Reflexer Monetary Policy Change

Summary

This proposal is meant to adjust FLX’s monetary policy in the following months by switching from a deflationary to an inflationary model (either permanently or for a limited amount of time). This change is meant to balance our focus on tech with proper capital formation and protocol bootstrapping as well as greatly increase the chance that RAI becomes a widely used stable asset.

The changes can be summarized as follows:

  • Deploy a contract that can mint new FLX weekly for a specific amount of time or in perpetuity
  • Split rewards between mint + LP, RAI integrations and stakers who protect the protocol

Background

In the last few months we’ve all seen RAI perform well during market downturns as well as during highly volatile periods. Despite this, the highly competitive DeFi market showed us that a sound system is not enough to rise to the top. Up until now, Reflexer has been conservative when it came to bootstrapping and capital formation to the point where the RAI protocol does not have all the attention and growth it could get.

We believe that our current situation (minimal participation, no growth, low protocol revenue) could be greatly improved by rethinking our monetary policy.

Reasons for the Change

  • Encourages active participation in the protocol by securing it as well as encouraging RAI adoption
  • Improves distribution for FLX
  • Has the potential to boost growth in the first years post launch until the protocol accrues enough fees to sustain itself

The Proposed Change

We propose the following change to FLX’s monetary policy:

  • Replace buyback and burn and debt auctions with FLX/ETH LP staking. Stakers will have their tokens auctioned in case the RAI protocol has bad debt. In case there aren’t enough tokens to auction, FLX holders can coordinate and offer a portion of the inflationary rewards in exchange for RAI that covers the debt. Stakers also receive a portion of the inflationary rewards in exchange for protecting the system
  • Stability fees are used to buyback FLX and offer that to stakers or buyback and build
  • Inflate FLX according to a predetermined schedule. All inflationary rewards must be distributed through 2 contracts: one of them mints new tokens and it can transfer them to the second contract used to distribute. This second contract is already deployed and we’re currently using it to distribute FLX. Note that these contracts will be immutable

The proposed inflation schedule would start with 6,000 FLX in the first week and then every week afterwards, the weekly amount will go down by 0.61% for 156 weeks (3 years). This means that at the end of the initial 3 years, there will be approximately 1,604,918.90 FLX. This is almost equivalent to the following inflation schedule:

  • Year 1: 14.404%
  • Year 2: 9.89%

From the 3rd year onward, the protocol can have a perpetual inflation rate of 2% per year which is compounded weekly. Terminal inflation can be turned off completely later on.

This is the projected FLX supply over the next 5 years if the protocol were to start minting in August 2021:

flx-supply

And here you can see the projected weekly inflation:

Inflationary rewards would start as soon as the minting contract is ready and audited as well as after the staking contract is audited. Alternatively, we can start to give out more rewards from the current treasury as soon as possible and then deploy the minter contract when it’s done.

Initially, incentives will be split 35% for stakers and the rest for mint + LP and other RAI integrations. Distribution weights will be adjusted over time depending on what the protocol needs, meaning that post governance minimization, this responsability will be passed to a DAO.

Note that the current emissions schedule will be lowered and inflation will take its place.

Implementation

A WIP implementation of the minter can be found here.

EDIT: adjusted the inflation schedule. Added an alternative to perpetual inflation.

7 Likes

RAI protocol does not have all the attention and growth it could get.

I agree :100:. People are finally becoming aware of USDC and DAI’s weaknesses so it may be a good time to start that sort of marketing and bring attention to RAI.

I think a low level of permanent FLX distribution is a good idea but I’m not sure I’d call it “inflation” – FLX/ETH stakers are providing security to other protocol users and should be compensated for it.

“Inflation” is memetically weak. Don’t use the “i” word. (Also I’m not sure permanent and arbitrarily chosen 8% inflation is a good idea, that’s a very separate discussion from this post though). Try to draw comparisons to MKR, which people mostly understand.

