[GIP-30] LM Adjustment №1

GM everyone! Off to a fucking great start, thanks to everyone for being active, farming, helping find bugs… Here is a recap of the first few days post V2 launch, twitter thread here.

The exercise of shifting votes and incentives should be done every now and then, and later on can be given into the hands of tokenomics of GEAR or some PDI (that automatic thing Tarun keeps talking about? aka incentives change with utilization). Anyway, we are not there yet, but we already need changes, imho. I know is too early so we can’t talk of precise numbers just yet [third-party platforms are already in the process of adding Gearbox info: Nansen, DeBank, etc. - pleasу help us poke them!] but there are some numbers which are very very apparent. That’s the topic for today.

Let’s start with “why”. The idea is to keep optimal borrow rates at optimal level, so borrowers can make some %. It doesn’t mean they have to make 50% profits with a simple strategy (they can though, if they add market directional positions to a farm like here). This exercise makes less sense when there are 100 strategies, but now it’s pretty clear what & how can make money aka be usable. So we can and should fix. Everyone is free to use however they want, we are just looking at the most obvious opportunities.

Let’s start with the optimal rates. They were set up with the utilization parameters to reflect whatever currently can be sourced across the available positions and strategies.

We estimate that at optimal 80% utilization - the borrowing costs are approximately:

  • 2.1% for USDC/DAI
  • 3.5% for ETH/BTC
  • and 1.4% for wstETH

These are the back of the envelope estimations we did for what the borrowing cost for Credit Accounts would be at 80% utilization given current Gearbox V2 parameters.

  • Stables = seems good. Stables convex positions on FRAX and LUSD and even GUSD can offer jus a bit above (and more). So, all good, borrowers are happy enough. Because remember, every 0.5% difference between borrow rate and farm APY is actually a +3.5% yield at acceptable risks + GEAR soon. Bueno!
  • For (W)ETH, also good. Lido gives above, Convex too, Yearn as well.
  • For wtsETH, no bueno sers. On my memory, it has never been that vanilla stETH rebase yield was > the risk of providing liquidity in stETH/ETH Convex or yearn pool (the steCRV). It has always been above. But in the past few weeks, it has not been the case. And that was the highest-making $$ pool(vault) in DeFi for the last few months. If it stayed that way, wstETH would be the most obvious almost-no-liquidation-possible debt asset for it. But as things stand, it is not. wtsETH is currently too expensive by itself, it’s an unsable debt asset.

1. Cut brrrr on wstETH by 100% immediately IF this vote were to go through

So what? Well the GEAR incentives for wstETH pool are currently a waste. It’s too much of an “expensive debt asset”. It can allow for stETH shorting essentially, but the market for that does not seem to be huge right now anyway, is it? So my motion is to remove all incentives for wstETH pool (but keep the pool itself, no need to remove) and redirect the same supply incentives to the other pools.

There is more potential for borrowers to realize on stables & ETH, so let’s give them that!

Vanilla TVL without any sign of utilization is a useless expenditure. With this move, we increase the chances of utilization on product debt assets, while minimizing for TVL drops. The 7.5K wstETH [8.2K ETH] currently being there represents $13M of TVL. But that number is useless if it just gets brrr and contributes nothing. I believe some of those LPs can do switch to ETH pool, some might decide to stick around to see utilization grow, and some will leave. That is fine, the rebalances are natural!

This should prompt 1% withdrawal fee removal immediately for this pool specifically, so LPs can take decisions at the same time. Would be unethical to remove and keep the fee. Already voted for!

2.Cut brrrr on WBTC by 50% immediately IF this vote were to go through

https://snapshot.org/#/frax.eth/proposal/0x3b1509fd9347e5b409f2623a1ad84ae50b6a02da2bc7b69805c474ee3497ec32

WBTC is a different asset, and can still yield interesting short-long positions. Keep it for now.

This should prompt 1% withdrawal fee removal immediately for this pool specifically, so LPs can take decisions at the same time. Would be unethical to remove and keep the fee. Already voted for!

3. CUT CA LM for wSTETH & WBTC. Keep WETH-USDC-DAI as before.

  • $60M+ was borrowed in 5 days and that’s before ninja wave 3.
  • Protocols coming in, like Brahma and Mellow, to borrow more.

4. Move that expenditure to other pools + FRAX pool

  • wstETH pool rewards being 0.43% GEAR supply [minus whatever has accrued to wstETH LPs so far] I would suggest to redirect the following way to other pools:
    – 50% to USDC that is +0.215%
    – 50% to (W)ETH that is +0.215%
  • WBTC pool rewards that are cut by 50% meaning 0.12% GEAR is freed up [minus whatever has accrued to wstETH LPs so far] I would suggest to redirect the following way to other pools:
    – 100% to new FRAX pool [to be voted on]
  • CA LM for wstETH & WBTC fully going into FRAX pool

That will make FRAX pool have 0.168% incentives and could incentivize scaling AMO to $10M!

