SMART Yield Rewards Remix

Summary
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.

Description
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.

Motivation
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.

Technical details
Every senior bond includes the relevant parameters necessary for pulling this program off, namely the minting address, time of mint, and the principal size.

Useful Links
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.

Argumentation

For

  • 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

Against

  • 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

DAO Vote
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.

8 Likes

Seems well thought. You have my blessing.

This seems like a well rounded solution. I have just two questions regarding the release of the rewards:

  • How does the mint date come in to play with the rewards? Will there be an incentive to have an expiry beyond January 2022?
  • Do you have any details about how the rewards will be vested? Weekly, by block or all at once?
1 Like

First, if i understand this correctly, we want to incentivize utilization pre-full utility and we expect full utility in September. At least for whatever hidden alpha is buried in the Smart Alpha launch / ancillary app. Any news on the Curve front?

Second, I support senior incentiviation. I think the risk of short-term market disruption is more than offset by increased utilization leading to potential long-term adoption. That said, do we have any stats on what the junior mercenaries are doing with Bond in terms of hodl, stake, or dump?

Lastly, we should think about aligning the future extension and/or expiration of senior/junior incentives in a way that eases back in to pure market demand.

  • It’s gonna be snapshotted on Aug 31st. All sBonds minted prior to that with the maturity beyond Jan 2022 are going to participate in the rewards program. No additional bonuses for longer lock-ups though.
  • The distribution mechanics is still being discussed
1 Like
  • We do not expect full utility in September. SMART Alpha launches then but won’t have any crossover functionality with SMART Yield. FIAT is the codename for the ancillary app.

  • Curve team does not appear to want to chat with us at this time. We’ll look to revisit their availability once FIAT is closer to launch.

  • The team over at ARCx actually did an assessment for us - some 65% of BOND earned through the junior tranche is dumped. Yikes.

  • Once FIAT is live, senior demand will become insensitive to interest rates. This should be more than enough to ensure leverage is readily available to juniors.

Preserve the capital you have, stop the dumping, and increase APR on both sides of the pool to buy time until you’ve achieved product/market fit with FIAT. Nice! Generally, you have my full support, but I do have a one significant concern: I don’t see how this proposal would NOT trigger a run on the juniors, irrespective of whether a vote passes before the remaining junior rewards run out or not.

The first issue is the 23 day gap between junior rewards ending (8th) and the senior rewards starting (31st). Right now, there’s almost no senior investment in most SY pools, meaning that, aside from added smart contract risk, the risk profile of the junior tranche is effectively no different than loaning directly to the underlying. Relatively low risk, high reward through supplementary $BOND. With the removal of junior rewards, the rational thing to do would be to avoid the additional contract risk and invest in the pool directly (especially for the whales, whom appear to comprise the majority of Barnbridge’s TVL). Moreover, there are other similarly high yielding, high quality projects in Defi right now that possess similar risk profiles and liquidity they could farm in the interim. So the majority will certainly exit. It seems you’re assuming they’ll then proceed to move over to the senior tranche because of the modestly elevated APR, but why would they do that before incentives start? The way to get an optimal rate in the senior tranche would be to wait until all the juniors leave, so both pools end up nearly empty. However, with both pools empty, either one becomes equivalent to loaning directly to the underlying, so investors would end up moving their capital elsewhere anyway.

If we determine 23 days with almost 0 TVL is the likely outcome, one solution could be moving the senior rewards snapshot to a date before the junior rewards end. But this presents a second problem: By engineering a huge inflow into the senior pool, the reserve requirements for juniors will skyrocket - thereby increasing liquidity risk - and lever up their interest rate sensitivity. Sure, the APR will rise to compensate, and those $BOND rewards will be juicy. But we’re talking an order of magnitude increase in risk appetite, and the management of interest rate risk requires a significantly different set of tools and skills compared to smart contract risk. Further, those high bond rewards would last only days, and whomever remains to acquire them will be left with the prospect of being trapped in a position with significantly elevated risk - risk they never planned on managing - for months. On the surface, we might expect juniors to move to seniors right on the 8th when the rewards end, attempting to optimally time their transfer to maximize rewards yet avoid getting stuck. However, this scenario presents a prisoners dilemma: Since investors know everyone else will try to do the same thing and they have little chance to cooperate, the dominant strategy will be to withdraw not when this proposal passes, but as soon as they become aware of its existence - that is, almost certainly before the rewards start. Thus, the result is ultimately the same: a TVL void until the senior rewards start.

