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- #12/
Recommended Adjustment to Vault Reward Schedule on Kintsugi and Interlay
Therefore I would recommend shrinking the gap between liquidation and premium redeem and increasing the gap between premium redeem and secure thresholds.
IMO the ability for vaults to set higher custom thresholds addresses this concern. So any vault that prefers higher secure thresholds, the vault should set a higher threshold. Making the gap between liquidation and premium redeem smaller, increases likelihood of liquidations which is not ideal.
I think it's a good idea to raise the vKINT/vINTR staking reward rate above the vault rewards rate, which may encourage more vault token staking instead of sell pressure.
That doesn't solve the actual problem: emissions are too high in this bear market. It just bleeds out the treasury without adding much value.
At higher rates I’ve been able to pool community resources to run a vault, but if vault rewards reduce to only about 10% higher than staking rewards I don’t think there’s enough incentive for people to pool together funds in a community vault.
Three's always the option to adjust rewards later on.
I really look forward to LKSM/LDOT vaults and injecting treasury funds into the new DEX to supply “Treasury Owned Liquidity” as another way to stabilize the token price.
LKSM vaults are live on Kintsugi :)
Edited
Technical Proposals
The technical proposal overwrites the storage items of the vaultAnnuity.rewardPerBlock amount. This approach is chosen as the scheduled rewards are batches of [tokenTransfer, update_reward_per_block]. However, we can't use update_reward_per_block since it will try to distribute the total rewards over 1 year.
Kintsugi
Current value: 456,621,004,566 planck
New value: 102,803,978,514 planck
New value in little-endian hex: 0x123998ef170000000000000000000000 (use https://www.save-editor.com/tools/wse_hex.html to verify)
Extrinsic
Proposal
Interlay
Current value: 456,621,004,566 planck
New value: 98,660,856,493 planck
New value in little-endian hex: 0xad32a5f8160000000000000000000000 (use https://www.save-editor.com/tools/wse_hex.html to verify)
Extrinsic
Proposal
Edited
The current KINT and INTR reward emission is unsustainable:
~80% APR on Kintsugi
~65% APR on Interlay
I don't think this is accurate since most vaults are self minted.So the actual APR is much lower.When there is no demand for KBTC/IBTC, BTC is also the cost that the vault operator needs to pay, and needs to bear risks.
The goal of this proposal is to adjust Vault block reward rates to be more sustainable while keeping incentives for operators high enough - and more reliable.
The goal appears to be to reduce the block reward. But why reduce it? We saw:
This creates a negative feedback loop: there is too much emission, disproportional to the adoption curve, and Vaults are incentivized to sell KINT/INTR in anticipation of being able to repurchase it cheaper at a later point in time. This in turn creates a downwards spiral of both token prices that slowly but steadily burns treasury funding and reduces returns for Vaults (despite the high emission).
Simply put, there is no actual demand for INTR/KINT, so the vault operator chose to sell the rewarded INTR/KINT, which caused the price to drop.
Then let's consider:
- Why did the vault operator sell INTR/KINT? Is it because there are too many rewards?
- Why did the price drop?
My considerations are:
The total amount of INTR/KINT is unlimited, which means that if you put INTR/KINT in your hand, it will depreciate every moment. Therefore, if the reward is reduced, the depreciation is only reduced, but the depreciation is still happening. In this way, no one will choose to hold INTR/KINT.
Therefore, no matter what the block reward rate is, the price will keep falling because there is no demand for INTR/KINT.
I have the following suggestion
- First set the total amount of INTR/KINT, and then reduce the block reward.
- Provide a function similar to "Layer 2", users can safely provide BTC to share the rewards of the vault operator. The vault operator can set the commission by itself.
" incentivized to sell KINT/INTR in anticipation of being able to repurchase it cheaper at a later point in time"
That was funny! What evidence do you have for the second part of your assertion?
I agree completely with the analysis of JZCg in terms of lack of utility for the token.
It seems to me that the vast majority of the Kintsugi users are vault operators, in other words KINT farmers. I predict that many will leave if you decrease the vault rewards. Personally, I have scaled back my activity to about 1/10th mainly due to losing my KSM short hedge on FTX. But even without the FTX debacle, I was preparing to leave as soon as the APR no longer justified the risks.
For me, there is insufficient work done on analytical tools and strengthening of the UI accuracy:
- dashboards only show 4 days of history and don't use accurate prices
- APRs don't take into account real block times
- Hard coded 24-hr logic when the chain uses 48hr for premium redeems
These deficiencies are manifestation of the risks of putting one's money into a degen yield farm. Maybe Kintsugi is still the most lucrative one out there, but I doubt it's 4x over par.
