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:
- Add BarnBridge SMART Alpha KPI options implementation by Reinis-FRP · Pull Request #397 · UMAprotocol/UMIPs · G
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.
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