If increased FLX distribution generates hype and gets bigger integrations, that’d be awesome.

I think part of the reason Reflexer is not getting as much attention as other projects is because the current staking/airdrop situation doesn’t fit into the typical “degen farming” template. Every other project has a UI that provides instantaneous APY data and a dopamine rush as apes see number go up.

If we’re going with this route, it is vital to ensure that the protocol gets value from the FLX dilution.

Summoning my inner Jane Goodall

Here are my observations on the average degen ape’s workflow:

  1. Ape sees high TVL on DefiPulse, or high APY on vfat.tools, or forward looking investment advice on twitter/youtube.

    :eyes:

  2. Ape degen apes into pool 2.

  3. Ape reads about what they just aped into.

  4. Ape hypes what they just aped into on social media to get other people to follow them into pool 2. :arrows_clockwise: point #1.

  5. We use high TVL/engagement to obtain new integrations and grow network effects.

My suggestions are:
A. Ensure that APY is easily calculable so sites like vfat.tools can integrate the data. An issue with the current distribution scheme is it requires people to go to the gist, read it, go to coingecko, figure out current supply and price, then do arithmetic. Apes just want to see NGU. (Necessary for point 1 above)

B. Ensure that there is an accessible “Why RAI?” article on the reflexer.finance landing page that distills reflexer’s strengths/talking points. This is necessary for points 3/4 above.

  • Hedge against DAI’s weaknesses (centralized governance, governance attacks, regulatory attacks, etc.)
  • Has survived major downturns
  • DeFi primitive that is currently missing
    don’t mention SAI. Nobody who got into crypto after 2018 knows wtf SAI is.

C. Have a good idea of the types of integrations so that when we have $1B+ TVL the shrewdness community knows who to brigade inform on twitter/reddit.

D. Discuss the fuck out of “tokenomics” prior to increasing inflation. If you look at forums for projects that harnessed inflation successfully you will see that there was a lot of debate and optimization prior to setting incentive rates. We should be getting useful data points this week with the pool 2 distribution scheme.

E. Ensure that tokenomics are transparent and comprehensible. This is important. If people get confused and lose a lot of money they will feel burned and that is bad for longterm prospects.

We must put the apes to work in a way that benefits the protocol.


This content is my opinion alone and is provided for informational purposes only. Don’t rely upon as legal, business, or investment advice. :roll_eyes:

7 Likes

For A. we can show APYs on our stats page although it’s cumbersome when we switch distributions/amounts etc.

Why RAI can also be added on the welcome page and we can link to another page on our website that talks about it. Agree we should avoid mentioning SAI.

In terms of integrations we still need to do: Curve, Aave, Compound, Idle (main page), possibly collateral in Maker, Tornado.

I’ll announce this week everywhere that we plan to update the monetary policy and then we’ll spend time talking with the community so agree. Lastly, we’ll make a post where we discuss the change and we can point to it every time someone asks about tokenomics.

5 Likes

Sounds good. :+1:

One other “integration” I’d like to see in the slightly more distant future is more uniswap liquidity in different pairs. e.g. LINK/RAI.

It creates valuable network effects and could cause more uniswap transactions to get routed through RAI/DAI and RAI/ETH which would make LPing more profitable which means we’ll have to rely less on FLX subsidy for RAI/ETH LP.

No idea how to make this happen – hopefully once the community grows we can find some like-minded projects that would rather do their pool2 LP token vs RAI as opposed to USDC or DAI.

2 Likes

I am conflicted. In principle I agree that if something needs to be improved, by all means do it. But on the other hand, I hate monetary policy changes that essentially change everything, including the characteristics of the asset you hold (in this case FLX).

Inflation seems high for the first year, and it also seems that there will no mechanisms in place to counter its effects (although that could be discussed in the future by the DAO). I also think that it is better to allow 2% perpetual inflation which could be later adjusted to 0 by the DAO. I prefer monetary policies that can be tightened if needed, not expanded.

