SIP-001: Dynamic emissions

[pgpsam]

Motivation

Since its inception, Sturdy has offered compelling yields for both lenders and borrowers. For example, USDC lenders have earned over 16% APR over the past 30 days (source). Likewise, borrowers can earn over 80% by leveraging Convex stETH LPs. So why aren’t more users taking advantage?

Having spoken to many prospective users, the most common hesitancy I’ve heard about using Sturdy is the lack of liquidity. Lenders are concerned that (a) making a large deposit would significantly impact rates and (b) that they might not be able to withdraw their deposit. Both of these are a consequence of relatively low liquidity.

Similarly, there typically is very little liquidity to borrow. This is particularly problematic given the high gas costs associated with borrowing, which necessitates that borrowers take on large positions to break even. These issues negatively impact existing users as well. Small withdrawals can cause borrow APYs to spike. While these tend to get arbed out after a few days, it still significantly eats into borrower yields.

As Sturdy considers incentivizing liquidity, how can we maximize the value of the incentives to match the current needs of the protocol?

The traditional liquidity mining solution is to emit a fixed percentage of the token supply over a set period of time. However, this comes with several drawbacks. Oftentimes protocols tend to set emissions too high, resulting in low utilization. This liquidity isn’t being put to work by borrowers, effectively wasting tokens on non-productive assets. Additionally, by giving emissions to collateral assets, users are able to fold or loop. This is a degenerate use case that does not serve the protocol’s users.

Proposal

Rather than emit a fixed percentage of tokens, this proposal seeks to implement dynamic emissions that adjust based on utilization rates. That way, the Sturdy protocol will be able to attain liquidity without emitting more tokens than is necessary. Additionally, emissions would solely be for lending assets, not collateral, ensuring that users would not be able to fold.

This program would be in effect for a period of 60 days, at which point governance would evaluate its success and make adjustments as needed

The specific parameters will be as follows (note the total supply of $STRDY is 100,000,000):

Initial emissions per second:
ETH: 0.06430041152 (equal to 333,333 $STRDY over 60 days)
USDC: 0.03215020576 (equal to 166,667 $STRDY over 60 days)
DAI: 0.01607510288 (equal to 83,333 $STRDY over 60 days)
USDT: 0.01607510288 (equal to 83,333 $STRDY over 60 days)

Every seven days, the emissions per second for each pool will be adjusted by the following function:
Utilization rate under 50%: new rate = previous rate - .1 x initial emissions per second
Utilization rate from 50% - 70%: no change
Utilization rate over 70%: new rate = previous rate + .1 x initial emissions per second

Emissions rates for each pool would be hard capped at 1.5 x initial emissions per second.

[secret]

Thanks to the team, this reminds me of the VELA emission standards

[keysplatz]

I feel like the rate bump should occur when utilization rate > 80%. The costs/risks are already subsidized by emissions leading up to it. However, at > 80% the risks to lenders/borrows does increase meaningfully as normal rates increase.

[elsess]

Thanks to the team, nice work!

[Yakitori]

Hi everyone,

Congratulations to the team for their much-awaited token launch!

I agree that, while Sturdy is a unique and genius protocol, lack of liquidity has been an issue preventing mass adoption.

Because this proposal targets liquidity providers and not leveragers, there is no risk of seeing the classic value extraction behaviors through folding.

We at Astrolab.finance are building on top of Sturdy, and this proposal totally aligns with what we’re looking for, in terms of liquidity depth, and decentralization.

[pgpsam]

Thanks for your feedback! Here is my rationale.

Ideally, borrowers should be able to (a) expect relatively consistent borrow rates and (b) have the ability to lever up. When utilization is too close to 80%, there’s no way for new borrowers to lever up, since doing so would immediately push utilization above 80% and result in them losing money from interest rates. Additionally, small withdrawals would be able to push utilization above 80%, resulting in large swings in interest rates.

Let me know if this makes sense.

[EverythingBlockchain]

Hello team,

I would like to congratulate you on taking the first step toward a DAO direction.

Although the concept of emissions on lending assets rather than the collateral is understandable, it may not be enough to motivate users to borrow, aside from the product itself. It would not be ideal to have liquidity without utilization.

Therefore, I propose emissions based on both the health ratio and utilization. The higher the health ratio, the greater the emissions for lenders.

I would also pitch for an escrowed model for emissions. This would help protect the token’s value and prevent dumping.