So the changes would look as follows:

1 Like

it makes sense to me, cvx/crv pool is the only strat worth farming stETH on and like you said it’s borked, so primary use case becomes shorting stETH. There’s plenty of other yield opportunities out there for ETH, better to just let this one be a bastard child that ppl can use when stETH gets fudded or use strategically if cvx/crv strats return in value, but having an entire incentivized pool for basically one yield strategy makes no sense

Makes complete sense.

Would like to add to stop the brr on WBTC, there’s not much utilisation and thus having a non-incentivised supply won’t risk borrow rates

The optimal ratio was to keep 4.7M in there. Let’s reduce down to 3M and see what happens? So like that would make it go down to about 0.15% then. Small enough, but keeps composability possible?

Borrowings never really gone anywhere with WBTC tbh, let’s cut the loss on it and move the rewards to a more demanded pool tbh. We can build back WBTC when there is an adapter that leads to the demand for the same

Agree with killing off wstETH rewards.

Yes, I quite agree with you. Step by step

Ok sers. Reduced WBTC pool by a half as suggested. All emissions are same, not more or less.

See the first post for updates, quite some big ones!

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A midway on WBTC seems fair, gg. Let’s do it

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I agree. It seems that in principle our development path should be in favor of LM LP and constantly adding interesting strategies so that people using CA can constantly have something new and highly profitable and always be motivated to use CA.

Not a fan of this pre-GIP, ngl. Feels like a bait and switch for CAs after justifiably expecting rewards according to GIP-22.

What happened to this statement?:
“Prospective Leverage Ninjas have asked for small LM for CA side too, not as a financial incentive but just as an alignment for users to be able to get a piece of the protocol governance. That didn’t seem too unfair, and the spending required for it is extrmeely small too.”

Has anything changed in the meantime?

edit, addendum: These additional GEAR rewards for CAs make sense from a protocols perspective too, so they aren’t for nothing imho. More borrow demand → higher APY for lenders.

edit2: Full disclosure, got a few CAs running. So obviously I’m biased in this regard.

Feels like a bait and switch for CAs after justifiably expecting rewards according to GIP-22.

That would suck actually, so definitely want to avoid that. But so far only 1 Ninja out of the entire list has expressed concerns about it [you might be second ser]. So, gathering feedback and ideas first, of course. Or maybe you are the same person not sure! Please do say, cause ninja feedback is extremely important, and it’s only important from ninjas if they truly expected something. As others don’t mind by default.

Has anything changed in the meantime?

No, that’s all the same. It just that the rates voted for before was 1% APY for $40M of borrowing or so, so if they were to stay, it would literally be 0.5% or less. Is that even relevant as user-alignment?

If the user-alignment ideas were to persist, it would need to be upgraded. And I am not sure if more emissions for no reasons are a viable path. So imho, as a ninja: let it either be 0% or 2%+ then. And 2%+ was not voted on. And again, there doesn’t seem to be a reason to do it.

But the other side of the coin is that the narrative of “organic adoption, clear PMF for Credit Accounts” gets somewhat diluted with these rewards. So, those tiny emissions are not an issue. But they are so tiny to not be relevant - yet those small rewards still potentially pose some narrative risk to Credit Accounts.

More borrow demand → higher APY for lenders…

Actually on this, it’s not so trivial. Would disagree here.

  • People calculate APYs and like to know what they are paying + making. The APY of GEAR while untransferable would fully distort this and make it complicated. Those who would like to calculate organic net APYs, might end up with near0 if the utilization ratio unnaturally jumps too much.
  • There are protocols (like Brahma, and Mellow later) doing strategies and require ONLY organic APYs. And they will be Credit Account users. If the logic of “gib rewards on CA side, it will indirectly make LP rates better” is applied, these protocols might not be able to operate. That’d be BAD!
  • The utilization curve was flattened out to not cause much spikes before 85% rate. Beyond that, even by 1%, it gets… insane. So saying that “better APYs on CA side will make LP side catch up” doesn’t seem to hold up. I am not sure if I got the math wrong, but this is basically how it is:

Before → after

Important decision-making for LM adjustment.

So, got good pushback on CA rewards. Incorporating changes.

  1. CA LM is not cut fully, they stay the same for WETH-DAI-USDC! Fully cut for WBTC & wstETH tho.
  2. The full wstETH & 50% WBTC pools LM cuts for LPs → go into new FRAX pool.

That is in light of the proposal by FRAX DAO that has just passed:

This way we optimize rewards + do not have to make new inflation. Win-win!

https://snapshot.org/#/frax.eth/proposal/0x3b1509fd9347e5b409f2623a1ad84ae50b6a02da2bc7b69805c474ee3497ec32

Important context: Gearbox Protocol Dashboard

sorry, i don’t understand. why in ‘4.Move that…’ wstETH pool rewards redirect to USDC/DAI and WETH. but in the Screenshot below, wstETH rewards just redirect to WETH and USDC? what’s more, why in ‘2.cut brrr on WBTC…’ WBTC reward move to WETH and USDC Pool 50-50%,whereas in ‘4.Move that…’ it all goes to Frax pool. I’m quiet confused.

Had 4 edits here, apologies for these. The final truth after all feedback and requests - is the last screenshot of the changes. Will fix textual edits. Please check again if that is correct now?