# 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)

Interlay is a platform that connects Bitcoin and other cryptocurrencies to DeFi. They have completed their expansion from BTC bridge to DeFi hub over the last few months. The end of the DeFi hub incentive program marks a good time to assess the INTR tokenomics and debate improvements and next steps. 

The goals of the INTR token are transaction fees, governance, liquidity bootstrapping, and feature access. To successfully navigate the current market and challenges faced by the ecosystem, the goal of a tokenomics update should be to keep LPs and vaults incentivized to provide capital to the bridge and DeFi hub, reduce sell pressure on the INTR token, and improve liquidity of the INTR token.

Three possible action items are identified, which help achieve the goals above. These include redirecting part of the INTR rewards for vaults, LPs, and lending supply to staking, depositing INTR into HydraDX’s Omnipool to improve liquidity, and removing token inflation to limit the total amount of INTR to 1bn.

LP rewards are coming to an end, and the community must decide on whether or not to prolong incentives at the current rates, cut the incentives down, or remove them altogether. The effect on the price, created by the selling pressure, is leveraged by the low liquidity of the token. 

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. One suggestion is to redirect 50% of the token emission currently distributed to vaults, LP, and lenders to INTR stakers.

Another suggestion is to deposit a considerable amount of INTR tokens to HydraDX’s Omnipool via treasury to increase liquidity. 

As the third action item, we would like to bring to discussion removing the planned inflation of INTR after year 4, effectively limiting the INTR supply to 1 bn.

Call for Discussion: Next Steps for INTR Tokenomics

Based on the discussion [Next Steps for INTR Tokenomics](https://interlay.subsquare.io/posts/24), we would like to gauge sentiment for a proposal that would enact the following action items:

- Deposit 12.5m INTR into HydraDX to create the same liquidity as in the current INTR/USDT pool and stop paying incentives for that pool (this will require a separate proposal though)
- Remove the 2% inflation after year 4 of the token launch, as a first step to make INTR deflationary
-  Change the reward distribution for vaults, LPs, lending and staking as summarized in the table below (redirecting 50% of the rewards for most parts)


## Block Rewards after change*
|  | Current Rewards 90 days | Current per block rewards | New per block rewards | New Rewards 90 days |
| --- | --- | --- | --- | --- |
| iBTC/USDT | 3,800,000 | 5.864197531 | 2.932098765 | 1,900,000 |
| iBTC/DOT | 2,000,000 | 3.086419753 | 1.543209877 | 1,000,000 |
| INTR/USDT | 2,000,000 | 3.086419753 | 0 | 0 |
| iBTC | 0 | 0 | 0 | 0 |
| DOT | 450,000 | 0.6944444444 | 0.3472222222 | 225,000 |
| USDT | 210,000 | 0.3240740741 | 0.162037037 | 105,000 |
| Vaults | 27,753,351 | 42.8292456 | 21.4146228 | 13,876,676 |
| Staking | 3,664,929 | 5.6557541660 | 33.5981547442 | 21,771,604 |
| Total | 39,878,280 | 61.54055532 | 59.99734545 | 38,878,280 |

## Yield after change
**Note:** It's worth mentioning that the vault APY only includes INTR rewards. Any yield coming from the collateral (e.g. staking yield or lending yield+rewards) will accrue on top of the numbers in the table.

|  | Current APY | New APY |
| --- | --- | --- |
| iBTC/USDT - pool | 44.0% | 22.0% |
| iBTC/DOT - pool | 33.0% | 15.5% |
| INTR/USDT - pool | 60.0% | 0.0% |
| iBTC - lending | 0.0% | 0.0% |
| DOT - lending | 14.9% | 8.3% |
| USDT - lending | 11.4% | 8.0% |
| Vaults | 58.0% | 29.0% |
| INTR staking | 41.5% | 247.4% |

*EDIT: The amounts mentioned in the column "Current Rewards 90 days" where actually distributed over ~92 days, such that the current and new *per block rewards* were/are slightly lower what is displayed here. This does not change the total amount to be issued.

