The last change in vires improved the structure of incentives by increasing the APY of locked supplies. However, the APY of unlocked supplies is still too high and quite close to locked supplies ones. So here we have a situation where locking supplies benefits are not really much. compared to unlocked ones. Funds are locked but rate difference with unlocked supply is too small for justify to lock. After all unlocked supplies in current liquidity situation are more interested in going out asap than in gaining high interest rates.
Actually the only difference between unlocked and locked supplies total APY is the vires APY. If we increase the proportion of borrowing interests that go to generate vires APY for locked supplies, we may increase this difference. However, this will only move more rewards from unlocked to locked suppliers. And nothing else. It does not help with liquidity problem nor any other stress in the ecosystem. And there are much more interesting ways to increase the APY difference with additional benefits. So in the proposal the benefit for people that commit to the protocol and lock funds is not immediate rewards, but as helps in the long term stability, it is still a big benefit for them.
My proposal here is to make vires to work closely with neutrino, and reduce the unlocked supplies APY significantly (for example, by the neutrino BR factor when BR < 1) , and use the undistributed reward to burn USDN:
- for USDN unlocked supplies, the undistributed rewards is directly burn. No swap USDN->WAVES, but just burn USDN, in order to increase BR.
- for the other unlocked supplies, use it to sell on market (or swap in swop, puzzle, etc) in exchange of USDN, and then burn these USDN. This will create a buy pressure on USDN that will help with depeg, and also increase BR.
Notice that this mechanism also maintains intact the incentive to provide liquidity, as the locked supplies conserve high APY. In addition, as BR increases, instead of increasing unlocked supplies APY, we can increase the vires APY for locked supplies. In this way a bigger APY difference between locked and unlocked supplies is conserved even when BR > 1.
A possible approach could be:
- If BR < 0.5, the current unlocked supplies APY (lets call it nAPY) is adjusted by BR, that is, APY = nAPY * BR. Remaining goes to burn USDN.
- If 0.5 < BR < 1, APY = nAPY * 0.5, additional vAPY = nAPY * (BR - 0.5). Remaining goes to burn USDN.
- If BR > 1, APY = additional vAPY = nAPY * 0.5.
With the current neutrino BR and unlocked supplies, around 1.16M USDN can be burned daily:
unlocked USDN supplies = 667.1M
unlocked USDT supplies = 120M
unlocked USDC supplies = 224.6M
total USDN daily interests paid to unlocked supplies = 667.1M * 0.5873 / 365 = 1.07M
total USDT daily interests paid to unlocked supplies = 120M * 0.4 / 365 = 0.13M
total USDC daily interest paid to unlocked supplies = 224.6M * 0.4 / 365 = 0.25M
Total = 1.45M If (1- BR) = 0.8 goes to burn, then 1.16M USDN daily can be burned with this mechanism.
The only limitation right now is the lack of liquidity of USDC and USDT. Part of it are paid to suppliers, and the other part does not exist. So there is no USDC/USDT available for buying USDN. Under this situation, it is better if only the USDN unlocked supplies part is used to be burned (still they are 800K daily), and the USDC/USDT part just for reducing the borrowing rate, that is, decrease debt accumulation, until utilization of these assets shrink enough.
Notice that in this case, the daily interest rate accumulation of USDT/USDC borrowings is reduced substantially, by 380K. Also, by avoiding for now the complications of buying USDN in market, the initial stage of the proposal is much simpler to implement. We then have the following initial setup:
- burn the unaccrued USDN interests (right now, 800K/day)
- use unaccrued USDT/USTC interests for reducing borrowing payments (right now, by 380K/day)
Update I was replied that most USDN supplies are unborrowable, and only 27M are borrowable. So the current amount of daily burning is much smaller than what I said. This is right. I computed wrong above. However, this unborrowable supply belongs to Sasha, so this can change after the proposal. By switching to borrowable supply, even with the APY correction will get more interest than unborrowable. And this supply can be progressively being switched to borrowable as USDN depeg pressure decrease. Also, the switch to borrowed supply shouldn’t have much effect right now, as USDN borrowing interest rate is high. If any potential issue with this, the USDN borrowing max rate can even be increased further (for example, to avoid USDN shorters)
Update 2 The APY correction must be applied not only to unlocked supplies, but also to LP tokens. Same concept. And for avoiding unlocked suppliers to escape rate reduction by exporting to LP tokens.