The rewards for SMART Yield juniors expire on August 8th for all but Compound USDC, which will go until the end of September. Given that:
- Our long-term solution for senior demand is still a couple months out
- Junior TVL earns the protocol no revenues beyond new entrants
- Rewards are going to mercenary capital at the expense of DAO stakers
It does not make sense for these rewards to be continued at this time, and the core team will not vote on-chain in favor of a measure to extend them nor to introduce a junior reward program for Polygon SMART Yield. Our view is that junior tranche rewards can be brought back in the lead up to the launch of the aforementioned solution for senior demand. Moreover, BOND subsidies will be of more productive use for SMART Alpha’s launch in September.
With that said, the existing junior liquidity should not go to waste, which is why we are proposing a one-time period of BOND rewards for SMART Yield seniors on mainnet.
All senior bonds ever minted prior to August 31st, 2021 with an expiry date beyond January 30th, 2022 would be eligible for a share of 100,000 BOND set aside for the effort (excluding any minted by the core team). A user’s share of the rewards will be calculated based on both principal size and mint date, and be vested over the course of February 2022.
This would be tracked manually, as opposed to the KPI option mechanism previously discussed for Polygon SMART Yield. Note, we are actively working with the UMA team on building out an engine for spinning up KPI options and are looking forward to using them heavily with SMART Alpha.
The SMART Yield junior tranches were incentivized because they are the pools that take on the risk within the application. In normal circumstances, incentivizing the senior pool would result in a market distortion where rates would get pushed down to the point where new entrants would stop coming in and the system could potentially stall out.
We currently find ourselves in abnormal circumstances - or rather, cyclical ones. Because SMART Yield seniors currently lack any secondary utility aside from locking in a rate, they lack appeal in deleveraged market periods. This will be the case until the launch of our ancillary app. By incentivizing senior tranche participants for the moment in time prior to the junior tranche rewards lapsing, and presumably, TVL plummeting, we would see a TVL floor form in that the excess yield earned by the senior side would represent meaningful APR for some amount of juniors, regardless of there being rewards for them or not.
Every senior bond includes the relevant parameters necessary for pulling this program off, namely the minting address, time of mint, and the principal size.
If you think this will pass a DAO vote, you should probably go mint a senior bond now:
Furthermore, please consider the below chart for an overview of the APR available to senior bonds should 100,000 BOND be earmarked for this initiative, under various market conditions.
- Locks in long-term TVL
- Would allow SMART Yield juniors to see outsized yields at times
- Creates a pool of seniors that could then use the ancillary app being developed
- Low tangible return on investment, given the fee structure for the senior bonds
- We do not know what the price of BOND will be on February 1st, 2022
- Could trigger a run on the junior tranches
A snapshot will be submitted Saturday morning EST. As usual, this is very much a conversation still - feel free to air all your comments and concerns.