Implementing KPI Options for Polygon SMART Yield

Summary
Incentivize BarnBridge community members and SMART Yield depositors with Key-Performance-Indicator (KPI) options that pay out a fraction of the total BOND set aside for the program. KPI Options would have an expiry on October 31st, and all claimable BOND would be vested over the subsequent 12 weeks. The amount of BOND paid out to KPI Option holders would be determined by a function of a) the TVL in Polygon SMART Yield, and b) the ratio between the junior and senior pools.

Since this is being submitted by myself, I want to clarify that while the core team is on board with the idea, any parameters and concepts laid out below were at my suggestion. Nothing is set in stone so please feel free to tear into any part you find to be counterproductive or inefficient.

Description
KPI (Key Performance Indicator) options address concerns surrounding liquidity mining by replacing the native asset as the reward for liquidity mining participants. Users instead receive tokens that entitle them to claim a pro rata portion of a sum of the native asset held in an escrow contract upon a given expiration date. The sum to be distributed to options holders is determined by the status of the KPI at the time of expiry. If the chosen metric hits the predetermined target, the entire sum of tokens would be paid out — otherwise, only a fraction of the tokens that were set aside would go to options holders.

The concept was pioneered by the team over at UMA Protocol. Check out the Useful Links section to get a better sense for it:

Motivation
Liquidity mining has proven to be a powerful mechanism for unlocking flywheels across DeFi. By rewarding early users with upside in the form of a project’s native asset, positive risk taking is subsidized, resulting in a greater chance for network effects to take hold. But this mechanism is a blunt one. More often than not, it attracts mercenary capital willing to take immediate profits at the expense of long-term holders, making it difficult to bootstrap a grassroots community beyond the most die-hard of supporters. Moreover, it clouds a team’s ability to assess how much of that capital will persist even once rewards subside.

SMART Yield junior depositors on Ethereum mainnet have been subsidized to date by targeted emissions of the BarnBridge governance token, $BOND. Given the depressed state of the market at this time, however, enabling liquidity for a $100M bond to be minted on the senior side remains underwhelming with rates ranging between 1.5% and 2.1%. While these types of cyclical market downturns will be less of a concern once our complementary SMART FIAT app is live, it does not make sense for the Polygon deployment of SMART Yield to pursue the same rewards strategy in the interim.

Technical details
A total of 10,000 bbKPI_poly_SY ERC-20 tokens would be minted, to be used for claiming a pro rata share of the final $BOND rewards pool (Max’s preference: 100,000 BOND). They would be allocated in accordance with the following breakdown:

  • Polygon Junior Tranche Balancer Pool LPs (Share of Pool): 5,000

BarnBridge would create a Balancer pool on Polygon with a weighting of 20% USDC / 35% bb_poly_aUSDC / 35% bb_poly_aDAI / 10% bb_poly_aUSDT. This would facilitate secondary liquidity for holders to trade between jTokens as well as to exit their positions without redeeming their principals.

  • Polygon Junior and Senior Tranche Depositors (Share of Pools): 2,000

Not all junior tranche depositors will want to take on the perceived risks of providing liquidity for their asset. Nor are senior depositors capable of providing liquidity to an AMM with their NFT positions. Reserving 20% of the option token supply for primary interactions with the application ensures that no user gets left out. Junior depositors who are providing Balancer liquidity will remain eligible for their share of these distributions as well.

  • Discretionary: 3,000

If you’ve been a good community member and SMART Yield user, you’d be in luck! More detail will be revealed on the breakdown of this subsegment should the program move forward.

These options tokens would be distributed in two ways.

  • For the non-discretionary segments mentioned here, snapshots would be taken twice weekly at random intervals (Chainlink VRF would determine the block retroactively) - if you were participating in SMART Yield or providing secondary liquidity, you get a pro rata share of the options distributed by each snapshot. Note, the program would have decaying emissions for the options tokens with each snapshot taken (i.e. early supporters rewarded) and would allow up to a 100% boost of your share of the options pool by staying in for up to 9 successive snapshots (i.e. keep participating and you get a boost).

  • For the discretionary segments, you would either have been snapshotted already or the date and time will be announced beforehand.

The KPI that would be tracked by this program would be the output of the following equation:

Polygon SMART Yield TVL * (Polygon SY Senior TVL / Polygon SY Junior TVL)

The KPI output would be bound between 10M and 100M, and the TVL ratio modifier would be bound between 0.5 and 1.5. This means that the junior : senior ratio could not reduce the output by more than 50% or increase it by more than 50%, and that the KPI output could be no less than 10M and no more than 100M.

