Proposal for amending the yield farming mechanics

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THE PROBLEM

Under the current reward system, the Liquidity Providers (LP’s) in AVAX pools get exact same rewards as in PNG Pools for each AVAX equivalent amount they provide. This creates a risk reward imbalance in favour of AVAX pools since AVAX is considered a more secure investment with its

  • larger market cap
  • lesser inflation
  • lower risk of impermanent loss due to bigger liquidity pools.

As a result, most of the PNG rewards goes to AVAX LP’s, who then dump those to buy more AVAX. The sell pressure on the PNG results in decreased yield for all the LP’s including those in AVAX pools and limits the growth of liquidity pools.

THE CHALLENGE

PNG price must be supported by creating incentives to buy and hold on to PNG.

THE SOLUTION
I have listed several proposals below which will contribute to demand. These proposals can be voted separately

PROPOSAL 1- INCREASING THE REWARD FOR PNG POOLS

While incentivizing AVAX liquidity is important for attracting LP’s to Pangolin, the majority of the PNG rewards should support PNG pools and go to PNG LP’s who are more likely to hold on to their tokens to increase their liquidity instead of dumping them.

I propose to split the daily 175k PNG rewards to two fixed buckets regardless of the total liquidity in them:

  • PNG Pools: 62.5% of the rewards
  • AVAX Pools: 37.5% of the rewards

With the increased PNG price, 37.5% of incentives is enough to keep AVAX LP’s in Pangolin

I believe this is better than having a reward ratio for each AVAX equivalent liquidity between AVAX and PNG Pools in which case PNG rewards would start to fall along with the PNG price.

Sparing 62.5% of the PNG rewards only for PNG pools will positively effect the PNG value and result in increased liquidity in PNG Pools.

PROPOSAL 2 - SPLITTING REWARD BUCKETS INTO SMALLER PEICES FOR EACH PAIR

Provided that Proposal 1 is accepted and PNG and AVAX pools are split, the reward for each pair in the respective bucket should be determined hourly.

Currently it is based purely on the amount of liquidity in that pool. I propose that the liquidity pool factors should be adjusted taking the IL within the calculation period into account such that the more IL in that specific pool, the more rewards it should get. This will work as a quasi insurance for the LPs. Despite its effect may be small compared to the accrued IL at the beginning, the beauty of this proposal is that it will provide additional rewards even when the price recovers in a different time slot, since IL will calculated separately for each time slot. So the high volatility will not be something to be afraid of but an opportunity for LPs to earn extra rewards.

Also, the pairs with more tx volume require a bigger liquidity pool. I propose to take the transaction volume also into account when determining the rewards for each liquidity pool.

The IL adjusted liquidity weight should be 60% and the tx volume weight should be 40%.

Below is a numeric example:

Liquidity (PLG) @ begining IL during calculatio period IL adjusted liquidity weight reward factor (60%) tx volume (mUSD) -40% Overall bucket weight Daily PNG reward
A B C = A* (1+B) D E = 0.6 x C/∑C + 0.4 x D/ ∑D
PNG ETH 1000 20% 1,200.00 2.00 16% 15,844
PNG BTC 2000 10% 2,200.00 3.00 27% 26,623
PNG AVAX 5000 0% 5,000.00 6.00 58% 57,532
TOTAL 8000 8,400.00 11.00 100% 100,000

Specific note on AVAX PNG Pools: I suggest it gets rewards from both PNG and AVAX buckets.

PROPOSAL 3 - LIMITING THE NUMBER OF PNG POOLS
Proposal 3 does not depend on other proposals and can be voted separately.

PNG Pools should be limited to WBTC, ETH, USDT and DAI at the beginning to help creating decent pool sizes. Once the liquidity amount exceeds a certain level, other PNG pairs can always be voted to be added.

PROPOSAL 4 - VALUING THE TIME SPENT IN LIQUIDITY POOLS
Proposal 4 does not depend on other proposals and can be voted separately.

Incentivizing LP’s to stay in the liquidity pools as long as possible is also key for securing enough liquidity and preventing PNG dumps. Hence in each pool, the reward factor of each LP should be increased by 2% for each day spent in the liquidity pool.

Below is a numeric example for further clarity:

Lets assume that PNG-ETH Pool distributes 100PNG per day.

There are 3 LP’s in this pool who have provided 1000 PNG over last 25 days.

Each day spent in the pool is valued with an additional 2% reward factor.

It is also important to have a cap on the reward factor to balance the effect. I propose to cap it at 1.5 which can be reached in 25 days.

In this scenario, the reward per LP is follows:

PNG liquidity provided Duration in the pool Reward factor Total Reward Factor Reward weight PNG Rewards
A B C = MIN(1.5, (1+2% x B)) D = A x C E = D / Total D E x Total Pool Rewards
LP1 200 25 days 1+2%*25=1.50 300 25.64% 25.64
LP2 300 10 days 1+2%*10=1.20 360 30.77% 30.77
LP3 500 1 day 1+2%*1=1.02 510 43.59% 43.59
TOTAL 1000 1170 100.00% 100

Every time an LP adds liquidity a new row will be added in the table as it would have a different time stamp. When withdrawing the liquidity, the last injected amount should go out first, or in other words first in last out (FILO)

PROPOSAL 5 - PANGOLIN LOTTERY
Proposal 5 does not depend on other proposals and can be voted separately.