We could also implement a staking proposal that links the reward emission multiplier to the staked value and duration.

Would love to hear your thoughts and challenges, if any.

[keysplatz]

Fair enough. Makes sense

[pgpsam]

@EverythingBlockchain

Although the concept of emissions on lending assets higher than the collateral is understandable, it may not be enough to motivate users to borrow, aside from the product itself. It would not be ideal to have liquidity without utilization.

Therefore, I propose emissions based on both the health ratio and utilization. The higher the health ratio, the greater the emissions for lenders.

I’m not sure I understand how you’d set emissions based on health ratio; each borrower has an individual health ratio, it’s not a global property. And it’s not clear to me why you’d want to tie health ratio(s) to emissions.

@EverythingBlockchain

I would also pitch for an escrowed model for emissions. This would help protect the token’s value and prevent dumping.

We could also implement a staking proposal that links the reward emission multiplier to the staked value and duration.

Definitely something worth considering (though maybe not necessarily applicable right now given the token is non-transferable) – feel free to make a post in Discussion if you’d like to discuss this further.

[EverythingBlockchain]

@pgpsam

I’m not sure I understand how you’d set emissions based on health ratio; each borrower has an individual health ratio, it’s not a global property. And it’s not clear to me why you’d want to tie health ratio(s) to emissions.

The reason for the inclusion of the health ratio in the emissions is to incentivize both borrowers and lenders rather than just lenders.

There is no special incentive for users to lend their funds and borrow besides the zero interest rate, which can significantly spike during a high utilization period unless users leverage the funds on Sturdy to maximize the gains. The interest on borrowed positions on Sturdy for a longer duration accumulates to what most other protocols offer.
The second aspect is to match deposits with a healthy utilization. Even though the challenge is low liquidity atm, in the future, we don’t want to have instances where we have liquidity but no borrowers.

Emission rates could depend on different tiers of health ratio. Depending on the users’ average weighted health ratio, emissions could flow to the users.

@pgpsam

Definitely something worth considering (though maybe not necessarily applicable right now given the token is non-transferable) – feel free to make a post in Discussion if you’d like to discuss this further.

At some point, the token will be transferable, and it only makes sense to have a solid base in place.
I will be dropping this in the discussion.

[pgpsam]

@EverythingBlockchain

The reason for the inclusion of the health ratio in the emissions is to incentivize both borrowers and lenders rather than just lenders.

Ah I see what you mean now. Given that utilization rates have consistently been high, I’m not sure it makes sense to provide incentives to borrowers – i.e., there’s strong evidence for organic borrowing demand. Additionally, the current proposal builds in a mechanism for lowering emissions in the event of low utilization.

[ssiiki]

To begin with, ETH mainnet alone is unlikely to attract users, let alone liquidity.
I think it is necessary to expand to L2 and other markets to increase the number of users and liquidity.

[Yakitori]

Sturdy currently has a lending shortage, not a borrowing shortage. The ability to borrow at 0% and deposit collateral yielding > 0%, making leveraging/looping profitable 95% of the time, is imho enough to get borrowers.

We rarely go under 70% in the stablecoin market, which is a feat compared to other lending protocols.

@ssiiki

To begin with, ETH mainnet alone is unlikely to attract users, let alone liquidity.
I think it is necessary to expand to L2 and other markets to increase the number of users and liquidity.

Mainnet is still leading by far in terms of TVL, and in terms of opportunity. Aura alone can provide a good source of safe and yieldy collateral. I agree though that going to Arbitrum, which is in fashion atm, would be interesting for Sturdy.

[Defi_Consulting]

Hi @pgpsam,

Great to see the first forum post go live and fantastic to see a more innovative approach to token emissions being explored here.

Sturdy exhibits strong borrowing demand and focusing rewards on deposits is a rational first step to growing the protocols adoption. As the utilising of the liquidity pools is consistently high, it further supports using incentives to attract deposits. It is great to see prioritisation and value being placed on the feedback received from current and potential users.

With the creation of the Sturdy USD pool, bb-s-USD, and gauge on Balancer, hopefully Aura Finance soon, it will be great to watch the TVL grow in the coming weeks.

I would encourage considering partaking in a bribe campaign to help kick start the Core Pool feedback loop. With recent events at Euler, there is a unique opportunity in the market right now for Sturdy to capitalise on.