To determine how many BOND tokens are available as a result of the KPI output, the payout function would simply be:

KPI Output / 1000

Useful Links

Argumentation
The Polygon deployment of SMART Yield provides an opportunity to test out the concept of a KPI option program because it represents a blank slate that the community can then compare against its mainnet analogue. The following questions would all be worth considering as data starts to come in:

  • Was the amount of BOND set aside adequate?
  • Were snapshots done in a fair and constructive manner?
  • Did TVL persist beyond the end of the program?
  • Should a similar program be implemented for mainnet SMART Yield?
  • If successful, how can we tailor KPI options for SMART Alpha?

These questions highlight the primary risk associated with KPI Options, which is that the concept is still a new one and that there is true opportunity cost associated with piloting such a program. If the market deems the option token to be underwhelming, it will not drive material liquidity; if airdrop recipients do little to evangelize the product, they’ll get a free ride in the case of a successful outcome. Relative to the current status of SMART Yield incentives, which have done little to attract senior deposits at a far higher cost of capital, these risks appear to be worth taking.

DAO Vote
None yet, but this topic is of high urgency given that we’ll want to see it in effect on Polygon before trying it on mainnet - that reward program ends around August 8th.

The key items to consider here are:

  • Is the community in favor of trialing KPI options?
  • If so, how much BOND would need to be set aside for the effort?
  • If so, does the proposed distribution of options make sense?
7 Likes

Highly in favor of developing smarter ways for BOND incentivization programs. Considering we have been previously releasing 28k BOND per week and 17k of that was allocated to Aave pools Max’s proposal of 100k total per ~3 months looks pretty reasonable (vs 204k for Aave with the current incentivization model) imo.

3 Likes
  • Yes
  • Abstain
  • Perhaps, depending on (1) how much we want to incentivize senior side and (2) any insights the team may have into larger senior entrants into polygon that were previously idle due to L1 gas costs.

There is a lot to unpack here.

I support the KPI option path as it potentially could solve some community concern about dilutive token distributions and if successful should lead to significant senior TVL. I also recognize the success of this mechanism is strongly correlated to its fixed parameters set. The risks associated with this method are worth pursuing to possibly find market fit for these options and as a result the BarnBridge protocol.

Has there been any thought to include other communities in this option effort to help evangelize users to protocol? AAVE, SNX, LINK, BNT communities would be logical choices.

I’m highly in favor of the included vesting schedule. The 100K BOND allocation seems reasonable in relation to other pools as @pabless has pointed out.

Senior TVL is my largest concern. Thoughts on a dedicated allocation to seniors only?

1 Like

Question @Ser_M , the snapshot will be taken from the Balancer pool right?
So 1 snapshot for the secondary market, 1 for the protocol itself (junior + senior) and 1 TBD if I read correctly?
Thanks

I’m in full favor of this as well.

3 Likes

I’m all for trialing KPI options. 100k BOND seems feasible in relation to other pools as @pabless and @Mike987 mentioned.

1 Like

I think this is a worthwhile experiment.

There is a pressing need for a workable solution to bootstrapping secondary liquidity.

Migrating incentives from bootstrapping primary TVL to bootstrapping secondary liquidity makes a lot of sense.

It improves SMART Yield by making our current static TVL more productive while giving liquidity an easier way to move around our assets and exit if needed.

Assets that are easier to exit through liquid secondary markets are (all things equal) more attractive to enter in the first place.

I’d defer to @Ser_M view on the ideal structure since he has done the requisite research, and others who have dug in deeper as well.

Trialing this out on Polygon is a SMART move. Its also a good opportunity to reduce token emissions as the products value is enhanced in other ways.

6 Likes

Community airdrops would fall under the discretionary category, yes. Existing Balancer LPs and AAVE voters (re: AIP-23 going live shortly) are relevant candidates in my opinion.

I think rewarding seniors could be done in a clever way. If you were to take the sum set aside for juniors and senior in Polygon SY, and directed them just at seniors in an inverse direction relative to how you’re rewarding juniors, you create the most incentive at the end of the program. (i.e. award juniors early, award seniors later to carry the app beyond its conclusion).

2 Likes

That’s what I was getting at, yeah. Perhaps as Mike points out we should just airdrop to seniors and none to juniors not providing secondary liquidity.

3 Likes

Does anyone know of any examples of other communities that have tried this and come out the other side with some data? I am not aware of any, but thought I would ask.

I like the idea as a trial. It’s tough to say whether this will just kick the bucket down the road so to speak, when it comes down to retaining TVL/encouraging holding BOND, but it’s a reasonable test given the number of BOND tokens involved.

