# TLDR

Interlay has completed it’s expansion from BTC bridge to DeFi hub over the last few months. The end of the DeFi hub incentive program at block 3714031, corresponding to ~2023-10-07 (https://interlay.subscan.io/block/3714031), marks a good time to assess the INTR tokenomics and debate improvements and next steps. 

************************************************INTR Goals as per v2 whitepaper************************************************

The goals of the INTR token, as suggested in the [v2 whitepaper](https://gateway.pinata.cloud/ipfs/QmWp62gdLssFpAoG2JqK8sy3m3rTRUa8LyzoSY8ZFisYNB), have so far been:

- Transaction fees
- Governance
- Liquidity bootstrapping (Vaults, LPs, lenders)
- Feature access (currently collators and more in the future)

**Goals of Tokenomics Update**

To successfully navigate the current market and challenges faced by our ecosystem, while making sure the network is in a position to capitalize on upcoming opportunities, the goal of a tokenomics update should be as follows:

- Keep LPs and vaults incentivized to provide capital to the bridge and Defi hub
- Reduce sell pressure on the INTR token
- Improve liquidity of the INTR token

********************************Possible Actions********************************

We identify three possible action items, which help achieve the goals above.

- Redirect part of the INTR rewards for vaults, LPs, and lending supply to staking so that capital providers have an increased incentive to lock INTR instead of selling it
- Deposit INTR into HydraDX’s Omnipool to improve liquidity and stop paying out high rewards for the INTR/USDT pool
- Remove token inflation to limit the total amount of INTR to 1bn

There are likely more approaches that can be taken here, and it would be welcome to hear ideas from the community.

# Problem

With the rewards for LPs and supplier of capital to the lending market coming to an end, the we as a community must decide on whether or not to prolong incentives at the current rates, cut the incentives down, or remove them altogether. Cutting down the incentives or removing them helps reduce selling pressure but will likely lead to capital leaving the bridge and DeFi hub. This in turn would reduce the efficiency at which users can trade and borrow on the DeFi hub and further lower the minting capacity of the bridge.

On the other hand, data analysis suggests that most LPs seem to be selling their INTR rewards, which puts considerable sell pressure on the token at the expense of long-term INTR holder who have staked their tokens to retain ownership over the project and cast their votes in governance. In addition to that, the continuing price decrease of INTR makes it more difficult for the treasury to compensate vaults, LPs, and contributors for the value they add to the network.

The effect on the price, created by the selling pressure, is leveraged by the low liquidity of the token. Although the market makers on centralized exchanges, as well as the liquidity of the USDT/INTR pool on the DeFi hub helped to improve liquidity, both attempts have not achieved sufficient liquidity for the token to efficiently trade at size.

# Suggested Solutions

## Redirecting Rewards

If we want to maintain the DeFi hub and ensure there is sufficient liquidity for efficient trading and borrowing/lending, then we cannot completely remove LP rewards. The same holds true for the bridge, which needs to attract more capital and Vaults to grow. To still reduce the selling pressure while encouraging LPs and vaults to provide capital and services, we suggest to **redirect 50% of the token emission currently distributed to vaults, LP, and lenders to INTR stakers (vINTR holder).** 

This would change the APRs roughly to the value in the table below

|  | Vault | USDT/iBTC Pool | DOT/iBTC Pool | INTR/USDT Pool* | Staking (max lock-up duration) |
| --- | --- | --- | --- | --- | --- |
| Current APR | 30% | 29% | 24% | 53% | 34% |
| New APR | 15% | 15% | 12% | 0% - 27% | 95% |

*Pool incentives for this pool could be replaced by protocol owned liquidity, see the next section.

On a first sight this seems to make it much less attractive to LP or operate a vault since the direct rewards would be 50% lower than they are now. However, receivers of the rewards can still lock their INTR in staking and receive the residual (that part of INTR that has been redirected to staking) over time. This should encourage more people, especially everyone who believes in the project's long-term success, to stake their rewards rather than selling them directly, without making economic sacrifices.

Compared to directly emitting staked rewards, this solution also allows individuals to decide if and for how long they are willing to lock up their gains. E.g. if they choose to only lock them up for half of the maximum length, they would still get 50% of the maximum staking reward (~47% APY in the above example).

At the bottom line, this proposal does not change the net INTR emissions, nor does it meaningfully impact the total APR protocol participants can receive for their services. It has the potential, however, to significantly reduce selling pressure on INTR as it creates a strong economic incentive to stake rewards rather than sell them.

It is worth noting that vaults can already use yield-bearing assets as collateral, such as qTokens from lending as well as vDOT, a staking derivative powered by Bifrost. This allows vaults to “re-stake” their capital and increase earnings, such that a lower subsidy with INTR tokens at around 15% is still an attractive yield pick-up (Vault rewards are paid “on top” of staking/lending).

## Deposit INTR into HydraDX Omnipool as Protocol Owned Liquidity (POL)

As already stated, the low liquidity of INTR intensified the price decrease of INTR due to constant sales of INTR tokens. One option to increase liquidity, which has already been [discussed by the community](https://interlay.subsquare.io/posts/18), is to deposit a considerable amount of INTR tokens to HydraDX’s Omnipool via treasury. Despite the potential risks involved with depositing a large amount of INTR into Omnipool, it also comes with several benefits and the discussion has generally received positive feedback. 

We suggest revisiting this topic and discussing how many INTR the Interlay DAO should contribute to the Omnipool as POL. Likewise, we should discuss if it makes sense to continue incentivizing the INTR/USDT pool at the current TVL targets (even at reduced rates), considering that this pool is very expensive in terms of rewards and only a small portion of the liquidity is required for the pools main use cases:

- Onboarding new users that do not yet have INTR
- The “bring your own fee” feature.

In the [previous discussion](https://interlay.subsquare.io/posts/18#34) it was suggested that the DAO would need to deposit around 20m INTR to Omnipool in order to achieve the same level of liquidity as a $50,000 TVL Uniswap V3 pool on Stellaswap. Due to price changes of INTR, this amount would increase to around 63m INTR (25% of the treasury) by now. To put this into perspective, to achieve the same liquidity as currently in the INTR/USDT pool, the DAO would have to deposit around 14.7m INTR into the Omnipool.

While a deposit of 14.7m would not improve liquidity, it would at least remove the need for the Interlay treasury to keep paying APRs for LPs of that pool of +50% at a minimum risk for the DAO. The other extreme of depositing 63m INTR (the number mainly comes from the comparison to a former proposal for a Pulsar pool on Stellaswap) seems to expose the DAO to a lot of risk given that this would be a large part of the treasury. 

Therefore, one suggestion could be to start with a deposit of 12m-15m INTR to create a substitute for the INTR/USDT pool and stop incentivizing this pool altogether. In fact, the treasury could then sell some INTR for USDT in the Omnipool and use that to LP a small amount of INTR/USDT on Interlay to ensure some minimum liquidity is available to maintain the functions mentioned above. Subsequently, more INTR can be added to the Omnipool in the future after an evaluation of the initial deposit and/or when INTR price has come back from it’s all-time low. 

# Remove inflation

As the third action item, we would like to bring to discussion removing the planned inflation of INTR after year 4 (counting from the token generation event), effectively limiting the INTR supply to 1 bn. 

Conversations in the community seem to indicate that many (potential) holders are worried about the possible dilution in the future, with so many unknowns.

-- Philipp @ Interlay

**Update 21/09/2023:** Corrected the amount of INTR the DAO would need to put into the HydraDX pool in order to correspond to the current INTR/USDT liquidity (7m -> 15m)