Apply veBANK boost to Supply Interest Rate

Temperature Check
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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.

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.
  • Technical feasibility (contract development)
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Add under To be determined
Does this create the expectation of profit through BANK under Howey?

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great proposal! i think offering this kind of utility to BANK would be beneficial for the protocol and the users

why should it do that? you dont profit by only holding BANK. it just gives you extra APR when you use the lending market as a boost like you get already through the BANK boost

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I haven’t read any application of Howey that requires the proposed investment contract to be held solely for it to be considered a security. In fact, Howey itself was a case where there were multiple contracts together were deemed an investment contract and therefore a security, even though if they were individually not investment contracts. Here, BANK in conjunction with DeFi could be considered profit for holding BANK.
Further, if I read your statement in different words, it can be said like this: “You don’t profit by only holding BANK. It just gives you more profit when you use the lending market as a boost”. If you replace extra APR with profit, it seems obvious here that it can be considered an expectation of profit. APR is already expecting a gain, so why shouldn’t expecting more gain be considered an expectation of profit?
IDK, I’m just thinking here.

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Another way to frame this is thinking about banks offering preferred rates for customers who hold a certain level of money in their accounts. If BANK is a token of governance, then it might be considered that governors who are locking up a lot of BANK are being given preferred rates due to their status within the ecosystem. In the banks I’ve seen, the preferred rates apply to checking and savings accounts, which I do not think are considered securities. That said, I am not a lawyer, so outside advice would be best here.

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I agree with @bitshiftmod that this is unlikely to be seen as a security. I say that as someone who comments around here frequently about needing to avoid that classification. Here is a summary of what the SEC likes to see in a token:

  1. The platform used to sell the tokens will be fully developed and operational at the time of the sale. The funds from sales will not be used to develop the platform.
  2. The tokens will be immediately usable for their intended functionality (purchasing air charter services).
  3. The tokens will be transferable on the internal platform only.
  4. The tokens will be sold at the same price throughout the existence of the company.
  5. The company will offer to repurchase tokens only at a discount of the face value.
  6. The tokens are marketed in a manner that emphasizes the functionality of the token and not the potential for the increase in market value.
  1. :white_check_mark: The v2 was already out when BANK appeared. imo to me this means the dev team can’t sell BANK to pay themselves to develop new features for Algofi. They can do stuff like charge fees for a fiat onramp or put ads on the front end to finance it, but not by selling BANK.
  2. :white_check_mark: BANK launched with Governance
  3. :white_check_mark: you can only really buy BANK on Algofi and that is p2p via AMM, not from the dev team.
  4. :man_shrugging: this is the hardest one to me because its possible this disallows the dev team from selling their BANK, at least via the company. Maybe they could pay themselves salaries in BANK and then sell it as individuals but I’m not a lawyer so I don’t know how “spirit of the law” works in regard to SEC regulations. I guess they can sell at whatever price they sold as a part of the private sale.
  5. :white_check_mark: as long as the dev team avoids trying to buyback BANK
  6. Governance is already a utility, and imo this proposal is an example of something that fits into added utility. Any price increase in BANK is a side effect of increased utility. I think a token burn or dividends is what would trigger this.
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That’s for this summary. Will be a great reference.

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I like this idea and will vote for it should it go to the proposal stage.
The supply interest rate should always be directly propotional to veBANK.

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This is a very good idea. I’d vote for it. Once rewards manager is up and running this would be a nice addition. I wonder if it can be done without a contract mod. Could it work through existing rewards mechanism?

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We can’t compare Howey test related inquiries to Bank (not BANK) related products. Each has a different regulatory regime governing them.

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Thanks all for your comments. I’ve copied this proposal to the Proposal Staging forum:

and have added a section on examples of what users can expect for adjusted Supply APRs, some additional questions to figure out, as well as a link back to this Temperature check so users can reference the conversations here.

2 Likes