RAI Incentive Adjustment - July 2022

General Discussion
1

This is a temperature check post that may become a template which can be used by the DAO to gauge overall sentiment regarding incentive changes. It will be short and to the point as any proposal will hopefully be for an ungoverned system like RAI.

For the upcoming incentive distribution that starts on 15th of July 2022, there were a couple of proposals in the community Discord to change RAI incentives. Below you can find three polls meant to gather overall sentiment on a couple of these changes. Feel free to comment with other polls/ideas.

EDIT: these polls will last until 3rd of July at 5pm UTC.

  1. Should the FLX incentives for RAI/DAI Uniswap v3 be lowered?
  • Yes, lower by 30 FLX
  • Yes, lower by 40 FLX
  • Yes, lower by 50 FLX
  • No (comment)

0 voters

  1. If Uniswap v3 incentives are lowered, should Uniswap v2 RAI/ETH incentives increase?
  • Yes, increase by 20 FLX
  • Yes, increase by 30 FLX
  • Yes, increase by 40 FLX
  • No (comment)

0 voters

  1. Should there be a pure mint incentive for RAI?
  • Yes, 5 FLX for mint only incentive
  • Yes, 10 FLX for mint only incentive
  • Yes, 20 FLX for mint only incentive
  • No

0 voters

3 Likes
2

So I was generally against fiddling with the incentives like this until the discussion today. Good points were made and Dr. Ghost was able to provide some solid examples of how the V3 incentives are pushing behavior awry. That said, I’m cautious of lowering the liquidity incentives too much, particularly since people exiting the pool will make it more profitable to those who stay. I do also like saving some FLX though. So I figured reducing V3 by a third would be a good start. I’ve kinda felt for a while that the RAI/ETH incentives are kinda low, so voted to bump those up just a little bit. (actually ends up being a doubling)

Finally, I generally agree with Dr. Stone that a mint incentive is. . .questionable. I’m game for trying it out though to see what happens. We really need more people to mint right now. Do we know how that will be calculated though? Will it divided to all open safe holders, or only those who mint within the month? And new safes only or anyone who increases their debt?

3

I think we should reduce rewards and make them last longer. I don’t think we need as much at this point.

Also, the PID will just keep grinding on the people long Rai. And to go irrationally long would arguably bring into consideration the shutdown module. Which would make “cornering Rai” and going long riskier as the settlement price (unless I misunderstand) is based off redemption

4

Currently it will take selling about 1m RAI on uniswap to bring the RAI market price down to the redemption price (this ignores arbitrage from other pools). People providing liquidity on RAI/DAI pool to earn the current incentive have almost all of their LP position held as Dai (since market price is at the upper range of the recommended position) - meaning that all of the LP position is available to purchase Rai from anyone selling it and making the price harder to move downward. We should not be subsidizing these LP positions with FLX rewards. The best thing to happen would be for RAI/DAI LPs to withdraw their funds and reduce the total amount of RAI that needs to be sold to let the price fall to the redemption price. Current FLX incentives on this pool are working DIRECTLY AGINST the incentive from the PID and should be removed as soon as possible. Agree that incentivizing RAI minting does not make a lot sense right now unless we could tie it directly to minting / selling at market price.

1 Like
5

I think the incentives (and market conditions) have skewed behaviors to a point where the RAI ecosystem is not acting rationally. Instead, some people are chasing incentives and doing things that would never happen “organically” and these incentives are having ripple effects which hurt other RAI ecosystem participants. This is the exact opposite of what I signed up for when I bought bags of ungovernance tokens.

The RAI/DAI minter incentive is literally a price control with a centralized entity telling the market where to allocate capital. :roll_eyes:

  1. Should the FLX incentives for RAI/DAI Uniswap v3 be lowered?

I voted for lower by 50 FLX. The current mint + LP RAI/DAI incentive is broken.

Here is the liquidity profile for a normal market (Coinbase Pro RAI/USD pair):
image

Notice how there is less liquidity at the market price, and more on either side. Market makers are rational profit-seeking actors and want to buy RAI from liquidity takers for less, and sell it to them for more.

Your liquidity is not liquidity.
Now here’s what it looks like for uniswap V3 RAI/DAI:

image
image635Ă—746 23.3 KB

(I drew the bottom part because I couldn’t find a good way to get depth charts for uniswap v3.)