Now, I’m probably overlooking something important that changes the calculus here, and I hope that’s the case because the proposal is great otherwise. That said, how did you become comfortable with risk of a junior run? And, if a run does occur and our TVL craters for a month, what are the repercussions, and how do you plan to respond?

4 Likes

oof. or maybe not. 35% success rate might be considered cheap mercenary capital…

thanks for the quick replies. still of the opinion to green light this proposal.

1 Like

I know you acknowledge it in the against section, but isn’t triggering a run on the junior tranche likely and also a big problem. If the senior tranche yield ever becomes close to the junior, or in this case substantially higher, there is no reason anyone would ever invest in the junior tranche.

This is a very important point raised. From the ARCx assessment we can assume at least 65% of the TVL in juniors will leave as soon as rewards end.

If this plays out it will severely impact how much underlying junior value is in place to support any anticipated growth in Seniors as a result of this new plan to incentivize seniors.

It seem to be it would be prudent to extend rewards such that there is some period of overlap between the current junior rewards and the new Senior incentives.

Otherwise a large amount of BOND expended to acquire the current junior TVL would have been essentially for not.

@Ser_M what are you thoughts on the comment from @afad_ro ?

Thanks for the mention, @Akin. These are some great points, and I agree that in order to facilitate the smooth transfer of as much TVL as possible from junior to senior - which, as you’ve made clear, is important - we should at the very least overlap the rewards programs. But there are some possible catalysts for a premature run on juniors that remain even if we extend the junior rewards to the point of overlap. Seeing as a run on juniors is a significant risk, I would consider adding the following redundancies:

  • Adding a TVL cap on the snapshot

  • Holding multiple snapshots over a period of time, breaking up the rewards into several chunks

  • Holding the first senior snapshot before junior rewards end, rather than extending junior rewards to meet the 31st snapshot date

Here’s why:

Per the second point in my original post, what if no investors are willing to risk the consequence of being the last junior to transfer over to seniors before the rewards begin - that is, the risk of being stuck in a high risk junior position for several months with no added rewards? Even if the dates overlap, they may leave before senior rewards begin regardless to avoid this outcome.

Adding a TVL cap on the snapshot is one way this problem could be addressed. With a cap low enough to incite FOMO, juniors who want senior rewards are incentivized to move over before the cap is reached. Further, a cap creates a floor on the bond reward itself. With added certainty of the minimum bond recieved, investors can assess their worst/best case scenarios as soon as the cap is established, rather than right before the snapshot - after most capital that will enter the pool has entered the pool. Without this measure, there is 0 incentive to move over to the senior tranche before the snapshot for those who were cautious and removed their juniors early - worse, they’re actually incentivized to wait.

As opposed to extending junior rewards until the 31st, we should consider starting senior rewards before the 8th instead. Since the incentive to enter seniors with a snapshot cap is inverse to the time remaining, whereas the incentive to leave juniors increases the more investors become aware of this proposal (likely now), a junior run becomes more likely to occur before senior fomo builds as time passes. Further, the alternative, extending juniors, also extends BOND dumping, which drives the price down and with it the attractiveness of senior rewards. This, however, has the drawback of reducing the time for news to spread, which may reduce the TVL we preserve.

The way to address this issue could be to hold multiple snapshots over time, breaking up the 100k allocation into several chunks. That way, a portion of juniors will move over immediately, while the remaining can be added progressively. The 100k allocation is also an experiment - we do not know for sure how this is going to play out. But we do know we need to make something work. Holding a separate vote for each snapshot would allow us to make changes on the fly if we need to change course.

As a final thought, it would be prudent to assume a significant portion of the 65% BOND sellers will be lost if we defer rewards 6 or 7 months into the future, regardless of the other details in the proposal, as the immediate BOND dumping itself suggests their confidence in BOND price appreciation is low. With $260MM TVL, that leaves us with $91MM. We should prioritize that $91MM.