Fixing emission rates without having a complete rethink of the whole economic model seems to me a very risky approach.
The proposal seeks to reduce the rewards on Kintsugi to ~30% APR.
Some thoughts that I have regarding this change are:
- The APR is only met with 100% collateral usage. In the real world, you're facing redeems and issues and you'll never reach constant collateral usage and thus constant rewards
- Vault operators carry the risk of losing collateral through premium redeems or liquidations
- Vault operators have the occurring infrastructure and operational costs to keep the vault running and maintained
Given the unstable rewards and involved costs it will become more or less similar effective to just staking the collateral which is why I would then re-evaluate vault operations.
@wdBL...JZCg
I don't think this is accurate since most vaults are self minted.So the actual APR is much lower.When there is no demand for KBTC/IBTC, BTC is also the cost that the vault operator needs to pay, and needs to bear risks.
If there is no use for kBTC/iBTC, the vault operator should not self-mint it in the first place. Vaults should only self-mint if they want to use kBTC in DeFi, that's the whole purpose of Interlay. Otherwise you could just hold your BTC in your cold wallet. So this argument that self-minting reduces the APR does not sound very reasonable to me. On Interlay we currently have 89 iBTC minted. Only 22 of those are LPed into pool. Since there are no other use cases as of now, the rest most certainly remains under self-custody by vaults who self-minted and only farm rewards but do not contribute to the growth of the ecosystem at all.
Another thing to consider is, that the ecosystem also has to provide incentives for liquidity bootstrapping for the AMM and lending protocol launch. This will help to increase volume of the bridge and in turn also the rewards. I think in the end, vault operators will be more interested in earning BTC fees than INTR rewards, so I would considers this reduction in the light of the overall strategy for Interlay and Kintsugi.
I agree with the need for more INTR/KINT utility though and this is actively being worked on. This proposal is only the first step into a completely reworked tokenomics.
Given the unstable rewards and involved costs it will become more or less similar effective to just staking the collateral which is why I would then re-evaluate vault operations.
On Kintsugi LKSM is already supported as a collateral and there are plans to extend this offer to more staking derivatives as well as to allow the same on Interlay. This means that you can actually get the vault rewards on top of your staking rewards, so these two options are not competing with each other.
@wdB3...ay33
"the ecosystem also has to provide incentives for liquidity bootstrapping for the AMM and lending protocol launch"
Instead, Kint/Intr treasuries should deposit KINT/INTR and submit a proposal to KSM/DOT treasury to deposit an equivalent amount of KSM/DOT. Therefore the treasury would provide liquidity for the KINT/KSM and INTR/DOT pairs and you wouldn't need to provide liquidity incentives for mercenary capital for those pairs. ("Treasury Owned Liquidity") (kBTC/iBTC pairs would be different since treasury doesn't hold any kBTC/iBTC, but it could slowly be bought over time. For those pairs, LP incentives would be needed at first.)
I totally agree that treasury owned liquidity should be prioritized over attracting LPs via incentives. However, this only works for KINT/INTR at the moment. Given that the lending protocol will likely whitelist other assets as collateral, there should be enough liquidity on-chain to create profitable liquidation opportunities for distressed debt and that will requires initial incentives.
Also, your post implies that LPs are bad, doing it only for the money, whereas vaults are the good guys who deserve the incentives. Given the comments above, it seems that many vaults behave very much like the 'mercenary capital' you described. Once APY becomes to low they will move on and farm elsewhere. The ecosystem needs vaults and LPs that also provide capital at realistic APYs and those can only be sustained by bringing real volume to the ecosystem, which can only be achieved by bringing more use cases for kBTC & iBTC.
Thanks for starting an active discussion!
Please check out the Interlay 2.0 roadmap announcement that addresses quite a few points raised so far: https://medium.com/interlay/interlay-2-0-roadmap-c6387d9d1abb
Edited
FYI, the mentioned proposal for switching to a capacity-based Vault block reward distribution model has been summarized in this discussion post:
Please also consider point (3) - the recommendation here is to stabilize Vault revenue and review it regularly, scaling as the network gains adoption and DAO revenues start to pick up.
Hi,
I'm sorry there is something I don't get in your calculations.
If you :
- Divide vault block reward by 4.5
- Reduce collateral threshold to 160%
- Move to a formula where reward = (vault capacity / total vault capacity) * block reward
I don't see how this isn't just equivalent to dividing current APY by 4.5 directly
Indeed, reducing collateral threshold has no impact on APY with the new formula.
With the same amount of collateral provided total and collateral provided for a given vault, the given vault will just have its current APY divided by 4.5, meaning much less than the announced 25%.
