*Fix Interlay Escrow Rewards*

The "Escrow" pallet is distributing too many rewards per block because it incorrectly updated the `RewardPerBlock` variable at the start of "Year 2". This is calculated using the following formula:

`rewardPerBlock = totalBalance / emissionPeriod`

Where `totalBalance` is the total amount of INTR we have scheduled to distribute over the `emissionPeriod` (one year). The implementation actually uses the total balance assigned to `EscrowAnnuityAccount` which also includes unclaimed INTR already distributed. This isn't an issue for the Vault rewards because we transfer those funds from `VaultAnnuityAccount` to `FeeAccount`, but in this case we then do not have enough funds to fulfil the expected rewards.

:link: https://interlay.subsquare.io/democracy/proposals/0

The subsequent adjustment to the Vault rewards added more rewards to the Escrow (staking) annuity pallet - this is what distributes rewards each block. This also updated the `RewardPerBlock` incorrectly because it used the previous (invalid) figure and additionally didn't align until the end of the epoch as intended.

:link: https://interlay.subsquare.io/democracy/proposals/86

This proposal corrects the remaining calls previously scheduled in the "Activate INTR Staking Rewards" proposal to do the following:

- at block 4400000, reduce `RewardPerBlock` to 261148158032 - the remaining surplus is distributed over the remaining blocks of year 2
- at year 3 set `RewardPerBlock` to 47564687975, don't update for year 4
- transfer year 3 and 4 rewards as before
- set `RewardPerBlock` to zero at end of year 4 to stop distributing rewards

Interlay is a platform that distributes rewards to users who hold a certain cryptocurrency called INTR.

The "Escrow" pallet, which distributes rewards, was giving out too many rewards per block because of a mistake in how the rewards were calculated.

To fix this mistake, Interlay proposed a plan to adjust the rewards given out over the next few years.

The plan involves reducing the rewards given out in year 2, setting a specific reward amount for year 3, and then stopping rewards altogether at the end of year 4.

This plan will help ensure that rewards are distributed fairly and correctly to users who hold INTR.

Fix Interlay Escrow Rewards

# Summary
- This proposal aims to improve the bridge’s and vault’s economic security by:
    - Changing slashing for vaults from premium redeems and unprocessed redeems from 10% to 2%
    - Increasing the minimum collateral for all vaults to `$1,000 * secure_threshold` to ensure premium redeems and liquidations remain profitable
- Use ~ $145 of the DAO treasury to buy iBTC and burn under-collateralized iBTC in the liquidation vault

# Parameter Changes
Recently, a user [reported](https://discord.com/channels/745259537707040778/991617172407337030/1179866092441706626) a vault that got liquidated because it did not process a redeem request and got slashed for 10% of its collateral. The result was that the vault's collateral ratio dropped below 100%. Hence, the vault’s BTC was no longer secured, and liquidators were not incentivized to redeem iBTC to receive collateral because the collateral value would be less than the redeemed iBTC.

The vault was likely abandoned, which only had ~$130 in collateral and backed 0.003515 iBTC, so the damage is limited to a few USD. However, it highlights that we should change a few parameters to prevent such cases from happening again. Therefore, the proposal suggests to apply the following changes:

- **Reduce the slashing** punishment for premium redeems and unprocessed redeems from 10% to 2%
- **Increasing the minimum collateral** for all types to `$1,000 * secure_threshold` or more specifically:
    - USDT: $1,500 (=1,500 USDT)
    - qUSDT: $1,500 (=7,500 USDT)
    - DOT: $1,300 (=236 DOT)
    - vDOT: $1,350 (=200 vDOT)
    - qDOT: $1,300 (=1,000 qDOT)

**Reducing the slashing** amount will have two effects. First, the change will ensure that punishments for vaults will not cause the collateral ratio to decrease below 100%. This is true if a vault is close to the lowest liquidation threshold in the entire system, which is 105%, so the liquidated collateral would still contain a 3% premium for liquidators. Secondly, it drastically reduces the financial risks for vault operators in case their service is unresponsive or temporarily falls below the premium redeem threshold. This should also support the current attempt to onboard new vault operators and increase mint capacity.

**Increasing the minimum collateral** is required to ensure that premium redeems remain profitable. We have recently seen several days where fees for Bitcoin transactions were ~$20, so premium redeems with a 2% premium on amounts of less than $1,000 would have been unprofitable. The same issue, although to a lesser extent, holds for liquidations if we assume that someone has to (re-)mint iBTC before/after burning his iBTC in the liquidation process. In both cases, a Bitcoin transaction will be triggered, so the proceeds from the premium redeem or liquidation should cover at least the costs of such a transaction. The suggested amount should still be small enough to not jeopardize decentralization but also to ensure profitability for the actions mentioned above.

**Numerical example**
If the vault is completely offline and does not respond anymore, it will get slashed until the collateral ratio is below the liquidation threshold. Assuming a newly registered vault would have at least $1,300 collateral at at 130% collateral ratio and is unresponsive, then users would be able to drain the vault down to $1,050 or 105% collateral ratio, by getting reimbursed on their failed redeems. Below that level the vault would get liquidated. At this point, a liquidator would get ~$50 for the liquidation, which should cover the transaction fees on BTC (if we assume he has to (re-)mint iBTC) and some profit.

Currently the smallest vaults only provide ~$5 to liquidators so even a small increase in BTC fees make it unprofitable for liquidators to do this.

# Burn liquidated iBTC
Given that the liquidated collateral of the vault does not fully cover the iBTC value anymore, it is suggested to use treasury funds to buy 0.003515 iBTC with INTR via HydraDX and burn the iBTC to receive 130.08 USDT, which shall reside in the DAO’s treasury. At a Bitcoin price of $41,418.36 (as of 04.12.2023), this would incur a loss for the treasury of about $15.51.

SubSquare has proposed changes to improve the economic security of the bridge and vault. The changes include reducing the slashing punishment for vaults, increasing the minimum collateral for all types, and burning under-collateralized iBTC in the liquidation vault. The proposal aims to prevent cases where the collateral ratio drops below 100% and liquidators are not incentivized to redeem iBTC. The changes will ensure profitability for premium redeems and liquidations and reduce financial risks for vault operators. The proposal also suggests using treasury funds to buy iBTC and burn under-collateralized iBTC in the liquidation vault. This will result in a loss of about $15.51 for the treasury.

Proposal			Status

#87Fix Interlay Escrow Rewards			Executed

Proposal	Last Activity

#37Improving Vault and Bridge Security Parameters	Unknown time

Interlay

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