they deposit or some other asset they like. So the key is to make sure users can do that… win their prizes and recieve them in whatever asset they desire.” Source.
- Since POOL becomes the intermediary step–the goal you shared in the past–the depositor who wins receives POOL directly in their wallet, which is great! But now they need to know what to do with it, and if they swap their POOL for another desired asset, they incur the fee associated with the tier on whatever AMM is chosen plus gas and price impact (i.e., slippage). This is in addition to the portion that is used to incentivize boths to liquidate the yield into the prize token. A portion of all yield generated goes to the reserve, too, as you’ve highlighted.
POOL holders (POOL liquidity) and Depositors (Prize Token Liquidity)
On the first point, you likely don’t need much liquidity to enable smaller swaps from native assets to vault tokens, but the incentive to LP needs to be equal to or greater than the potential yield earned if you deposited the whole amount into PT v5, unless you use a Balancer 80/20 pool, where 80% is the prize token and 20% is the native token.
- As I shared above, this is more of a public good than anything else and should be funded as such, if implemented.
For POOL LPs, any large shifts in POOL and/or WETH price is going to create a larger degree of impermanent loss (IL). The incentives would need to be greater than the potential IL, and providing liquidity is a complicated process. To be successful, you likely need to use a liquidity management protocol like Arrakis (if you go the Uni v3 route) or a Balancer pool. It is not easy to be a successful LP.
- This also seems like a public good, with greater downside for POOL LPs. You really just need to build up one large LP position between POOL and an asset with deep liquidity, so trades can route through existing pairs. With that said, you introduce IL for POOL holders and this moves farther away from the no loss ethos.
The Reserve
It does seem like 25% to 35% of the annual yield goes to the reserve, which serves the following two purposes:
- funds the incentives to submit draw
- provides a cushion when there is insufficient tier liquidity for prizes
The reserve cannot be withdrawn by anyone; it can only be used to incentivize draws and supplement prize liquidity.
Source: PoolTogether v5 docs
Am I correct in assuming grand prize liquidity would flow from the reserve or is that incorrect?
From my understanding, this provides the incentive for a bot to run the RNG draw, which pushes the draw to the target networks AND it provides liquidity if prizes awarded are greater than the available yield in POOL. This solves a core issue we had in v4, where the subsidy from the treasury represented a large amount of the awarded prizes for the first year after v4 was launched.
- POOL holders voted to provide an initial subsidy of $1m from the treasury to bootstrap growth in v4, but v4’s TVL didn’t see the expected growth even with incentives until OP incentives provided a temporary boost.
If I an correctly assuming grand prizes would likely be awarded from the reserve, it doesn’t necessarily mean all POOL held in the reserve is inaccessible.
The Burn Narrative
This aspect of the tokenomics and the general discussion in the beta chat is somewhat offputting, imo. The yield comes from depositors yield, which is then used in an auction for POOL, with a liquidation bonus to incentivize bots (i.e., a certain discount on yield assets that enables bots to realize a profit). Fees are expected within the protocol to automated certain processes.
However, the burn narrative comes from contracts winning POOL that cannot move the POOL. You can incentivize activity that burns more POOL, with the goal of seeing an increase in POOL price. Imo, this turns the protocol into a vehicle to increase the price of POOL over time, with human intervention causing an increase in the degree of POOL burned through native asset/prize token LPs.
If POOL does not increase in price, then the system is prone to break from what I can tell. Removing more POOL from circulation doesn’t necessarily increase price. I’ve shared this before in the beta chat channel on Discord.
- People who have held POOL for a long time will likely sell at some point in the future once on-chain liquidity improves. As @underthesea shared, we’ve seen this activity whenever POL has seen an increase in the ETH held in the position on Uni v3. This means sell pressure.
- If we’re assuming most users won’t want to hold POOL but will want to swap into their desired asset, which does correspond to behaviour associated with saving, then there is more sell pressure.
- People who run bots can buy a decent amount of POOL and just use that to liquidate yield. They aren’t necessarily buying POOL every day and their goal is to buy POOL to sell in the vAMM, which then goes to winners. See above comment.
Most of the conversation assumes up-only outcomes, but this only works if POOL is used for emissions from the start of v5’s launch, not a token that has been distributed over the last several years.
POOL token price would be associated with the available annual yield that “backs” the token, so speak, which doesn’t have the same impact on price as the stated in the proposal, unless I’m missing something.
And this statement is part of a larger thought, which I’ll share because I have a question about this.
Why does the reserve need to be so aggressive, where it captures ~31.25% of the available circulating supply at all times? This represents a large portion of yield that isn’t awarded as prizes, unless this is where grand prize awards come from.
Overall Thoughts
This seems to add a lot of complexity and dependencies on people willing to LP, with the goal of increasing the price of POOL. We used to prohibit price talk in the PoolTogether Discord server, but now there are people sharing openly on Discord and the forum that the price of POOL will go up. Given the past caution about price talk and regulatory action, I’m disappointed that we’re turning the POOL token into the protocol’s core product, with an emphasis on POOL price.
Much of the complexity in the tokenomics proposal comes from the lack of existing POOL liquidity. To create incentives, POOL holders can vote to distribute POOL from the treasury (4.04m+ POOL, which is greater than the circulating supply) to keep POOL deflationary, but you’ll eventually transfer the POOL in the treasury into the reserve according to my understanding of this proposal and that doesn’t quite make much sense to me.
In my opinion, this misaligns incentives between POOL holders and non-POOL holders (i.e., a majority of depositors).
I think much of this could be solved by changing the prize asset from POOL to another token with deep existing liquidity across networks, but that then swings the benefits to non-POOL holders (majority of depositors) and not to POOL holders.
However, POOL holders weren’t involved in the decision to remove governance control from the token over time and move to utility token model, where POOL became the unified prize asset. I would conclude, then, that changing the unifying prize asset would also be a decision made by Generation Software and not POOL holders given the movement to a more autonomous protocol with v5.
I would be curious if any outside group audited the economic model for v5 and if any user research was done prior to deciding POOL should be the unified prize asset.