EIP-17: Variable Coupon Premium Based on ESD Price and Length of Debt Cycle

I think we all agree that the current coupon system is not truly effective at incentivizing people to burn. This is evidenced by there only being 9 million coupons when there’s 500 million tokens floating around. And a continued low price. And that 100M tokens went to BSG when the returns were kinda meh. Clearly the coupons aren’t doing what they’re supposed to.

We got rid of the risk of capital loss with coupons with EIP-16. I think that was a good way to help incentivize burning, but not entirely. They still have another problem, and that’s namely this game of chicken.

Playing chicken

In this game, people refrain from buying coupons until the last epoch before we go into an expansion cycle. That’s because a coupon purchased last minute is just as good as one bought earlier (assuming equal debt ratios). This means coupons are not truly helping get out of contraction. They’re instead just accelerating it. Or more pessimistically, they’re doing nothing but causing the couponers to get juicy returns at the expense of the people who remained staked in the DAO.

A system like Basis makes burning BAC more attractive the cheaper BAC is. The price of bonds is the square of the current BAC price. For example, a bond when BAC is $0.90, means you only get a 10% discount ($0.81). Getting bonds when BAC is $0.60, means you’re getting a 40% discount ($0.36). This helps keep the price of BAC elevated (at least out of the 50/60’s) during the contraction cycle. But it also means that you’re not incentivized to buy them when it gets back to the 90 cent range since you’re really not getting much from it. So the price gets to the 80’s/90’s and seems to hover until a farm opens that shoots the price up and then people FOMO into expansion.

The ESD system, however, does it by increasing coupon premiums based on the length of the debt cycle. Each epoch debt increases. The higher the debt ratio, the higher the premiums. This is to get us out of a long cycle, which Basis does not do. Although we cap the debt ratio and even 56% premium doesn’t seem to incentivize aping at low prices.

So one incentivizes people during long cycles and when the price is near $1, and one incentivizes at really low prices but does nothing to eventually get them out.

To get some of the benefits, and to eliminate the weaknesses of both systems, I propose a hybrid system.

What this could look like

I don’t have this fully fleshed out yet, wanted to pass this idea by y’all first before diving into the math.

At a high level, the coupon premium could be a factor of TWAP and debt ratio.

For TWAP, it could have some minimum threshold for the TWAP scaling, so that it only kicks in below say $0.95 or even $0.90 to keep it from enhancing the game of chicken. It could also be done exponentially rather than linearly to ramp up premiums the lower the price, just like Basis.

The debt ratio side could be left as it is or adjusted downwards. So far, it doesn’t seem to incentivize people enough by itself, perhaps the max premium is still too low. (Maybe EIP-16 at max debt ratio will prove that wrong and we need to adjust the debt ratio premiums down).

So say for example, the price is $0.60 (like it is now), and it’s been a long debt cycle, this equation could yield a premium of 100%. And then when it gets into the 80’s to 90’s maybe it shrinks down to the 50%, or lower. Ideally it would also incentivize people to burn if it plummeted, thus decreasing debt, which would then reduce the game of chicken and get people to burn sooner.

Based on y’alls input we can come up with an equation for this.

To acknowledge other ideas

I know people have floated other ideas like rewarding people to bond in DAO by earning rewards in contraction that are only redeemable during expansion. Bonding in the DAO is similar to burning for coupons since that removes supply off the market. That could either be a replacement or a supplement to this proposal depending on what we all think.

I also know there’s a coupon auction idea. I think this has merit, but it also sounds a bit complicated to wrap your head around. In general, I think it’s best to have the easiest to understand system. Basis’ is simple since you go to their site and you can see that the price of bonds is cheap AF and can buy some. Educating people to come up with bids and understand the math behind it worries me.

There’s also talk of making expiration elastic based on price, but I think that was mostly solved with EIP-16, and I think it’s less attractive frankly. People don’t want to be locked up forever.

What do you think

Please pick apart and add to this idea!

1 Like

Nice comparison, If I understand correctly you think that ESD coupons function well when the price is near 1.00 for a long time.
I do think that the hybrid option is promising, but ESD suffers not only from under peg issues but also over peg issues, and in combination with time locks this makes under peg issues even worse.