1 Like

I think what you’re overlooking is that, for the reasons you pointed out, junior TVL is leaving anyway and seniors won’t care if they lock in a 0.2% or 2% rate (0.2% referring to deposits made after this junior rout).

BOND rewards would create rate-insensitive seniors either way, 2% here or there won’t matter for them. Moreover, the situation for juniors isn’t necessarily that dire - if you’re the last junior to leave, you’d be making 3x - 8x the underlying rate.

Generally in support of this - saving $BOND for better incentivisation mechanics in future is a no-brainer for the long-term sustainability and growth of BarnBridge.

Absolutely agree with holding multiple snapshots to encourage early movers.

I think there was a bit of confusion re: your cap point - seniors minted anytime before August 31st would be eligible. As in, between March 2021 and August 2021. So the overlap issue you’re pointing out isn’t quite the situation. But I do think saying x% gets set aside for those minted before August 8th is a compelling mechanism.

in my opinoin is more good to make it on polygon/matic…is more cheaper, I hope soon you can do it on polygon matic. also maybe you can develop the mobile app to be able to use metamask mobile too.

one question, if I want to particip at this stake all I need is to buy fast some bond’s and stake them until 30th 2022 correct?
if I have some – Prior to August 9th: 100% of sBond value, I’ll get 100%?

You would want to deposit into an Ethereum mainnet sBond pool (not the BOND token) and lock in a maturity on or past January 31, 2022.

If you do this before August 9th, the whole value of your sBond will be counted. If you wait for the following week, only 50% of the value will be counted (100,000 BOND will be divided across the total calculated value of all eligible seniors).

To your first point, I was referring to the bond reward distribution, rather than senior interest rate, which I agree is pretty negligible. The incentive to wait comes from a reduction in uncertainty, because the more seniors that pile in, the less bond is available per dollar in the pool. In an extreme example, if there’s only $1 worth of seniors, and it’s your $1, you get the entire 100k bond allocation for just a $1 investment. If there’s $100000, you get 1 bond. You won’t know what your allocation is until the moment before the snapshot is taken, after all capital has entered the pool, hence there is an incentive to wait until that moment to minimize uncertainty.

As for the second, certainly the large increase in junior interest will make for a commensurate compensation for the risk taken. However, in a more extreme example, so does 100x levered BTC futures, but the typical BTC investor would never touch those because it requires a different degree of risk appetite most people don’t have. Similarly, I would expect a large proportion of current junior investors, which are basically taking on the risk of the underlying+smart contract, lack the necessary risk appetite for the significantly more levered interest rate exposure.

That said, I think your implementation of a multi-snapshot will address both of these problems because the first snapshot ends in line with the end of junior rewards, and provides enough of an incentive (cost in the form of reduced bond allocation) to get in sooner to counterbalance the incentive to wait (increased present value due to decreased uncertainty). It also moves up the optimal entry point closer to the present, which reduces the chance of a run on juniors prior to the first senior snapshot. Wouldn’t change anything - think it’s great as is!

Agree on the cap - not the best mechanism. I like your current implementation of the multi-snapshot much better.

At any rate, hope my input was helpful and great to see how the proposal looks so far!

Is being the last junior exposed to 3x-8x leverage a something people would necessarily consider good. You are exposed to potentially 8x the downside risk as well right? Maybe I am wrong, but I don’t see that stopping a run on Juniors. I feel that if Senior Yield ever becomes greater than Junior Yield there becomes no reason to ever do Junior Yield. You take on way more risk for less reward.

I’m concerned the reduction in reward share over the four snapshots is too steep. That’s a serious drop in incentive. I looked through this forum and the governance Discord thread but couldn’t find the rationale for this schedule. Does someone have a reference for choosing this steep rate decrease? I would have thought that 50%, or perhaps 33% would be the floor for reward share reduction. People getting in during the 25% or 10% levels probably won’t even be considering the BOND reward with such a significant reduction in reward. Why not just cut off the rewards on August 16 while the incentive is meaningful?

Also, will the reward be airdropped or claimed?