- A proposal has been made to change the way rewards are given out for certain cryptocurrency transactions.
- They want to deposit a certain amount of INTR into HydraDX to create liquidity and stop paying incentives for a certain pool.
- They want to remove the 2% inflation after year 4 of the token launch to make INTR deflationary.
- They want to redirect 50% of the rewards for most parts of the transactions.
- The yield for certain transactions will change if this proposal is accepted.

Poll: Next Steps for INTR Tokenomics

# Summary
- **EDIT:** The incentives and pools for the DEX were changed to reflect the community feedback as well as current market conditions
- Bootstrap liquidity for DEX and lending market through incentives to ensure a successful launch with sufficient liquidity to attract power users
- Source enough DOT supply into lending market to enable the usage of the iBTC staking product
-  **EDIT:** Due to various blockers, the iBTC staking product will not be live for launch.
-**EDIT:** ~~Register qDOT and qUSDT as vault collateral to improve efficiency and source liquidity into lending market~~ This is postponed and first tested on Kintsugi for safety reasons.
- Focus on main DEX pools (iBTC/DOT, iBTC/USDT, INTR/DOT) and lending markets (iBTC, USDT, DOT)
- A total of 8.46m INTR (~$130,000) would be requested from the treasury to incentivize DEX pools and lending markets for three month. This amounts to around 3.5% of the current treasury
- Target TVLs are $1.6m for the DEX and $1.4m for the lending market

# Goal
The goal of this discussion post is to get community feedback on the plan outlined below, how to successfully launch the DeFi hub on Interlay and to attract sufficient capital to enable efficient usage of the DEX, lending market, bridge as well as the highly anticipated iBTC staking product.

In order to achieve this, two main requirements need to be put in place. First, to attract enough liquidity, it is proposed to incentivise the lending markets and liquidity pools. Secondly, to ensure sufficient supply of DOT into the lending market, which is a requirement for the iBTC staking product to work, it is proposed to register qDOT as vault collateral.

qDOT is the token that a supplier receives for depositing DOT into the lending market. qDOT can be redeemed for DOT any time, given the market has free liquidity. Doing so, vault operators don’t have to choose between depositing into the lending market or locking DOT as vault collateral but can utilize both, thereby providing borrowing liquidity for DOT as well as minting capacity for iBTC.

# Vault collateral
**EDIT:** This is postponed and first tested on Kintsugi for safety reasons and not part of the current proposal. 
As stated above, registering qDOT as vault collateral is considered one of the main pillars for a successful launch of the iBTC staking product. Apart from qDOT, it is also proposed to register qUSDT as vault collateral. Albeit not being so popular as collateral, utilizing qUSDT as vault collateral would still pose an improvement in terms of capital efficiency and should have similar effects as qDOT in terms of supply in the USDT lending market.

Based on the [analysis](https://github.com/interlay/collateralization-analysis/) the following parameters are proposed:

| Asset | Liquidation Threshold | Premium Redeem Threshold | Safe Mint Threshold |
| --- | --- | --- | --- |
| qDOT | 125% | 140% | 155% |
| qUSDT | 135% | 145% | 155% |

Since qTokens are just a claim of the underlying token deposited into the lending market, the underlying tokens served as a proxy in the analysis and hence both share the same thresholds.

# DEX

One of the main goals of the launch in order to be considered successful is to attract sufficient liquidity into the pools to ensure efficient trading, even of larger positions. This is an important requirement to attract ‘power user’ that account for the majority of the volume on a DEX and are therefore a critical user group to achieve a level of trading volume that generate sustainable trading fees for liquidity provider.

Based on the experience from the Kintsugi launch, it is proposed to launch with three essential pools, with a focus on the iBTC/USDT pool, which attracted the most volume and TVL on Kintsugi (kBTC/USDT), despite lower APY compared to the kBTC/KSM pool. The proposed incentives would run for 3 month to allow enough time for trading activity to gain traction while simultaneously avoid draining too many funds from the treasury.

