Adjustment of AVAX/MELT liquidity pool incentives

Proposal Type: Modification of Liquidity Mining Incentives

Proposer: Defrost Team

Proposal: This proposal is to vote on whether and how to adjust AVAX/MELT liquidity pool incentives.

Background:

Currently, the protocol is simultaneously rewarding AVAX/MELT with USDC.e and Joe, with an APR of roughly 100%. The size of the AVAX/MELT pool is around $700K.

  • 50,000 MELT tokens are allocated to the liquidity providers in the H2Oav3CRV pool per day, as basic rewards.
  • 1000 MELT tokens are allocated to the liquidity providers in the AVAX/H2O pool on Trader Joe per day, as basic rewards.
  • sMELT stakers see their rewards compounded by 0.2% per day.

Details:

As discussed in the forum, the liquidity of the AVAX/MELT pool on Traderjoe is still not deep enough. We need to find a better way to incentivize the AVAX/MELT pool, while still maintaining the MELT emission at a reasonable rate.

The options should follow the premises below.

  • The total MELT incentives will not be increased.
  • Options should be compatible with the smart contracts we have deployed.

Possible options:

  1. Stays unchanged.

  2. Migrate 3000 MELT/day as incentives from the H2Oav3CRV pool to AVAX/MELT pool, as basic rewards, and launch a similar boosting mechanism in the AVAX/MELT pool. (NOTE: Due to the current mining contract, USDC.e rewards will be terminated)

  3. Decrease the sMELT daily compounding rewards from 0.2% to 0.1%, migrate 3000 MELT/day as incentives to AVAX/MELT pool, as basic rewards, and initiate a similar boosting mechanism in the AVAX/MELT pool. (NOTE: Again, due to the current mining contract, USDC.e rewards will be terminated)

  4. Decrease 2000 MELT/day incentives in the H2Oav3CRV pool, and decrease the sMELT daily compounding rewards from 0.2% to 0.15%. Increase 3000 MELT/day as incentives in the AVAX/MELT pool, as basic rewards, and create a similar boosting mechanism in the AVAX/MELT pool. (Once again, due to the current mining contract, USDC.e rewards will be terminated)

1 Like

I will vote no to all of the above changes. Decentivizing MELT to boost MELT/AVAX is in my mind simply unacceptable. I remember precisely how much additional incentivation for holding MELT positively affected the market. Just as unacceptable is moving from USDC back to MELT rewards. While this highly incentivizes a deep pool at the top of the market, it decentivizes a deep pool at the bottom of the market since the APRs diminish as price drops (as opposed to USDC in which the APR rises during price drops). The bottom is where we need to be most concerned about liquidity, as thats where we are going to see flash crashes like we experienced previously. The rewards were changed to USDC for a variety of reasons. Lets not undo all the hard work that we have done.

For the record, I supply MELT/AVAX LPs, my stance is pro-Defrost, not anti-LP provider.

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Then your vote is 1 :slight_smile:
If you are holding MELT LPs, you must be confident about MELT future and longing MELT. Incentivizing some MELT will surely compensate your IL when providing LPs.
Also, the plan is like moving 4-6% from the curve pool to the MELT/AVAX LP, the influence on the curve pool is small, and the total emission of MELT is not increased.

I am for option 4

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I prefer either no change or option 2. The reason is that I would just use the USDC to buy melt anyways - so it cuts out a transaction.

OTOH by holding USDC I can time my own buys and have no vesting period. This gives an agility that is lost with melt mining on other pools.

Side question, but why is H2O/AVAX only 1000 melt divided per day? Is it based on pool size?

3 Scenarios:

Scenario 1 - The LP provider is creating passive income or taking rewards out of the ecosystem.

Scenario 2 - The LP provider is compounding rewards back into the LP.

Scenario 3 - the LP provider is trying to earn more MELT.

With MELT rewards:

1 - MELT is sold for stables or other tokens. Negative effect on price.

2 - Half of earned MELT is sold for AVAX and added back into the pool. Negative effect on price.

3 - The MELT is staked. No effect on price.

With USDC rewards:

1 - Rewards are harvested. No effect on price.

2 - USDC is used to buy MELT and AVAX. Positive effect on price

3 - USDC is used to buy MELT, which is then staked. Positive effect on price.

Keeping rewards as USDC also has a net positive effect on price vs the net negative effect of rewarding MELT.

3 Likes

I will vote for Option 1 (still think the ELK pools might help this as they have some sort of anti-IL mechanism) and propose an “auto-LP” I talked about in the discussion before.

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Non-booster will dump their MELT rewards as soon as they can. The fact they are not boosting proves this. On the other hand LPs have a vested incentive to care about the MELT price and the wider project.