The only thing changing is that the bridge will have more capacity and that's it (oh, and the slashing or liquidation risk is increasing)
Let's say capacity-based Vault block reward distribution model is implemented :
Reward.Now = Reward w/ secure threshold at 260 = (vault capacity / total capacity) * current block reward
Reward.Then = Reward w/ secure threshold at 160 = (vault capacity / total capacity) * new block reward
We take the hypothesis this does not change : (vault capacity / total capacity) so we get
Reward.Now / Reward.Then = current block reward / new block reward
= 4.5 * new block reward / new bloc reward
= 4.5
==> Changing vault block reward by a ratio of 4.5 directly changes APY by 4.5, and secure threshold level has no form of impact
Edited
And in practice it's even worse, as there is currently ~10% available capacity in the bridge, implementing the capacity-based Vault block reward distribution model already reduces from ~10% current APY.
So see, for a vault at secure threshold:
Current APY ~65%
Apply capacity-based reward
New APY ~59%
Apply new bloc reward (/4.5)
New APY ~13%
Collateral Threshold Proposals
Kintsugi
Current values KSM <> KBTC
- liquidation: 150%
- premium-redeem: 200%
- secure (min. when minting): 260%
Proposed new values KSM <> KBTC
- liquidation: 130%
- premium-redeem: 145%
- secure (min. when minting): 160%
Extrinsic
Proposal
Interlay
Current values DOT <> IBTC
- liquidation: 150%
- premium-redeem: 200%
- secure (min. when minting): 260%
Proposed new values DOT <> IBTC
- liquidation: 125%
- premium-redeem: 140%
- secure (min. when minting): 155%
Extrinsic
Proposal
Edited
@wd9B...grYv
Using APR/APY as a reference point is tricky because it depends on many factors. This is why the proposal is to have the community/operators review and vote to adjust this more on a continuous basis.
The main goal of the proposal is to move to a more sustainable model and save treasury funds for the launch of the Interlay 2.0 DeFi hub. It also allows Vaults that have active risk management in place (i.e., check regularly/have notifications etc.) to go to lower collateral thresholds. You can still set custom, higher thresholds to manage liquidation risk - at the cost of having a lower capacity in the newly recommended Vault capacity model. Plus, there is not much point to have iBTC idling in a Vault unless it is being used in DeFi as it is no longer a criteria of qualifying for block rewards - i.e., capital allocated towards self-minted iBTC can be freed up and used elsewhere, e.g. to increase capacity.
The implicit assumption that vault operators are receiving too much seems flawed. I suspect that nearly all vault operators have lost significant money in fiat terms from the decline in collateral value + cost of setup + daily maintenance of both a tech setup and finance/collateral management. Seems very unfair to leverage the vaults to take all of the substantial early costs to de-risk the protocol (some vaults actually had their collateral confiscated through no fault of their own!) and now change the emissions rate from the levels that have been specifically detailed and understood by all protocol participants from day 1. The vaults have as much incentive as anyone (even more) to ensure demand for INTR/KINT - shouldn't the specifics of INTR/KINT utility be where the focus lies? And shouldn't MAJOR changes to emissions rate such as the ones proposed here be rolled out together with these utility specifics. If the vaults are the heart of the protocol, it doesn't seem right to push them aside now.
The “secure” thresholds are uncomfortably close to the premium redeem and liquidation thresholds.
So far the premium redeem threshold of 200% has been the important threshold that vaults pay attention to, to avoid an extra 10% fee on redeems. It has been triggered many times by vaults whereas I'm not aware of the liquidation threshold being hit. Against the 200% premium threshold, we’ve usually seen vaults prefer to stay in the 230-250% range, with anything below about 215% requiring immediate action. Therefore a good ratio between initial “secure” threshold and the premium redeem threshold would be around 240%/200% or 1.2. However the proposed new thresholds for KSM are much lower at 160%/145% = 1.1. Therefore I would recommend shrinking the gap between liquidation and premium redeem and increasing the gap between premium redeem and secure thresholds. Specifically, for KSM I’d suggest reducing premium redeem to 140% and increase initial secure threshold to 165%. Similar change for DOT (135%, 160%).
I think it's a good idea to raise the vKINT/vINTR staking reward rate above the vault rewards rate, which may encourage more vault token staking instead of sell pressure. I think the vault rewards rates are slashed too far, though, but I’m biased as a vault operator. At higher rates I’ve been able to pool community resources to run a vault, but if vault rewards reduce to only about 10% higher than staking rewards I don’t think there’s enough incentive for people to pool together funds in a community vault.
I really look forward to LKSM/LDOT vaults and injecting treasury funds into the new DEX to supply “Treasury Owned Liquidity” as another way to stabilize the token price.