Summary
After the recent Discord post by the Interlay team, we are putting forward this proposal to readjust the vault rewards to the levels suggested by the team in that post to prevent capital flight and preserve vault integrity.
This proposal readjusts vault block rewards to a level below the original vault reward level but still sufficient to incentivise liquidity to the protocol at reasonable collateralization rates. We believe an adjusted reward scheme will prevent the further unwinding of vaults, which has already been witnessed after the previous Referendum #33 is otherwise expected to accelerate over the coming weeks.
We believe that periodic reviews should still be undertaken to assess the reward levels based on movements in the INTR price in order to ensure the long-term health of vault operators and the protocol overall.
It is now evident that the substantially reduced reward level implemented via Referendum #33 does not compensate for the significant risks and costs of running a vault including: fixed infrastructure setup and maintenance costs, daily collateral management, delta risk on collateral assets and real-time monitoring and risk assessment. In addition, meaningful “black swan” risks have been and will continue to be incurred by vault operators as the protocol matures. We have recently seen the bricking of the KINT chain—which completely locked up collateral—and prior issues with liquidations at no fault of the vault operators. Other issues will likely arise as the protocol matures. These risks must be adequately addressed for the protocol to grow and attract capital.
This proposal is intended to realign the incentives given the most recent data and direct feedback from the INTR team and vault operators.
Aim of the proposal
To help realign the vault incentives post-Referendum #33, mitigate capital flight and minimize vault unwinds.
As mentioned by the Interlay team, the reduction in rewards was intended to lower vault APY to a sustainable level with the assumption that vaults would run at the new lower collateral threshold of 155%. However, it is now clear that this collateral level creates a very high level of risk for operators, and thus many vault operators (and nearly all Vault operators with substantial capacity) are not comfortable running with low collateral coverage and, therefore, the assumptions of the original proposal require adjustment. This proposal increases vault rewards (while still keeping them below initial levels) to prevent further capital flight and maintain an experienced set of vault infrastructure providers as the Interlay team rolls out their new product roadmap.
Under today’s reward structure, if vaults continue to run at a level of 260%, the current APY is only 16% which is only equivalent to a passive $DOT staking rate and not sustainable or attractive given the requirements for vault operation and the risks listed above. Even a vault operating at the latest premium redeem threshold of 140% but still using the same operational cushion of 60% [260% vs. 200%] is only yielding 20% for an activity that requires FAR more infrastructure investment, operational engagement, risk, and expense than passive staking on the $DOT relay chain.
Solution
1) Adjust Vault block rewards to an appropriate risk and reward level
The proposal is to adjust the Vault rewards such that at a collateral level of 260% APR on Interlay is ~40-50%, assuming the amount of collateral locked prior to the capital flight following Referendum #33. (Locked BTC and collateral would be expected to revert close to prior levels once rewards are readjusted). This is the level recommended by the Interlay team in recent discussions with Vault operators.
Accordingly, this proposal updates the block reward from 9.866085649312430 INTR to 35.6621004566 INTR. No other changes are proposed to the reward structure, collateral requirements, or INTR runtime.
2) Regular Review & Adjustment of Vault Economics.
We believe that, as proposed in Referendum #33, a structure should be established to periodically review vault economics, and the community should have final say as to how these economics (and also those allocated for staking and liquidity incentives) are adjusted over time based on a myriad of internal and external factors. There are numerous variables to consider here (many of which will be fluid over time), so we believe this review and adjustment structure should be established with a separate referendum that is developed once the specifics of INTR 2.0 are more clear.
Expected Result
Why should the community vote in favor of this proposal?
As a community, we all have a vested interest in the long-term success of the Interlay protocol. One of the elements of success requires an increase in the capital entering the protocol as well as supporting experienced vault operators who are the “heart of the Interlay bridge” and have borne significant risks helping the growth of the protocol from inception. Running a vault is a critical part of the ecosystem and carries risks, costs, resources, and ongoing time. It requires substantial capital commitment and is much more time intensive than running a collator or validator, for example, and as such, the emissions structure must reflect this.
In order to ensure the success of the protocol, there must be adequate rewards for the continued investment by these important stakeholders. We believe this proposal aligns the risks and rewards to an appropriate place for the short to medium term. It is a healthy balance between the initial emissions schedule and its extreme and unsustainable reduction affected by Referendum #33. We note that rewards to Vault Operators are already scheduled to decline by very substantial amounts each year (from 120mm INTR in year 1 to 30mm INTR in year 4).
Interlay is proposing to adjust the rewards for vault operators to prevent capital flight and maintain experienced vault infrastructure providers. The current reward structure is not sustainable or attractive given the requirements for vault operation and the risks involved. The proposal adjusts the Vault rewards to an appropriate risk and reward level and updates the block reward from 9.866085649312430 INTR to 35.6621004566 INTR. The proposal also suggests regular reviews and adjustments of vault economics. The expected result is to stem the flight of capital from the INTR Vault ecosystem, increase capital entering the protocol over the medium term, and ensure the continuity and stability of experienced vault operators. The community should vote in favor of this proposal to ensure the long-term success of the Interlay protocol.
I'm supportive. But why make this proposal first on Interlay instead of Kintsugi?