1% of the pool rewards will be used as lottery reward and randomly awarded to one of the PNG LP’s weekly, who has provided more than 50 PNG worth of liquidity over the last 7 days.

Indeed lottery is a very common promotion tactic for creating demand. Think about ice creams giving Porsches or iPhones. Many people have a tendency for gambling/surprise elements. Even Facebook uses that sentiment and refreshes the feeds randomly each time you update the page.

A weekly lottery around 10k PNG given to PNG LP’s who stay in the pools for longer than 7 days will add to the “creating demand” story of PNG.

ON PNG STAKING

I have also come across several proposals to introduce PNG staking as in AVAX staking, however I do NOT support that idea.

Despite staking is very important for POS systems like AVAX in order to approve txs, it does not have much use for DEX operations. Pangolin’s interest lies in incentivizing liquidity pools not in staking. On the contrary, if there is too much incentive in staking, Pangolin cannot work due to lack of liquidity. Therefore, saving some of the 175k PNG to stakers and reducing the LP rewards should be avoided.

19 Likes

very good idea,just do it

Seems coherent. I would go for this scenario

:clap:

nice work @CevizliBaklava

This really will not change the basic tokenomics. It’s still the same amount of new PNG released every day, and also it doesn’t add a new use case that would promote hodling PNG and reduce the sell pressure. The assumption that PNG liquidity providers will not sell is a stretch.

Also, it’s insanely complicated and will confuse future liquidity providers who will have to do a lot of reading and calculations to understand what and when they will get as rewards.

What do you believe drives the value for PNG and SUSHI Tokens? It is the same proposal Pangolin will provide.

Please read up on Sushi. It uses completely different tokenomics. Most importantly, Sushi has staking rewards. Staking rewards is the main reason people want the Sushi token. Sushi also has an easily understandable lockup period for rewarded Sushi which people are willing to accept because of the staking rewards.

As I mentioned above, staking is not helpful for DEXes. Liquidity is. Hence, rewards should be awarded to LPS not to stakers. Sushi is trying to control emissions by creating more inflation. Doesnt seems sustainable to me.

2 Likes

You are just making that up. Staking is hugely successful for the value of the Sushi token. And the value of the Sushi token is what attracts liquidity providers as they can earn it through staking.
You proposal does nothing to increase general liquidity, only reduce it, as it will move liquidity to PNG pairs which is a useless token outside of the Pangolin exchange. So you’ll end up trading PNG amongst yourself.

1 Like

So rewarding Sushi for locking Sushi make sense but rewarding png for providing liquidity doesnt… Not following you …

It’s completely different token economics. Stacked sushi earns rewards from trading fees. Those are actual fees payed by other people. That is were sushi gets its value from.

Handing out more PNG for staking PNG is circular and self defeating. It doesn’t add any value. Tweaking PNG reward distribution does not at any value. It only inflates and drive the price down. Maybe a little slower or delayed but it will be inevitable.

2 Likes

Pangolin does not award PNG for staking but for providing liquidity. Liquidity is the backbone of a DEX unlike the staking. Pangolin also has trading fees and use it better, i.e. rewarding to the LPS (not the useless stakers who do not provide liquidity for txs). I would say this is a more sustainable model in any case

1 Like

Very well put together. I’m in favour.

@CevizliBaklava In the PNG Litepaper, it’s mentioned that rewards are distributed according to liquidity of the pools. Is it possible to change the system when the governance will be online?

That is the plan indeed

And look at how Sushi is doing. Sushi had luck that it was the first vampire protocol on mainnet. Long term, this kind of distribution will pay off, short term price changes give me no reason to pass ideas as these.

This will suck the liquidity out of all the other PNG pools.

Also lottery idea is silly.

I like the initial PNG/AVAX rewards split proposal, but without the lottery and putting AVAX-PNG only in the PNG bucket, not both.

Hourly adjustment idea should be submitted as a separate proposal. It’s quite complicated.

My preference is to keep it simple. Implementing changes in smart contracts is tedious and error prone – and bugs can be disastrous.

Lottery idea is not silly at all. Actually it is a very common sales tactic for creating demand. Think about icecreams giving porsches or iPhones. Many people have a tendency for gambling/surprise elements. Even facebook uses that sentiment and refreshes the feeds randomly each time you update the page. I think it will add to the “creating demand” story of PNG.

On double dipping the rewards of AVAX-PNG pool, it is ok since AVAX and PNG are the two most important currencies which contribute greatly to the success of Pangolin. I believe it is better to incentivize these more

I like reward based on time spent in LP. It would be fair to reward those more who keep their LP longer in the platform.