I’m a massive uniswap v3 shill when used elsewhere, but this incentive just isn’t working. k1ngf1sh did a great job describing it on the Discord.

The RAI price is very far off from the redemption price. There is very little inventory available to buy.
There are two causes: one is fairly organic. People had to deleverage because ETH price was going down, which meant they had to buy RAI off the market to put in their safes. At the same time, there is less demand for leverage because people are derisking so less people are shorting RAI.

The other cause is the RAI/DAI v3 minter incentive. The way it’s designed, it subsidizes rather inefficient “market makers”. These “market makers” aren’t making their profit from buying low and selling high. They want to avoid RAI exposure because RAI’s redemption rate means one can expect sell pressure. Therefore, right now, they’re buying just the bare minimum amount of RAI (to stay within range of the market price for liquidity mining) and then a long tail of DAI down to the redemption price. The absurd APR that they’re receiving right now – far higher than any other ETH staking APR that I know of, offsets the risk from the whopping -25% redemption rate. (And you know almost all of that FLX is being dumped – I manually looked through the top few recipients of the FLX incentive but can provide some scripts that need a few more hours of work to show this quantitatively.)

That’s not useful liquidity for market participants who want to close their safe or deleverage (it is a nice subsidy to DXdao, who is exiting their RAI position later this week at a nice profit). The incentive is blatantly “picking winners and losers”.

Anyways, I’m all for distributing FLX to protocol users but right now we’re so far away from anything resembling normal protocol use. The FLX subsidy to RAI/DAI V3 minters is larger than all the other subsidies combined (excluding FLX/ETH which is a special case). While it was well-intentioned, the restrictions are absurd. It’s attracting farmers instead of “efficient capital allocators”.

I’m for nuking V3 minting incentive as long as it’s this poorly designed. I would support something moving towards this: GitHub - guil-lambert/v3-staker-fixed-range: Canonical liquidity mining contract for Uniswap V3 or incentives based on the amount of fees collected but we need to be careful not to incentivize wash trading. But the current incentive structure is literally telling people where to get their RAI from (minting) and the full range of prices to put it over. The incentive is so large (25-100% APR) that market makers who may show up in a more natural market can’t profitably compete with the liquidity miners. e.g. if Alice wanted to LP v3 RAI/DAI but didn’t want ETH exposure, she wouldn’t be profitable due to extreme competition from subsidized liquidity miners.

  1. If Uniswap v3 incentives are lowered, should Uniswap v2 RAI/ETH incentives increase?

I voted yes. Don’t particularly care though. It’s not a huge provider of liquidity because uni-v2 is not great but if we can make RAI/ETH V2 LP more profitable than USDC/ETH V2 LP then that is cool and good.

  1. Should there be a pure mint incentive for RAI?

I prefer subsidies that incentivize RAI usage with as few strings attached. For this reason, I support pure mint incentives.

As I stated here, I’d also like to see a small subsidy to minting in FLX. Like 2-4% APR for value of minted RAI.

I don’t think this subsidy would be enough to incentivize people to mint+do nothing with their RAI. At 200% collateral factor, the risk of minting + sitting for a few % APR just isn’t worth it when you could put your ETH in stETH (or leveraged stETH) instead. However, it might tip the balance when people are deciding whether to mint RAI as opposed to DAI.

I’d also like to see more short term incentives aimed at getting integrated to other projects and boosting composability.

In the future, we should decide exactly what an incentive is supposed to incentivize/compete with, and tweak it to stay competitive with other DeFi protocols.

9 Likes
6

Good read as always, so thank you! It’s making me wonder if we should be even more aggressive with the reduction( I voted for lowering by 40).

I think I disagree a little with the last line though. I think this was a good incentive by design and this is a bit of a black swan event we’re correcting for. Although it is odd that it’s so high, not sure I noticed that before. It’s for counteracting the complexity and gas costs of maintaining the position though, hopefully if we can get a more automated strategy in place we’ll be able to reduce this incentive permanently(I’m viewing current changes as kind of temporary), and move more incentives towards integrations instead of just liquidity.

1 Like
7

Two more polls that were requested.