Be careful with the minting contract, even after audit. I like the two contract structure. Make sure that there is no possibility of infinite minting, that the newly minted tokens can only be distributed to the second contract and that there is no possibility to drain or exploit that, game the system, etc.

2 Likes

Personally I think it boils down to: a smaller cut out of something successful is better than 100% of something that’s not. This proposal is meant to boost RAI and give it a better fighting chance over the next few years.

You’re not the first to say you’re unsure about it so I think a smart way to go forward is to treat this as an experiment. We can have a 6 month window for example where we let the system mint more tokens and see if we get more capital and people who use the system.

6 Likes

Why not continue with integrations, add degen friendly metrics, and be a slightly more aggressive with the current supply distribution? Drip rewards are more attractive. Instant gratification. Also allowing FLX to accrue. Let the user decide when to claim FLX.

Also to consider Rai isn’t even on Aave, compound, or coinbase yet.

If TVL fails to meet X requirement by a specified date then enable the inflation contract? Or maybe inflation always occurs when TVL is always under a specified value for the foreseeable future?

Newly minted FLX can also be escrowed like Synthetix.

Also, what is the result in lowering the minimum 800 rai required for mint? Maybe reward active safes with some small equal distribution for limited time? This gets more people in the door to learn about RAI.

3 Likes

I appreciate your comments and I agree with you. Reflexer is just starting and if you, together with the team, advisors and investors believe that this change in the monetary policy will positively affect growth, usage, and protocol revenue, let’s try it. Full support.

3 Likes

My thoughts exactly. Alternatively to maintain some more ‘degen friendliness’ you could take the PieDAO approach that they use with their native DOUGH token. Allow instant access to a portion of rewards and the rest is escrowed for a reasonable time period. Allow long-term holders that are interested in the future of the protocol to maintain governance rights through some non-tradeable escrowed FLX token, analogous to eDOUGH.

Another thought I have is if you experiment with using inflation to drive adoption, I think it’d be much better to do that with key metrics and milestones you wish to achieve in mind. How much RAI would you like to see minted? How much liquidity in key AMM/lending markets? What integrations? With these in mind this could be a good opportunity to take advantage of UMA’s KPI options, rather than arbitrary inflation schedules. Mint new FLX, create KPI options with that and then distribute those.

1 Like

Escrowing is really interesting, we’ll look into that.

With the current distribution, rewards will end 12, maybe 18 months from now if we decrease emissions. The ideal future is one where Reflexer is a DAO and we need to keep 5-10% of the initialy supply for that.

The min amount to mint is already pretty low, especially when gas prices are sky high and there’s little incentive to liquidate.

1 Like

I agree with KPIs, will revise the post and publish those.

I’m not sure about KPIs options, didn’t UMA have limited success with those? I recall seeing about 200M TVL a couple weeks ago and now it’s a bit more than 100M. Kinda far from the 1B+ TVL ideal target that gave max payout.

1 Like

Success has been limited, but I’m not sure if that’s inherently to do with KPI options in and of themselves or if it’s a broader issue with UMA. With them being a building block and having several other apps built on top of them that drive adoption/TVL it’s much more convoluted on how exactly to achieve their goals. For Reflexer it seems like it would be a lot more straight forward, especially if the key metric you’re aiming for is more RAI minted.

Not giving a max payout is not necessarily a bad thing either. Say for example you did quarterly KPI options, for the first quarter you mint 50,000FLX (arbitrarily chosen) and create KPI options with those. If the KPIs are hit, the entire 50,000FLX is distributed to the options holders and the number of FLX minted for the next quarter is reduced by X%. If they aren’t hit, only a portion of the total 50,000FLX is distributed to options holders based on how close to hitting the KPIs they were. All excess FLX is then sent to a grants DAO governed by FLX holders with the intention of being spent of what you believe will help grow the ecosystem the best. Be that marketing, paying for work to be done to get integrated into other projects, CEXs etc. Either the metrics are hit or funding is secured for fixing the issues that’ll help hit said metrics down the line.

