Introducing an INTR/IBTC Reward rate

tl;dr.

INTR rewards are currently not tied to iBTC TVL
This can skew incentives during the early stages of the network
This proposal suggests to link INTR rewards to iBTC TVL
The total INTR allocation to Vaults (30% of supply) remains the same (if less is paid in month 1, more might be paid in month 2 if iBTC TVL increases)
This parameter is subject to community review and can be easily adjusted based on iBTC TVL growth.
INTR rewards are capped to a fixed INTR per iBTC reward until 135.57 iBTC are minted.

Introduction

Vaults are the heart of the Interlay network: they secure BTC while iBTC is being used in DeFi. To do so, they deposit collateral in different assets, insuring users against exchange rate fluctuations and misplacement of BTCCurrently, Vaults receive block rewards in INTR as incentive to provide this - premium - service (iBTC offers by far the highest security guarantees among all Bitcoin custody / wrapped BTC solutions)

Block rewards in INTR are paid every block. In the current configuration, there is no upper limit onto the block rewards that get paid out every block - i.e., there is no direct relation to the amount of actual iBTC minted and hence the real cost that Vaults have (the more BTC minted, the more collateral is needed).

This means: if there is only a single Vault securing for example 0.1 BTC, this Vault will receive 100% of the rewards. Likewise, if there are 150 Vaults backing 1,000 BTC, the same amount of rewards are distributed every block and split among all Vaults based on their locked BTC.

In principle, this provides incentive for more Vault operators to join the network and the emergence of a competitive market for BTC. However, during the early stages of network launch, there are numerous factors that can limit this growth, including but not limited to: (a) waiting for secure bridges to import diversified collateral assets, and (b) readiness of DeFi applications to accept iBTC and drive minting demand.

Problems

In summary, we are looking at the following potential problems that have occurred on the Kintsugi canary network over first weeks of operation:

Missing incentive to lock more collateral: INTR/block reward is not tied to BTC TVL, which can lead to skewed incentives during early stages of growth. Until a competitive Vault market kicks off, individual Vaults may lack incentive to add more collateral to enable additional iBTC minting to users.
Flooding INTR to the market: Vaults might sell INTR tokens to recover some of their costs and generate profit. However, if the amount of INTR is completely disproportionate to the iBTC TVL and the maturity and scale of the network, this can lead to too much INTR entering the market early on - which in turn reduces the effectiveness of INTR block rewards as incentive mechanism.

Goal

The main goal of the INTR block rewards were/are to bootstrap iBTC liquidity and enable the Interlay network to onboard as many Bitcoin users into the Polkadot ecosystem as possible. The goal of this proposal is to tie the incentives to actual performance of Vault operators to ensure sustainable operation and growth.

Proposal

This proposal suggests the introduction of an INTR/iBTC per block reward rate to tie INTR block reward payouts to iBTC TVL. This is a new parameter that can be updated via governance vote.

The more BTC is locked across all Vaults, the more INTR will be paid out by the network.

The initial value proposed is 0.34 INTR per IBTC per block.

This implies an INTR block reward (the maximum that can be paid out per block) of 45.66 INTR per block.

–> Hence, this proposal limits the rewards to max. 0.34 INTR per iBTC per block until the iBTC TVL reaches 135.57 iBTC and thereafter has no impact.

This figure (LINK) shows both the INTR per block that is distributed among all Vaults as well as the INTR per iBTC locked per block that is distributed to all Vaults based on the total iBTC TVL. Until 135.57 iBTC TVL the INTR per iBTC per block stays constant at 0.34 with this proposal. Above 135.57 iBTC TVL, as without this proposal, the INTR per iBTC per block decreases as the same amount of INTR block rewards are distributed among more iBTC TVL.

This initial rate takes into account projected iBTC TVL growth during the first weeks after launch, as well as the risks and costs associated with Vault operation. The goal is to maintain a highly competitive reward structure - but tied to performance/service provided (measured in iBTC TVL).

As the bridge TVL and capacity grows, this parameter can be changed and adjusted via proposals made by the community.

Remains unchanged:

The total allocation of INTR to Vaults (30% of supply) remains the same. If less rewards are paid in Q1 due to low iBTC TVL, more rewards can be paid if TVL picks up in Q2.
The INTR reward is still distributed proportionally among all Vaults based on how much BTC (%) they have locked compared to the total minted iBTC amount.

Suggestion to fast track - if the proposal is not contentious

Without fast-track, this proposal will go to vote in 5 days and iBTC launch will be earliest on 12 July.
All systems are ready to launch iBTC starting next week.

Hence, we suggest: If there is agreement on this proposal, it should be fast tracked on Tuesday 5th July to ensure launch can proceed.

If this proposal is contentious, then enough time should be left to discuss and agree - in that case, no fast-track is recommended.

Next steps

Let’s discuss here
Please vote on the off-chain proposal to signal your position (off-chain signalling ends Monday 4 July, 16:00 UTC): https://voting.opensquare.io/space/interlay/proposal/QmQ88aKM3m1ER3Aq6ot8UJSf4yWUb46rjquLo1eV18QrHT
(a) If vast majority is in favor: fast-track on Tuesday 5th July
(b) If contentious, a longer discussion is needed. Then it needs to be decided if this should delay iBTC launch.

Resources:

Vault rewards and risks: https://docs.interlay.io/#/vault/overview
Kintsugi kBTC dashboard: https://kintsugi.interlay.io/dashboard

Off-chain Signalling

https://voting.opensquare.io/space/interlay/proposal/QmQ88aKM3m1ER3Aq6ot8UJSf4yWUb46rjquLo1eV18QrHT

I'm not agree with problems :

1- Missing incentive to lock more collateral: INTR/block reward is not tied to BTC TVL, which can lead to skewed incentives during early stages of growth. Until a competitive Vault market kicks off, individual Vaults may lack incentive to add more collateral to enable additional iBTC minting to users.

=> Of course but many vaults are ready to jump in Interlay. So skewed incentives will be only in the first couple of hours. I think many vault take mote time to come in if we limit this game.

2-Flooding INTR to the market: Vaults might sell INTR tokens to recover some of their costs and generate profit. However, if the amount of INTR is completely disproportionate to the iBTC TVL and the maturity and scale of the network, this can lead to too much INTR entering the market early on - which in turn reduces the effectiveness of INTR block rewards as incentive mechanism.

=> Like response 1, I think many vaults take place in the first hours to take high incentive profit, this profit could be sell but I think it could be used for increase collateral so it is a good thing to open the raod for high BTC TVL.

So I think it is not necessary to add new distribution rule regarding Kintsugi. It works fine with kintsugi, no need to change that.