  1. If Uniswap v2 incentives are increased, should the mint requirement be back?
  • Yes
  • No

0 voters

  1. Should all the incentive changes take effect earlier than 15th of July?
  • Yes, apply the changes on 6th of July
  • Yes (apply on different date)
  • No

0 voters

1 Like
8

I think I’m starting to recoil from “incentives management” as it seems to be the primary community social activity, and I think our efforts are likely better spent elsewhere, like allocating FLX to the DAO to create RAI educational content.

As a result I’m going to generally support lowering FLX emissions for liquidity across the board, including in the current poll.

I voted to:

  1. reduce Uni v3 RAI/DAI LP + mint incentives by 50 FLX/day
  2. keep Uni v2 RAI/ETH LP incentives the same (do not increase)
  3. not introduce a pure mint incentive (more below)
  4. keep mint requirement off for Uni v2 RAI/ETH
  5. no need to rush the incentive adjustment (do it on July 15th)

I think we want to incentivize the minimum amount of RAI liquidity such that we still get quality RAI price feeds and manipulation isn’t too easy. So far we’ve discussed having 10% of the RAI supply available as liquidity in onchain AMMs that are used for the RAI oracle price at any time. Everything above that is probably us overpaying for liquidity…

Dr. Ghosto makes the case for a “pure mint” incentive right after he explains how the current incentives have skewed behaviors. IMO if our goal is to be neutral with respect to the controller, then we should do away with incentives, not add more. The pure mint incentive is also flawed because its “fairness” depends on the current APR estimation of 2-4%, which could swing rapidly with the FLX price. If FLX doubled or tripled then the pure mint incentive might be too high, once again skewing user behavior. If there was an easy way to automate it, I would be more in favor, but as it stands it will be annoying to deal with discussing updating the rate each month…

With respect to RAI/DAI Uni v3 LP, I agree that it’s annoying that RAI/DAI LPs, when they get pushed out of range, have to become RAI buyers. I think the curve v2 RAI/DAI LP + mint incentive suggested by @kyoronut could be a better fit for bootstrapping RAI liquidity, but of course that has to be deployed first.

8 Likes
9

My priority is just reducing RAI/DAI + mint incentive because I’m pretty sure it’s broken and I think we’re in agreement on that. Everything else is just my somewhat informed opinion.

Definitely want to avoid skewing behaviors as much as possible. I made a thread here for what I think an “as neutral as possible” mint incentive would look like.

Feel free to criticize. I think it’d just slightly subsidize RAI use without picking winners and losers (except MakerDAO, I hope it makes them lose a little bit).

5 Likes
10

A note: the script necessary to calculate the Aave mint + lend is extremely complex and prone to lots of bugs. @0x-kingfish we may need to pause/stop that incentive.

Separately, an extra poll that was requested:

  1. Should the Aave borrow incentive for RAI stop completely?
  • Yes
  • No (lower it)
  • No (do no changes)

0 voters

11

I support making incentive changes early.

If ETH rebounds before the incentive change, we might see market convergence, but we won’t have much certainty of the cause. We risk not getting information on whether the current controller params are adequate in this scenario.

In the absence of ETH recovery:
If incentives are reduced and the market converges, then the controller params could be adequate.

If incentives are reduced and the market doesn’t converge, then we should re-assess the controller params.

12

Stone, what was the motivation behind changing the aave borrow incentive?

13

Don’t know, I got a request to add this

14

At some point we need to get Dumbo to fly without the feather. The protocol needs liquidity to work the oracles, but the incentives need to NOT override the PID. So overall seems that the current market forces and FLX incentives are encouraging people to ignore the negative redemption rate. So to me, it might make more sense to work backwards. How much liquidity is enough, and have FLX kick in, increase if it is short. Longer term, we just need to assume that the trading fees are enough to incentivize LPs on CRV pool or Uni. That said in current pickle if we are going to tweak things. Seems mint only skew is the place, but needs to not override the redemption rate either.

1 Like
15

As a Rai user I really want to make sure we are stable and not doing anything that shoot us in the foot. UST/Luna, Celsius, Voyager etc 3AC.
The unwind is coming and its important something like this survives.

1 Like
16

I now support NOT changing incentives early.

7-day ETH/USD returns are now flat. Since organic leveraging might be picking up AND more importantly, we’ve had some plant/market response to rates, I’d prefer to keep incentives constant until 7/15.

This will allow us to continue observing the system without adding a third variable change.

1 Like
17

I agree, this next period should be interesting to watch unfolding before any tweaks
https://dune.com/queries/944628/1718720