2 Likes

I need to think about this more, but my gut feeling is this is a bad move for the project. As someone who bought into the FLX token believing in the importance of this project it doesn’t fill me with confidence.

You’re for sure going to nail the price lower with this, investors that might have previously supported the price at higher levels will look to bail and in effect the APY will probably not be too much different. The two criteria for APY are price and supply. Just because you increase the supply doesn’t mean you’re going to increase the APY. The opposite can even happen.

Just to give some added feedback, I was seeding ETH/RAI for the FLX reward. Uniswap v3 caused me to unstake it. The returns were much more attactive in the ETH/USDC pool which doesn’t have LM rewards, but my ETH was better placed there and RAI better placed in USDC. Maybe it’s changed since, but ultimately, you’re not going to fix the problem by nuking the market with supply. You’re going to alienate investors that bought into this after the launch, maybe your VCs are happy with it but for new ones coming in, you’re going to have to wait quite a while and for quite a drop in price before they show up. That’s just my brutally honest opinion. I would feel screwed over by this change tbh. You’re nuking the price after I’ve bought it at levels I may have continued buying at.

3 Likes

You also need to ask: is having rewards left for only a year from now enough for RAI to become sustainable? Because our opinion is that they’re not.

So is the risk of becoming completely irrelevant in a year better than giving the protocol enough runaway?

It boils down to this.

3 Likes

I personally am all for this proposal. I think it will allow the project to be more fairly distributed and more nimble in how it gets adoption.

I would like to make sure that the degen metrics are available and easily calculate-able as others have said.

2 Likes

I think having inflation occur indefinitely as an incentive when a key metric is under preforming might be a good idea. Perhaps the value of this metric can be changed by the future DAO. Could it be as simple as RAI supply minted is under X.

I also like the idea that FLX minted after the original supply is escrowed and can still be used for governance.

2 Likes

Maybe we start simple and see how it performs during the initial 3-6 months?

I like the ideas, just thinking about how we tranche development so we ship it this summer.

3 Likes

To allay some concerns from investors. It is important to consider that ethereums own tokenomics were(are) inflationary initially. Initial inflation fueled rewards mechanisms for protocol participants ensures greater equity in distribution of a given token and as discussed already can potentially fuel growth of the protocol.

Even if FLX were to experience some short to medium term price depreciation this is ultimately irrelevant to the long term value of the protocol. The inflation schedule proposed isn’t even 100% of the previous total supply. If investors are eyeing a top 100 market cap ranking for reflexer in the long term, than any minor volatility the inflation schedule may cause is noise.

Should the inflation schedule drive growth overall price appreciation would produce outsized gains making the minor supply increase a non-factor for long term holders.

With marketing to degens. It is a good idea to make reflexers metrics as readily understandable as possible. Perhaps that means omitting specific explanations of how the protocol works in favor of others that are more accessible. This said, in terms of developer documentation it is critical that all relevant information be maintained and or explained.

Meaning, should an analogy with SAI make sense to use in developer documentation that analogy should be used. The actual documentation and technical discussion should never cater to people who are not willing to put the time in to understand the history and progression of the ethereum ecosystem of which reflexer is part. Demonstrating an awareness of that history is at least part of what lended reflexer legitimacy to begin with in my opinion.

All said the new proposal has my full support and I think the above 3-6 month trial period for the inflation schedule is a good idea. Leaning towards the 6th month timeframe because 3 months may not provide enough data.

4 Likes

Extremely reasonable, agree with the 6 month timeframe and with making the explainers accessible.

4 Likes

My concern is stationary or deflationary supply theses are a dominant force in the token market today, for that reason I like the trial period with community negotiated KPIs approach.

1 Like