I suggest we don’t disturb the coupons. Instead, we leverage the power of DAO gains. I see the importance of governance but most of the ESD supply does not contribute to stabilization, on the contrary, it amplifies the destabilization. Even worse It creates fear that the DAO will dump under peg.

At the end of the day, ESD is a whale’s game. I strongly believe that “no dump” guarantees will improve the thrust in ESD for small players. Please see the picture for a suggestion to motivate people to buy ESD under peg.

I definitely like the idea to encourage bonding during contraction. And I’m not a fan of the long time locks as they definitely cause expansions to last longer than they should.

So to summarize, above 1.1, DAO can unbond and sell. 1.1 > TWAP > 0.9, no unbonding or bonding. Below 0.90 and you can bond.

Does this mean someone can’t unbond during contraction?

Locking people in the 1.10 > TWAP > 0.9 range seems like a good idea but has some unintended consequences. Ideally, we’d be in this range most of the time, hopefully all of the time. That means people would be totally illiquid unless there was a huge pump or dump. I’d be scared to put much in there in fears that it’d be locked there forever

One way I think we can shift this a bit from a game of chicken to a race is by borrowing an aspect of the DSD coupon system.

TLDR: the earlier you purchase your coupon, the smaller your penalty for redeeming early on in an epoch. Second half of the epoch has no penalty.

This coupon system has gaps on its own, but I think it can be a solid 1-2 punch with the current ESD update. Recent ESD update removed a lot of the risk behind buying coupons, making it easier for people to ape into coupons. Issue is still that there’s no race element/reason to get in earlier rather than later. Adding this DSD dynamic can make it more race like, while still only affecting your upside.

If people decide to redeem early and eat the penalty, that’s still useful because the system doesn’t have to reward as much ESD. Once you’re in a full expansion, coupon buyers can still redeem in the latter half of the epoch without having to deal with a penalty (so there’s still incentive to buy coupons even as we approach the end of contraction)

Does this mean someone can’t unbond during contraction? -Yes it does. This is intended by design. This motivates to unbond during over extensions.
Once we stabilize with in bands DAO can vote to shrink 1.10 > TWAP > 0.9 gap to, for example, 1.05 > TWAP > 0.95 or 1.01 > TWAP > 0.9 .We can even put a halving time
The crucial part is we now have motivation to:

  1. Buy esd without the expectation of coupon redemption and high premium.
  2. Unbond above peg because of the opportunity cost.

Also There is active work to warp DAO shares such that they can be used as collateral. If this is realized ESD becomes the money machine which rewards the true believers.

Are you suggesting that unbonding would be immediate after TWAP is above 1.10 (or whatever is defined) and there would be no locks?

Rather than not being able to unbond during contraction or while in the “goldilocks zone”, what if lock durations were extended to something that would dissuade people from bonding and dumping? I’d be concerned about being stuck in the DAO indefinitely and I’d like to have some guarantees that I can withdraw at some point in time. The length of the lock would have to be long enough to be able to smooth out any mass exits from the DAO.

Main goal is to create a incentive to unbound. Regardless of locks DAO is incentivized to unbound if there is a limited window. The concern of being stuck is the driver of this incentive.

I have self contradicting ideas about time locks but my proposal is independent of their existence. It is almost certain that there is no incentive to unbound from DAO while Twap>1 and No incentive to bound to DAO if there is coupons waiting for redemption. Time locks does not change this.

Similarly and more importantly this approach is also applies to Twap < 0.9

If Goldilocks Zone works, DAO will definitely want to squeeze it to reach a stable coin status.

This might actually be a good-ish idea, from a governance point of view. If the coin is stable, keep the governance people the same. If the coin is not stable, let them be changed out. As is, external actors can buy up governance even when ESD is tooling along at the peg, for nefarious purposes.

We might want to couple this with making expansion payouts not be locked, somehow, although that would be tough to implement in ESDS terms.

If ESD goes above the peg, and the DAO bonders unlock, and nobody can lock, how do we keep handing out expansion rewards?