Although I like it, we should find a way to inventivize secondary liquidity. It is valuable data we need going forward. That’s why I am constantly hammering on it. We should try new things like rewarding seniors and rewarding secondary markets. If it doesn’t work, that’s fine.
We will face the same discussions for SMART Alpha. Polygon is perfect for trying multiple things and picking the best options going forward for ETH mainnet.

We could provide secondary liquidity on mainnet for the cBB_DAI pool since it is on Sushiswap. We need data whether it works compared to directly rewarding juniors (like we do now) or airdropping to seniors.

Echoing Akin’s comment, highly in favor of this.

1 Like

I’m Highly in favor of this, lets build guys

1 Like

I didn’t mean to reply to pabless…
I’m Highly in favor of this, lets build guys… let’s do it

I’m glad to see that the recently launched Snapshot poll is specifying details for the discretionary fraction of the KPI options. My only misgiving is a bit in the weeds, but I think it’s important: will PID-5 (the DAO vote on whether to deploy these options) voters be included in the tabulation of addresses eligible for a share of the 1000 discretionary options for participation in DAO governance? Aside from the potential chicken-and-egg problem this might create for implementation, I think clarity on this point is important because ambiguity over eligibility may inevitably lead to hard feelings compared to making eligibility crystal-clear up front.

Excellent work, it’s been a pleasure following BB’s progress!


To @kcaryths’ question about other communities’ use of KPI options and outcomes, the one case I’m aware of that has already reached expiry is UMA’s own KPI options, which were structured to incentivize a variety of DeFi communities to increase TVL in UMA contracts. With respect to the targeted KPI alone, objectively I think it’s fair to say that the strategy was not successful: UMA’s TVL at expiry only barely exceeded the lower bound set for the options by UMA, so options holders collected only about 12% of what the options could have been worth had the TVL reached the upper bound they set. My impression is that most UMA KPI options recipients who sold their options on secondary markets (Sushiswap) fared better than those who waited for the contract to expire. Liquidity for the options on secondary markets was unincentivized and was therefore very low throughout the contract’s active period.

However, I think that judging the success or failure of a KPI options campaign on reaching or missing the KPI alone is missing the forest for the trees: UMA’s options campaign was very effective at raising awareness of their protocol and resulted in many more developer-hours invested in learning about UMA’s contracts than would have happened otherwise. Furthermore, by issuing options instead of UMA tokens directly, UMA has retained almost 90% of the tokens it had reserved for this initiative and is now redeploying a fraction of them for a new round of options with a different structure. In this sense, even though their TVL goals weren’t met, I view their TVL KPI options as a net win for UMA.

1 Like

Hi, I do not follow the discord so apologies if this was discussed there, it may also be beneficial to have significant posts from the discord posted to threads for visibility and posterity.I cannot see any discussion in this thread of these sections contained in the snapshot proposal:

  • 1,500 to addresses that have a mainnet senior SMART Yield deposit on August 1st, 2021
  • 1,000 to addresses that have voted in the BarnBridge DAO
  • 500 to addresses that vote in favor of AIP-23 (i.e. listing BOND on AAVE)

I understand and agree with providing these incentives to the mainnet senior SMART Yield deposit and to voters in favour of AIP-23 but do not see where the benefit accrues from giving options to voters in the DAO. DAO members are already rewarded with a high return for staking within the DAO and I feel a better allocation would surely be to further incentivize senior/junior or even smart exposure users.I would also be interested in opinions about the decisions to include mainnet seniors and AIP-23 voters.

In support, definitely worthwhile to experiment with smarter ways to reward BOND. :slight_smile:

Great points @allthecolors!

I can understand your concern and perception that maybe these incentives could be better utilized. However, in regards to DAO rewards, there is no incentive to actually participate current state. You can camp your $BOND in the DAO and receive rewards without actually having to vote. The rewards pile up either way. PID-4, for example, only just eclipsed the quorum threshold of 40%. I thought this was a little bit disturbing given it was a proposal that seemed to have universal support, and did from those who actual voted, and real utility. Lack of participation almost prevented this PID from passing. Perhaps these PIDs are not really in doubt given the vBOND weighting of the largest participants, but I would think you would want to see as close to 100% participation as possible regardless. My guess is that DAO stakers either aren’t keeping track of proposals going live or do not perceive any benefit to spending the gas. Either way, these individuals are earning the same incentives as their more active counterparts. I think including DAO voters in this proposal is a nice way to reward those who have been actively engaged while also promoting more community involvement. I should disclose I am a DAO participant who has voted though (shocker!), so there is definitely some bias.