An efficienct coupon mechanism is important
This is our only built-in mechanism to return from TWAP < 1$. It could become very dangerous for the project as a whole if this stuff is inefficient or there is a lot of FUD about it.
Current coupon system is inefficient in restoring the peg
It frankly could be improved. The current mechanism does not directly affect the amount of USDC or ESD in the UNI-LP and hence the price. It just contracts supply in circulation temporarily which might (or might not) trigger a positive reaction in the market.
But we have seen multiple times that loads of coupons were bought with little and slow effect to the price and it lingering at 0,9$ for a while.
Coupon mechanism only affects the peg in the following indirect and rather unreliable ways:
People who have burned ESD for coupons need more at some point (e.g. for farming opportunities) and go buy them
People buy into ESD just to ape into coupons
People try to push the peg to save their coupon filled asses
People buy ESD below peg because a large number of coupons gives them confidence in returning to 1$ (for the reasons listed above)
Coupon mechanism should impact the price directly
To really impact the price, we need to make sure that somehow someone buys ESD for USDC upon a coupon purchase. This will not be possible by burning ESD for more future ESD, but only if the coupon minting mechanism involves some USDC.
Burning ESD should entitle you to buy coupons, but you should still have to pay for them with USDC - which is then used to accumulate ESD to push the price
Let me give you an example:
- You have 100 ESD and by burning them you can reserve 2x 100 = 200 coupons off a limited coupon supply (depending on bonded LP size)
- You can now buy these reserved coupons using USDC at a considerable discount of e.g. 80%, so for 40 USDC (variable and analogue to current premium system)
- Upon your purchase, your USDC are deposited in an ESD accumulating vault and you get the coupons
- Whenever an epoch is advanced, a smart contract exchanges all USDC in the vault for ESD at uniswap and puts the purchased ESD back in the vault
- The vault accumulates ESD during coupon purchases, pushing the price up in the process
- During next redemption/expansion, ESD from the vault is first used before printing more, reducing ESD inflation
- Coupon mechanism actively pushes price up
- Inflation during expansion reduced
- Coupon incentives might be reduced
- Probably takes some implementation effort
- Incentives for buying coupons too low
-> Add coupon staking rewards so coupons earn compounding interest (as discussed in other proposals already)
- Coupon run while liquidity is low could lead to a ridiculous price or even not enough liquidity to exchange the USDC in the vault
-> Cap max. available coupons depending on bonded (maybe also staked) LP to make sure there is enough liquidity by the end of the epoch. Also creates coupon buy pressure.
-> LPs might then need to be incentivized more during coupon runs to mitigate big fluctuations. One incentive are high UNI exchange fees due to the accumulator, but bonded LPs could potentially also receive a share of all coupons purchased.
- People exchange ESD for USDC just to buy coupons
-> This does not hurt. USDC goes 1:1 back to the pool.