Your point on USDC is a good one, assuming the USDC isn’t created via selling MELT in the first place (which I assume it isn’t). However USDC rewards are a separate issue from the one at hand.

I will vote for option 2.

Great stuff. I’ll vote for option 2. We need more liquidity in the project. Particularly given the MC often quoted doesn’t include sMELT (which of course is not locked). Including sMELT the total supply is 4m, giving a MC of c. $12m - $900k of liquidity is not sufficient.

I’m impressed that the Defrost team has turned to this so quickly, and also with the community engagement. Great to see.

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You mean option 2 right?

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Thanks - very late at night here haha

Perhaps, we should discuss how to re-allocate the USDC rewards in another proposal, if this one passes.

I would vote for option 1.

USDc rewards for lp provision are a big differentiator of Defrost in the avalanche ecosystem.

I also like how it provides a bigger price cushion when melt prices fall and allows liquidity providers to generate passive income without having to sell equity into the market.

As long as we can keep increasing TVL and providing a better end user experience to the people using Defrost’s services don’t see liquidity as a problem. It generates a lot of volatility, but that is also opportunity.

Melt prices will rise as a consequence of attracting more users, creating more H2O use cases and creating a better end user experience. This all increases the cashflows generated by staking melt.

I like how most of the melt emissions are being sent to the h20-crv pools. It creates a bigger incentive for end users who just want to compound stable coins, helps with the H2O peg and aligns holders with a longer term view of the platform. Such that end users are also helping make the protocol stronger.

The higher melt price rises the greater the apy in the h20-crv pools. The more collateral that is added to the h2o-crv pool the more valuable melt becomes. The more valuable it becomes the higher the price goes. The higher the price the more incentives for h2o-crv staking.

I vote no change with the given options. The ability of this protocol to have options that bring in TVL without requiring additional MELT emissions is an important one. Losing the USDC rewards is a negative that would lose the appeal of the pool for me. With USDC rewards I can harvest and buy more MELT or any number of positive effects.

If there is a way to boost for MELT stakers without losing USDC I would be very in favor of this.

I’m leaning towards 1. If not 1, my next choice would be 4 because I feel this option is the least damaging to try because I think H2O near peg is very important to the platform and I would prefer not to lower the H2O crv incentives.

I think it is very important to clarify and understand specifically what we are trying to accomplish. Sure, ‘Deeper LP pool’, but why do we want that, what is the ‘real’ reason? Are we trying to allow ‘whales’ to buy into MELT more easily with less slippage, which is needed to exponentially grow TVL? Are we trying to hit some marketing number that makes some herd mentality difference, and facilitate mass adoption? Maybe there is also a tertiary reason to get rid of the USDC rewards so that income can be utilized elsewhere? I think we must understand the true motivations to evaluate if it is the right move or not.

As I explained in the other thread, I don’t think the liquidity will change much, just because the market cap is still quite low. Even a 50% increase in the LP is not going to move the needle much. Maybe there are secondary effects of a larger LP that matter, but I don’t think the first order effect of slightly better liquidity will be worth lowering the H2O crv compensation.

To add to my initial thoughts, I think the obvious ask we would be meeting is to enable newcomers to buy large amounts of MELT with lower slip. (though AFAIK this has not be explicitly acknowledged by the team or those pushing the proposal as the primary motivation).

Well this is just a result of MELT being so useful that we want to stake and boost with it, not LP it. We put a lot of effort to give MELT utility, but now it feels like it has a lot of utility that people want to buy it. Is the answer really to back-peddle and reduce MELT’s utility?

I will spell out my understanding. We like high MELT price. Why?

  1. High MELT value incentivizes the H2O crv liquidity.
  2. Liquid H2O crv is what mechanically supports peg, facilitates H2O, SV, SV_II which make up TVL
  3. TVL is our business model and makes income for defrost through fees
  4. Defrost income increases intrinsic value of MELT, which are basically shares of defrost.
  5. Higher intrinsic value of MELT leads to higher MELT price, which loops back to point 1.

So in this loop, I just wonder, what does lowering MELT utility or H2O crv incentive for more MELT/AVAX liquidity do?

At the end of the day, I am not willing to die on this hill. We can just try and revert if things go south (though this comes at a cost of perception, interrupting momentum, and dev work). I don’t claim to predict the effects of this and I wouldn’t mind being proven wrong.

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USDC rewards are derived from the protocol fees, not selling MELT. Increase the fees earned and you increase the APR without having to remove USDC rewards. I will 100% pull my LPs with this change and just move to single staking and stable LPs since we will be looking at vested rewards, in MELT, which I already gain at high APRs with lower risk elsewhere.

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