EIP-22: DAO Rewards

EIP-22: DAO Rewards

Background

This discussion is meant to be an extension and simplification of the ideas outlined in EIP-21, please read this first for full context.

Overview

We’d like to add an additional lever to aid with regulation during contraction periods. Using the model laid out in EIP-21, offering immediate, compounding, and deterministic rewards should allow us to rent even more contraction with a lower rate than coupons.

Complexity and Simplification

EIP-21 proposes creating another pool or “Reverse DAO” where these rewards would accrue. Though it would probably be the right long term goal, this adds considerable code and UX complexity to the system before we’ve been able to validate the powerfulness of this lever.

We instead propose adding these rewards directly to the DAO in an always-on fashion. This is much simpler, and should provide the same effect on circulating supply while we validate.

Spec

At the end of each advance call, rewards are minted to the DAO over the following formula:

EPOCH_REWARD = TOTAL_BONDED * (REWARD_MIN + DEBT_RATIO * REWARD_RATE)

We further propose the initial values:

REWARD_MIN = 0.3 bps
REWARD_RATE = 5.0 bps

Which corresponds to a minimum reward of ~3.5% APY and a maximum reward at 20% debt ratio of ~15.5% APY compounded per epoch.

Future Paths

If we’re able to validate this mechanic we should next aim to clean up our existing tools, for example by rolling coupons and DAO rewards into a single external pool, as laid out in EIP-21.

6 Likes

So the idea here is to pay people to stay bonded? Seems to be at a low enough rate that it shouldn’t be problematic, but might still be effective to keep circulating supply down. I like this.

4 Likes

As the original proposer of EIP-21, I’m really excited to see this move forward.

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So during expansions, we pay out the normal expansion rewards, which cap out at something like 3% per epoch, to the DAO.

And all the time (during expansion and contraction), we also pay something like 3.5%-15.5% per year, in ESD, to the DAO, to make staying bonded look attractive during contractions. And it goes up the further below the peg we get.

Would we do anything to prevent the extra supply from further depressing the price? And would this also apply to bonded liquidity providers?

2 Likes

Cheers to the simple iteration+implementation!

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I am very much in favor of this! How did you determine the reward rates?

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Definitely see the value of simplifying the process and growing the appeal of bonding to the DAO during contractions. Is the idea here that this would replace the coupon system or that it would exist in addition to it? Since the APY is low I think it makes for this to be a supplement to the coupon system.

My concern with it being a replacement is that it would have less of effect on demand when price is below 1 (relative to the post eip16/18 coupon system), making it potentially harder to return the peg. With current coupons I feel like users are more likely to put fresh capital into buying ESD (using current price) since successful conversion means a 3x (.52 to $1.55) while downside is limited with effectively no principal losses.

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My own understanding is that this is a step towards #1 that is mentioned in EIP-20 and it will work complementary to coupons. A further step might be to incentivise LP below the peg when the time is right (see the charts and tables on EIP-20).

While I love the idea of creating incentives to bond/LP during contractions, I worry about an always-on inflation of 3.5-15% to the DAO. It strikes me that this is untenable long term and may break the peg permanently at some future point.

I believe at some point, people will start to sell this inflation and we’ll be left with a bigger hole to crawl out of.

2 Likes

Definitely a valid concern. In my mind the goal of this proposal would be to try this mechanism out for a few months to validate its effectiveness. In that time period, even if it fails, it shouldn’t have a significant detrimental effect on supply.

If it’s successful and we would like to keep it long-term, the idea would be to pay the rewards using the reserve funds (if there’s a non-zero amount) so that we do not expand supply.

3 Likes

I understand the desire to create incentives to lock funds in the DAO, but this strikes me as borrowing too much from the future. Even a few months of ~10% APY can make reaching the peg significantly harder since the reflexivity of being under peg can spiral downwards. It’s a confidence game ultimately, and it’s harder for investors to be confident that the value will retain if printing is too out of control.

I am much more in favor of finding natural economic sinks for ESD. If we can find natural sources of demand for removing supply from the market, that will cause confidence to rise substantially. I am thinking of things like:

  • Holding future USDC reserves in Compound and using interest to buy and burn ESD.
  • Perhaps using a fraction of Treasury reserves to LP in Curve or the like and using rewards to buy and burn ESD.
  • Maybe the Treasury can deposit on CREAM and burn its interest earned.
  • Perhaps capturing a fraction of the fees generated in LP Uniswap shares and burning the ESD, using USDC to burn more ESD.
  • Maybe ESD can offer its own DEX and burn fees charged

I’m ultimately not that creative, and I’m sure we can do better, but I think this illustrates the point. If confidence that the price will have natural support rises, then people will be more willing to hold their money in the DAO. If we paper over the confidence issue with inflation, then I think it can have the opposite of the intended effect.

2 Likes