What a neutral mint incentive would look like

I’m all for cutting FLX emissions significantly but I wanted to have this proposal ready to go, should the community decide it wants to incentivize general RAI use in as neutral of a manner as possible.

I wouldn’t support this unless other incentives were significantly reduced. The goal is to generally incentivize RAI use in a way that’s easy to understand, avoid capital inefficiency, and doesn’t make my brain hurt (as opposed to the dynamics of RAI/DAI V3 LP with minting incentive, which are really complicated).

I call it:
Enough to do anything. But not enough to do nothing.

It’s a simple subsidy. You mint RAI. You get FLX. We tried this before and it failed because people minted RAI and then just held it. Basically they were staking ETH in a safe, then farming+dumping FLX. It added no value to the RAI ecosystem (other than inflating TVL + RAI market cap).

Why did mint subsidy fail?

Well, we were in the peak of DeFi farming mania. The market wasn’t rational. FLX wasn’t liquid yet, people just wanted to earn safe yield on their ETH. Farmers expected that minting + holding RAI would outperform other strategies.

How do we make this not fail?

We make minting + holding RAI unprofitable (vs alternatives). “You’re giving them free FLX for staking their ETH in a safe so mint+hold is always profitable”. I disagree because there’s an opportunity cost to putting ETH in a safe. There’s also risk (smart contract, liquidation, etc).

I am not going to try to price risk. However I am quite confident that the opportunity cost is ~4% APR on any ETH staked in the safe.

If you want long term 4% APR on your ETH, the market thinks a decent way to do it is swap your ETH for Lido stETH and then hold it until stETH is redeemable for underlying ETH. This is a very popular strategy.

If we target the amount of FLX rewards to be below 4% APR on ETH in a safe then people who want to mint + do nothing would probably be better off buying stETH or other similar delta neutral strategies.

However, all people who want to mint RAI will see some benefit from this incentive and I believe it will trickle to other RAI ecosystem participants. Is this still influencing the controller? Yes it is. But it’s less restricted than all the current incentives. It also doesn’t directly subsidize any other protocol (idle, aave, curve, etc.)

As Ameen brought up, if the price of FLX doubles or triples during the the month, then some farmers might decide to start minting + doing nothing. Personally, I’d be stoked if FLX price doubled in a month and I’d be willing to risk paying a little FLX to “do nothings” if that happens.

I propose that we tweak the amount of FLX being given out on a monthly basis.

At first, tweaking incentive amounts on a monthly basis doesn’t feel “laissez-faire”, but I think it actually is at least as laissez-faire as our current incentives structure. Right now, all of the incentives commit to an amount of FLX per day (and a fluctuating APR). Here, we’re committing to an APR (and a fluctuating amount of FLX).

How to do it
I do feel bad giving guifel more work to do but the way to do this is below (and I hope other incentives are cut to reduce his workload).

  1. Agree on what we think the subsidy should be for the foreseeable future. (I propose 4% on minted RAI which comes out to ~2% APR on ETH value at 200% collateralization.)

  2. On the 15th day of each month, when the reward period ends calculate:
    A) Average amount/value of RAI minted over the past 30 days. (rai_minted: right now it’s 6M)
    B) The average FLX price for the last 3 days.(*flx_price: *~10 RAI)
    C) FLX rewards = 0.04 * rai_minted/(365 * FLX_price) = 65 FLX/day

  3. When it’s time to calculate rewards, using mostly guifel’s red-highlighted code from here get the total amount of RAI minted by each safe. Distribute FLX (I think we could possibly just look at mint, redeem, liquidation events using Dune which might be less work).

Obviously I would prefer to automate this. I have no idea if there’s a good way to do that.

Anyways, the goal of this subsidy is if Alice is thinking about opening a DAI CDP, she may see the extra 2% APR and decide she’d like to experiment with RAI. Then she uses the RAI wherever she pleases and her counterparty also gets value from it. This way we’re giving FLX directly to at least some real users of RAI, and avoiding giving it to weird circular perpetual motion machine farming games. I think this will work as long as the subsidy is less than opportunity cost + risk.

Let 'er rip.

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My principle question here is how this works with the stability fee. If we’re charging a 2% stability fee and giving 4% incentives . . .:

  1. Aren’t we then bleeding as a protocol 2% per open position?
  2. Why would we not just eliminate the stability fee or make it negative instead?

Am I missing something here?

it’s paid in FLX which we are currently issuing way more of anyway

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I’m not sure bleeding is the right word but I’d argue that the protocol is bleeding less from this incentive than from all the other incentives. In either case, it should be less than 2% because less than 100% of minters will dump their FLX.

I vaguely recall that stability fee is ungoverned (or is about to be) and locked to 0.1% minimum? I’m having trouble finding where I saw that though. Once that happens, I anticipate we’ll probably get bored and have nothing better to do than debate incentives (which are still under the DAO’s control).

I mean, the fundamental difference is current incentives are paid out at a flat rate to uses of RAI. This means:
A. Since it’s a flat rate it’s possible to grow the protocol to the point were 2% collected is more than the amount of FLX paid out. (Which is kinda the point of the incentives anyway)
B. Current incentives are only paid out to some uses of RAI, so there is still a portion of RAI that we’re capitalizing on without paying out to.

With this proposal though those two things wouldn’t be true, the incentives would be paid out to all RAI AND grow with the protocol. To the point where if it’s a -2% we’d be actively devaluing as we grew. Complete ponzi mode I guess at that point, lol.

Again, unless I’m missing something. Also if this was just a temporary/one time thing to boost minting that would be fine. I’d want it paired with a marketing campaign though in that case.

I think Ghost’s point is that 2% doesn’t really change the calculus for mercenaries to get out of bed, but it can change the calculus for a user looking to collateralize their eth. We discussed previously about how we stacked with maker eth-a/b vaults, and I think this small change would be very net positive and, frankly, pretty cheap compared to what we’re paying for certain things now. IMO, it’s waaaay less ponzi than paying votium.