Apply veBANK Boost to Supply Interest Rate (Dynamic Reserve Factor)

Proposal Staging
1

Proposal

To stabilize and provide further value to $BANK, I propose that users with more veBANK earn a higher Supply Interest Rate (Supply APR ). To achieve this the amount allocated to “reserve factor” for Supply APR should be scaled by the user’s veBANK.

Goals

  • Reduce inflationary pressure of Bank emissions rate by greater incentivizing lockup rate.
  • Better incentivize liquidity by increasing Supply Interest Rate (i.e., Boost-enabled) for liquidity providers
  • Increase value of BANK to users and Treasury

Rationale

Bank is currently considered both a token of governance and a token of value. It is rewarded primarily to Farm pools to incentivize users to add liquidity. However, due to the current formula for calculating Boost, the current situation exists:

  • If you enter a small pool, it is difficult to get Max Boost when providing even a modest amount of liquidity. For example, as of 2023-1-30, if you put in 1K USD into the Algo/Bank pool (~$197.2k), you would have 0.005070993915 of the pool. To get max boost, you would need 994082.1095712438 veBANK (Global veBank currently at 196,032,992). Even at 4 year lockup, that would require more than 1K USD worth of BANK to achieve at current rates (using .018A per Bank, $.25 USD per Algo). The user here is rewarded by a large amount of Bank emissions but little incentive to lock up bank as it would take a large amount to increase their Boost rewards.
  • If you enter a large pool, such as the USDC Lend & Earn, you can maximize boost easily. For example, with 1K USDC put into the pool, and pool size today of ~$6.62M, your percent of the pool is 0.0001510574018. This would require 29,612.2344386002 veBank, which would require $33 USD worth of BANK to max boost. In this situation, there’s little incentive to lock up more BANK as it would have no effect to further Boost.

In both scenarios, the appeal of Max Boost on a pool is either too easy or too difficult to achieve such that it does not incentivize locking up additional BANK.

Note: there is a pressure to lock up more bank if the global veBANK amount increases at a rate such that users’ percent of veBANK goes down to require small additional BANK locks. However, with the current Max Boost incentive, it is not causing veBANK to grow rapidly enough to thwart inflation.

Proposed change to Supply Interest Rate

The current formula for Supply Interest Rate is:

Supply Interest Rate = Borrow Utilization * Borrow Interest Rate * (1 - Reserve Factor)

and the proposed change would introduce a veBANK scaling factor on the Reserve Factor:

Supply Interest Rate = Borrow Utilization * Borrow Interest Rate * (1 - Reserve Factor * veBankScalingFactor)

Note: The current Reserve Factor is 17.5%.

While this reduces the amount going to the treasury directly from percent of fees, the expectation is that increased liquidity will produce increased usage and fees to produce a net gain for the treasury, especially if BANK value rises.

Example

As an example, given that the user’s currently receive 82.5% of fees and Reserve Factor for Treasury is 17.5%, and a hypothetical pool receives a total of 10% APR in fees:

  • If reserve factor is allowed to go to 0 (i.e., no reserve given to Treasury), a non-boosted user would receive 8.25% APR while a max boosted user would receive 10% APR.

  • If reserve factor is allowed to go from 17.5% to 5%,a non-boosted user would receive 8.25% APR while a max boosted user would receive 9.5% APR.

To be determined

  • Formula for veBANK scaling factor for reserve factor
  • Amount of reserve factor that can be provided back to the user (i.e., Would it be possible to eliminate all reserve factor if a user has a very large amount of veBANK? Or should there be a minimum that goes to the Treasury). The details of implementation should factor in keeping the AlgoFi DAO treasury safe by ensuring it grows through increased volume of fees and BANK value. It should also factor in the examples of easy max boosting on larger pools.
  • Technical feasibility (contract development).
  • Could the reserve factor amount for max boost be dynamic and made part of the rewards manager (thus allowing votes to change the amount)?
  • Will bonus fees from boost be something to claim (like BANK)?