### Pool Overview

| Pair | Target TVL in USD | APR at target TVL | DOT deployed at target TVL | iBTC deployed at target TVL | INTR | INTR in USDT |
| --- | --- | --- | --- | --- | --- | --- |
| iBTC/USDT | 1,000,000 | 22.3% | — | 19 | 3,800,000 | $55,735 |
| iBTC/DOT | 400,000 | 29.3% | 43,290 | 8 | 2,000,000 | $29,334 |
| INTR/USDT | 200,000 | 58.7% | 21,645 | — | 2,000,000 | $29,334 |
| Total | 1,600,000 |  | 64,935 | 27 | 7,800,000 | $120,271 |

Since most of the yield for LPs will come from incentives in the beginning, it is suggested to launch the DEX with 0% fees to attract as much volume as possible.

# Lending

Similar to the DEX, it is suggested to focus on the most important markets to bootstrap enough liquidity for borrowing and lending activities, with a special focus on the DOT market due it’s importance for the iBTC staking product.

## Market Overview

### Interest Rates Parameter

The interest rate parameters were calibrated to provide a competitive supply and borrow APY at the optimal utilization ratio compared to other lending protocols on Polkadot. The jump rate for DOT was calibrated in a way to still provide excess return for the iBTC staking product at optimal utilization. Note that the optimal utilization for DOT is suggest to be at 80% to create more liquidity to withdraw qDOT to DOT if vaults that use qDOT as collateral get liquidated.

| Market | Base Rate | Jump Rate | Full Rate | Optimal Utilization |
| --- | --- | --- | --- | --- |
| iBTC | 0.0% | 5.0% | 50.0% | 90.0% |
| DOT | 5.0% | 20.0% | 50.0% | 80.0% |
| USDT | 0.0% | 10.0% | 50.0% | 90.0% |

### Security Parameters

Based on the [analysis](https://github.com/interlay/collateralization-analysis/) the following parameters are proposed:

| Market | Max LTV | Liquidation LTV | Reserve Factor | Close Factor | Liquidate Incentive | Liquidate Incentive Reserved Factor | Supply Cap (# tokens) |
| --- | --- | --- | --- | --- | --- | --- | --- |
| iBTC | 0.63 | 0.67 | 10.0% | 50.0% | 110.0% | 0.0% | 30 |
| DOT | 0.67 | 0.77 | 10.0% | 50.0% | 110.0% | 0.0% | 1,000,000 |
| USDT | 0.67 | 0.74 | 10.0% | 50.0% | 110.0% | 0.0% | 600,000 |

Details about the parameters can be found in the (github repo)[https://github.com/interlay/interbtc/blob/f0a0144a0cd7e512bf9b2c55e57b12e4b3b5e9c4/crates/loans/src/types.rs#L89].

### Incentive Estimates

First and foremost it’s worth noticing that no incentives for the supply of iBTC are suggested. This is because the iBTC staking product relies on users supplying iBTC and locking it as collateral in order to receive staking rewards. Hence. the target TVL for iBTC is equal to the `target TVL of DOT * DOT assumed utilization / iBTC max LTV`.

The incentives for the other markets are suggested to run for three months and are merely a means to bootstrap the initial liquidity. After attracting sufficient liquidity, it is assumed that users will borrow funds to use them in DeFi application, even if it’s just to do yield arbitrage between Interlay and other lending protocols.

| Market | Target TVL (USD) | Supplied Tokens | Incentive APY | Supply APY | Total APY | Rewards (INTR) | Rewards (USD) | Assumed Utilization |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| iBTC | 595,000 | 23 | 0.00% | 1.11% | 1.11% | 0 | 0 | 20% |
| DOT | 500,000 | 108,225 | 5.28% | 19.06% | 24.34% | 450,000 | $6,600 | 75% |
| USDT | 300,000 | 300,000 | 4.11% | 8.89% | 13.00% | 210,000 | $3,080 | 80% |
| Total | 1,395,000 |  |  |  |  | 660,000 | $9,680 |  |

**Note:** All calculations assume an INTR price of $0.01466722. The actual APR and TVL might change due to price changes of INTR and the other tokens used in these calculations.

