UMA KPI Options Partnership for SA

Over the past month, I’ve been collaborating with the UMA team to create a standardized program for SMART Alpha incentives. Progress has now been made on an implementation that could be piloted as soon as product launch:

This thread is meant to explain the concept, why we’d want to have rewards for SMART Alpha, and how we could go about deploying them.

The Concept
SMART Alpha outcomes are based on the junior dominance of a given pool in a given epoch. Bearish market sentiment leads to low junior dominance, and bullish market sentiment leads to high junior dominance. In that sense, there is no equilibrium junior dominance that we can target without warping user bias.

However, SMART Alpha does not exist in a vacuum. There are other products for the various assets we’ll come to support that may offer more compelling terms for hedging or leveraging. This could result in very low or very high rates of junior dominance across epochs while we’re still calibrating the best seniorRateModel curves for each pool (i.e., different assets will have different sweet spots for optimizing epoch length and the rate at which juniors take on leverage).

The proposed KPI program reflects this via a function that assigns a scoring system to each epoch.

  • Each epoch can either be valued at 0.5, 1, or 2 points.
  • Epochs with junior dominance below 20% or above 80% receive 0.5 points
  • Epoch with junior dominance between 20% and 40% or 60% and 80% receive 1 points
  • Epochs with junior dominance between 40% and 60% receive 2 points
  • The KPI will be measured as TVL * Average Epoch Score

Why We’d Want Rewards
This results in additional motivation for users to participate in SMART Alpha during lopsided epoch formations. With the reward program in place, we reduce the risk of low adoption during the early days of the application and give ourselves breathing room to calibrate each SMART Alpha pool accordingly.

Moreover, it will take time to get proper utility set up for each SMART Alpha pool. New pools will need secondary liquidity in order to be listed in our Rari Fuse pool, but without the ability to borrow against the position immediately, we could find ourselves dealing with a cold start issue.

Lastly, joint rewards programs with other communities would be a great avenue for marketing and customer acquisition. Airdropping a supply of a program’s options to active members in the community of the underlying asset would immediately bring interest to SMART Alpha and could even lead to protocol-level participation (e.g., DAO treasury usage).

Options tokens would be distributed both via airdrops and to users providing secondary liquidity for juniors and seniors.

How to Move Forward
Once the UMA team has assisted in creating the template implementation for SA reward programs, we’d have the opportunity to do the following:

  • 1 Month Pilot on Our Primary Pools
    – Set aside BOND for the WBTC and ETH SMART Alpha pools
    – Measure their success over the course of four epochs

  • First Wave of Partner Programs
    – Set aside BOND for SMART Alpha pools from communities that want to collaborate
    – Have them go for three months in order to revisit it in the near future

  • Establish a BOND Fund for SA pool bootstrapping
    – Once we have best practices codified, a lump sum of BOND could be allocated for other communities to draw upon for their SMART Alpha pools
    – We’d have a working group and governance process in place to assess proposals on an ongoing basis

What I’m hoping to get from this thread:

  • Your thoughts on the current reward design
  • Concerns you have about the proposed roadmap
  • Questions in general about KPI Options

I think the current reward design looks great! I also love the idea to run joint rewards programs with other communities; perfect way to get eyes on SA.

I like the concept and plans for the first wave, also agree with @cryptobenji about getting other communities involved via options.

There’s one aspect of the scoring system that doesn’t fully sit well with me. The proposed system seems to “waste” BOND unnecessarily in cases of extreme junior or senior dominance. To me, it seems like the incentives should go to zero as the junior dominance approaches 0% or 100%, but under the present formula they converge to something proportional to half of the TVL. This means the DAO would still be providing an incentive when the epoch is as far away from the DAO’s preferred equilibrium as it can be.

One way to address this would be to score epochs using a simple step-wise linear function that increases from 0 to 2 as junior dominance rises from 0% to 50%, then decreases back to 0 as junior dominance rises to 100% (in symbolic notation, y = 4x for 0 < x< 0.5, y = 4-4x for 0.5 < x < 1). I think this should be similarly simple to code while eliminating the incentive as markets become radically imbalanced.

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Hive mind is putting in work today - excellent point and I’ll look to get this updated accordingly.

Reinis from UMA here - thanks for great feedback!

This is absolutely easy to implement by stating the proposed formula in Step 5 of the KPI Options implementation method. And there is no coding involved as these are just human instructions that proposers, disputers or UMA voters would use when resolving price request at KPI options expiration.

For the broader context, the way how UMA oracle system works - it is a pull type of oracle where price is being resolved on-chain only when the consuming contract (KPI options in this application) requests it (here at expiration).

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Just updated the KPI Options Implementation PR to use step-wise linear function for target points calculation .

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I’ve been in BadgerDAO’s KPI options through the 3 seasons and with some tweaking it seems to have ultimately been successful and a good exercise in incentivizing participation and liquidity. If BarnBridge implemented KPI options I would almost certainly participate.


It is hard to comment unless we know what does junior dominance between 40%-60% means in terms of protection for seniors/leveraged gains for juniors?

The points/ranges could be updated after 1 month pilot program right?

“Once we have best practices codified, a lump sum of BOND could be allocated for other communities to draw upon for their SMART Alpha pools”

  • could we create some predetermined solutions based on protocol backtest (the protocol mcap, volatility for specific TF, current inflation etc) and offer more solutions to interested communities to participate in SA with:
  1. low protection / low gains
  2. moderate protection / moderate gains (that s our target for the 1 moth pilot program i guess)
  3. high protection / high gains
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Long term I’m more inclined to in incentivize TVL rather than junior dominance ratios. The protection curve should be dynamic and adjust based on junior dominance at each epoch initiation. This would allow market determined protection/leverage while also promoting continued participation at each epoch transition.

With that said, I’m onboard for the one month trial of our base pools to allow live testing of the protection curve. And fully support the roadmap for additional community inclusions via governance/BOND pool.