Reference

Temperature Check: Apply veBANK boost to Supply Interest Rate

7 Likes
2

Thanks @bitshiftmod for staging this proposal.
It’ll be great to hear feedback directly from the Algofi team before casting the vote, especially if there are potential consequences that we haven’t considered yet.
I personally think it is a very positive proposal for BANK holders. Thanks.

4 Likes
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Hmm, A Dragon proposal. That alone may be worth consideration.
Watching this one closely, lets see how Algofi reacts.

1 Like
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I think you’re tunneling on the boost number without considering your position relative to the position of everyone else in the pool. From Scenario 1 to Scenario 2 you’ve provided a percentage of liquidity equal to 188%. From Scenario 1 to 2 to achieve the same boost you need to provide a percentage difference of Bank equal to, you guessed it, 188%. This means you’re getting a consistent amount of value from your bank (relative to your position) in both scenarios. The scenarios are equivalent, one is not ‘harder’ or ‘easier’ to achieve boost. 2.5x boost for 29,612 veBank in Scenario 2 is just as much value to you receiving 1.1x boost (1) for 29,612 veBank in Scenario 1.

The goal with the boost system is not to achieve max boost because it represents the absolute upper bound. Instead we should be happy that high liquidity pools have so much more room for me to invest in boost (i.e. Bank). The low liquidity Scenario 1 I can only effectively use 29,612 Bank and that’s it, I have no incentive to hold more Bank than that. In the high liquidity Scenario 2, the sky is the limit! I could buy a much larger bag of Bank and it continues to be provide more value to me by raising my boost. (albeit with diminishing returns)

Thanks for coming to my Ted Talk, maybe this helps!

(1) I didn’t do the math here, feel free to correct me, I’ll update. The point remains the same that it will be much less than 2.5.

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Sorry, I do not understand where you are getting 188%, and my analysis certainly discusses the size of position relative to rest of pool, as that is what determines amount of veBANK required to max boost. Also, in scenario 2, after 29612 Bank is locked up, the sky is definitely not the limit, you get zero additional benefit to locking up additional Bank.

6

The specific number is not important, but it is important that it is the same in both scenarios. It proves that your boost is relative to your share of the pool. In the Scenario 1 you own a (relatively) large share of the pool at .5%. Whereas Scenario 2 you own .015% of the pool. In Scenario 2 you are a much smaller LP so you require much less bank to reach max boost.

To bring it back to my original point, it is not an ‘easier’ boost or a ‘harder’ boost. You are receiving the same share of boost in both Scenarios. (The only different being your proportion of the pool) You should not strive for max-boost and if you achieve it you’re encouraged to increase your TVL with any remaining capital.

You’re correct, I got my scenario numbers mixed up. Scenario 1 has additional room to raise your boost. (I’m past the time window so I can’t edit that post with a correction)

7

Again, I do not understand what you are getting at. It seems you are restating the points I made that if you want to incentivize locking up Bank, the current formula is problematic in that it either requires too little or too much Bank to make it worth locking up large amounts. Here, easier and harder refer to the amount of Bank required to boost.

Also, what is this “same share of boost” you are referring to? Please demonstrate with calculations so that I can understand what you are saying.

Additionally, having someone say that one shouldn’t strive for maximizing boost says to me that the boost system does not have enough perceived value to make it worth locking up Bank. If so, that is something this proposal seeks to address, so that one should be incentivized to lock up Bank.

2 Likes
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Algofi gov should not do anything to “provide further value to BANK”. We can argue about how we interpret Howey when we decide on a course of action. It is moot when rulings in law are a collection of information based on whatever will be gathered by the body issuing the ruling: law, evidence, and precedent. This happens later on, when the ruling is needed.
We do not need to provide any hint that we are putting effort into the value of BANK because BANK has no monetary value that we ascribe to it. It is a TOY: points to be used for governance of a system from which it spawns for free.