EIP-18: Pro-Rated Premium

EIP-18: Pro-Rated Premium

Author: @eqparenthesis

Purchase Incentivization

EIP-16 successfully made coupons less risky, however with the current mechanism, there’s little incentive to buy coupons early. When coupons are purchased, premium is fixed. This means purchasing at the start of a contraction yields the same return as right before a contraction is complete. We’d like to mitigate this behavior by ensuring that purchasing coupons early results in a higher relative reward.

Mechanic

On redeem the premium portion of the user’s coupon will be pro-rated by the time their ESD was locked.

redeemedPremium = premium * (lastContractionEpoch - couponEpoch) / 90

Implementation

We will add a new state variable that tracks whether we’re in contraction or expansion, and which epoch the current era started. This information will also be useful to enable other mechanics (e.g. locks based on eras).

From this data we can modify the computation for redeeming coupons. Leftover redeemable from non-pro-rated premium will get swept to bonded by the same code path that expires coupons.

Migration

This change will result in lower premiums unless coupons are locked for the full 90 epochs, which would be unfair to impose on existing coupon holders. As a result this update will be effective as of a specified epoch after the proposal is committed.

7 Likes

I generally like the idea a lot.

Only concern that comes to my mind is it creates a double incentive for newer coupons to supress and let older ones expire, as they also max-out rewards by doing so.

So it could create a fight between different coupon ages… Still so attractive to be the first one to buy?

When cycles tend to get shorter, how should the behaviour be if I hold coupons for longer than 1 cycle?
Lets say i bought towards the end of the cycle it could be more attractive for me to hold my coupons until the next expansion.

On another note, this could be a good moment to implement setting redeemable amount to 0 when going into contraction.

I’d argue that this is actually somewhat desirable behavior. If the price is neutral enough that this strategy reliably paid off, you’re contributing to the peg by delaying your redemption until later and should be compensated as such. Also, if we’re so stable that we’re constantly going above and below $1, risk and therefor market premium should be very low.

Not sure if it helps the peg to deplay a redemption, but true premium should be low in such a scenario.

So you suggest it should continue to accumulate?

IMO this model will only equalize early coupon buyers’ rewards with late coupon buyers… As epochs pass and not enough coupons are bought debt will be issued to reach ceiling at every 7/8th epochs . Even a linear increase in coupon purchases 90x2 epoch will be enough to almost equalize rewards for early/late buyers. ESD will be stuck at max debt and highest rewards. Again purchase of less than (3% supply ) like 15mm in an epoch will trigger downward spiral. Let alone unknown unknown that might keep price under the peg…

For reference, this is up for vote on the DAO, but unless a bunch of people vote soon it’s not going to hit the quorum.

This is band aid solution for balancing rewards as I said earlier…And if implemented now, “when debt is around 20%” nobody will buy coupons at 56% and wait 90 epoch…
I am very sorry seeing this is voted positively…

I would say setting debt to zero instead of redeemable…