Interlay is planning to launch a DeFi hub with a DEX, lending market, and bridge, and is seeking community feedback on the plan. The goal is to attract enough liquidity to ensure efficient usage of the DEX, lending market, bridge, and the highly anticipated iBTC staking product. To achieve this, the plan proposes incentivizing the lending markets and liquidity pools and ensuring sufficient supply of DOT into the lending market. The proposed parameters for qDOT and qUSDT as vault collateral are also provided. The DEX will focus on the iBTC/USDT, iBTC/DOT, and INTR/DOT pools, and the lending market will focus on the iBTC, USDT, and DOT markets. The proposed incentives for the DEX and lending markets would run for three months, and the target TVLs are $1.6m for the DEX and $1.4m for the lending market.

Interlay DeFi Hub Launch Discussion Post

RPC nodes are used to connect to the Interlay and Kintsugi networks. Dwellir and OnFinality are both providers in the Dotsama space to provide such services (think Infura for Dotsama).

It's generally a good idea to have two providers for redundancy in case one provider might go offline. However, the treasury should also not overspend on RPC node provision.

*Current status*

Currently, there are the following options for RPC nodes:
- Kintsugi/Interlay Labs. These are not invoiced against the treasury but the Interlay team operates these.
- OnFinality. OnFinality operates nodes for Kintsugi and Interlay networks. The currently charge the Kintsugi treasury only for the RPC node provision.
- Dwellir. Dwllir has recently set up Kintsugi and Interlay nodes as well. They are not charging the treasury but opened a discussion post on the Interlay forum to operate nodes in the future.

**Update 20 June 2023**

*Current costing*

- Please see the proposals and discussion by both OnFinality and Dwellir in their respective posts

*Next steps*

- OnFinality shared their proposal here: https://interlay.subsquare.io/post/23
- Dwellir shared their proposal here: https://interlay.subsquare.io/post/21

*What you can do*
Please share your opinion in the poll below. If you have comments, please leave them below.


1. RPC nodes are used to connect to networks like Interlay and Kintsugi.
2. Dwellir and OnFinality are providers of RPC nodes.
3. It's good to have two providers for redundancy.
4. The treasury should not overspend on RPC node provision.
5. OnFinality and Dwellir have shared their proposals for RPC node provision.

Future of RPC node providers

**INTR to Omnipool**


I have seen that recently various incentives have been made for iBTC pairs in different Dexs paid in INTR

So I would like to propose the following initiative:

**Provide INTR as liquidity in the Omnipool** (by design it allows LPing a single token) in order to access a large number of assets that will expand over time, which by providing liquidity, is as if we were opening a pair with each Omnipool asset, without the need to be incentivizing separate pools,

and in turn the Interlay community, will be able to **manage the fees generated** through governance, opening up different possibilities

It should also be noted that the HydraDX community owns and already provides **10 iBTC as liquidity**, which currently makes Omnipool the best option in terms of slippage, you can review it for yourselves

Also INTR could be used as an incentive in the Omnipool **(this can be separated in another discussion and is not the main point of the proposal)** once Liquidity Mining is active and create a broader liquidity base (with the difference that the LM of the Omnipool rewards long-term LPs, since the more last the position in the Omnipool, more rewards will be generated, these positions can also be transferred)

For now I would like to propose and discuss the above ideas, so as a community we can decide what the terms would be.

1. There are incentives for iBTC pairs in different Dexs paid in INTR.
2. The proposal is to provide INTR as liquidity in the Omnipool to access a large number of assets without the need to incentivize separate pools.
3. The Interlay community can manage the fees generated through governance, opening up different possibilities.
4. The Omnipool currently has 10 iBTC as liquidity, making it the best option in terms of slippage.
5. INTR could be used as an incentive in the Omnipool once Liquidity Mining is active and create a broader liquidity base.

Discussions