In the current incentive design, expansion rewards are distributed in sequence. Coupon holders get all the rewards first. ESD holders and LP providers get their rewards, only after coupons are redeemed or expired.
There’re 4 undesired side effects because of this sequence.
- During coupon redemption phase, ESD holders have no incentive to cooperate with coupon holders to keep the peg up.
- ESD holders have incentive to book short-term profits above $1, knowing coupon holders will keep bringing the price up.
- Coupon expiration is good for ESD holders, because they get to own a bigger share of the pie after the coupons expire.
- Liquidity dries up since LPs have no incentive during coupon redemption phase, in spite of ESD trading above $1.
This makes coupon holders and ESD holders work against each other, even though both share a bullish view on ESD.
The objective of the proposal is to make coupon holders and ESD holders cooperate and work in alignment with the protocol, with minimal changes.
- Remove the sequence in sharing the rewards.
This will avoid competitiveness between ESD holders and coupon holders. Expansion rewards can be offered in 80:20 ratio, between coupon holders and ESD holders, distributed in parallel. ESD holders include both DAO and LP. Liquidity will remain high at all times above $1, even during coupon redemption phase.
- Increase the expiration time to 180 epochs.
This will make ESD holders more cooperative to reach expansion faster during coupon redemption phase. The alternative to keep the price lower till coupon expiration is no longer rational.