Reallocate a percentage of MELT rewards to MELT LP

Hey all

I’m glad I found Defrost/MELT three weeks ago. While PA has been positive since, I am sure you all agree with me that the protocol is still materially undervalued. I believe one reason why is because too many MELT rewards are directed to the H2O3CRV pool, particularly to those that aren’t boosting with sMELT.

I propose the MELT reward for non-boosting depositors should decrease to c. 10 - 20%, which is more inline with competitors. Currently the non-boosted reward is c. 90% at a low MELT price of $1.50. This would greatly reduce the dumping of MELT by non-MELT holding depositors who have little interest in price appreciation or the protocol growing.

The reduced rewards should then be directed to the MELT - AVAX LP farm, which is currently only paying an APR of 110%. Such a low APR does not adequately incentivise LP-ing and deep liquidity. The lack of pool 2 rewards has two primary impacts: 1. Low liquidity given LP incentives are low, leading to volatility (as we’ve seen) 2. Less incentive to hold and LP and a greater incentive to dump rewards from stable farming. sMELT boosting certainly mitigates 2, but not entirely.

Depending on how the MELT reward reallocation from non-boosted depositors to the MELT pool 2 impacts the pool 2 APR, it may also make sense to allocate some boosted H2O3CRV pool rewards to pool 2, but hopefully that won’t be necessary. In any event it would make sense to discuss this here or in the Discord.

Thanks for reading.

Best

BBB

6 Likes

Absolutely nailed it. I’m in favor of this proposal 100% and believe it will benefit all MELT holders as well as the protocol as a whole.

Lets put it to an official vote!

I have a good chunk of LP in the MELT/AVAX pool because I’ve felt the rewards were the best of the bunch offered. However, I’ve been considering pulling them out despite any lucrative rewards.

Why? Because I really think the price of MELT is set to go up significantly. If the price of MELT increases significantly those of us in the LP will be left with fewer MELT than with other LP or staking options.

I think the rewards would have to increase really significantly to counteract this, but please someone correct me if I am wrong. I’m still learning about how providing liquidity works over time.

1 Like

You’re correct. I feel more explosive price moves coming up too. If our belief is widespread, even more LPs and liquidity could be lost.

Agree 100 percent. The thread starter is a gigabrain. Someone hire this man as an advisor. He knows his shit

If this is to be in place of USDC rewards, I disagree immensely, for reasons Ill outline below. You might change my mind if this is in addition to, rather than instead of, USDC rewards.

We specifically switched over from MELT to USDC rewards a month ago for a good reason. MELT rewards were getting mass sold on the market. If you want more MELT… a person can take their USDC rewards and buy more MELT, we want to see more buying. Im not seeing the issue that this resolves but I do see the issues it causes.

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.

USDC rewards create a net positive price impact, MELT rewards a net negative. Seems pretty straightforward to me.

MELT APRs increase when bullish and decrease when bearish do to the fluctuations in price. Inversely, USDC APRs increase when bearish and decrease when bullish since its price doesnt change with the value of the LP.

With USDC you would have higher APRs, thus deeper pools, at the bottoms of the market. MELT, at the top of the market. Shallow pools at the top of the market just cause quick price hikes due to slippage. Shallow pools at the bottom of the market cause fast, severe dumps. If I have to choose, Im going to choose deeper pools at the bottom, thus USDC rewards.

No to this proposal if its to be considered a USDC replacement. Yes if its meant to be additional incentivization.

Counter Proposal: Im a fan of providing both MELT and USDC rewards. Incentivize both the bull and bear markets, increase rather than just change incentivization. If MELT price is low, you get high USDC APRs. If MELT price is high, you get high MELT APRs. Incentivized in every market condition. MELT isnt only going to go up, emissions rates are going to create periods of correction.

4 Likes

Counter-proposal:

I agree liquidity is an issue. The trick is that unless the project starts with part of liquidity provided by the team in the original allocation, it is very difficult to reach reasonable liquidity on DEXes. It is simple - you believe in the project, so you rather hold because you don’t want to be eaten by IL. To compensate for this properly, there would need to be huge rewards that would simply lead to MELT dumping. So I would vote against, it doesn’t solve anything

The proposal or simply an idea or food for thought:

Use part of MELT currently being burned and/or part of the H2O fees and add them to liquidity. I know everyone loves burns but MELT liquidity really can become an issue moving forward. I’m not saying don’t burn anything but maybe half burn & half liquidity. If there is not enough H2O for the second half of LP, the excess MELT can be burned anyway. These are all technicalities but the important part that neither of the halves would create selling pressure on MELT or H2O.

4 Likes

Not a bad idea to add that also and combine yours and mine.

I agree that more incentive to hold MELT is needed; however, reducing the APR of the Curve pool to 15-20% is too dramatic. H2O is newer and less tested than its competitors, so it needs to pay out a risk premium. To incentivize liquidity providers to provide liquidity on DeFrost, the rate needs to be at least 30-40% imo.

One other consideration is that right now, the MELT boost doesn’t kick in until you have thousands staked. If boosted rewards kicked in more gradually, the protocol would have more leeway to reduce emissions and H2O liquidity providers would have more incentive to hold and stake their rewards.

tldr:
I fully understand the pain points of low liquidity in the MELT-AVAX pool. However, I believe the low LP liquidity is entirely due to MELT’s low marketcap. I do not believe adding MELT rewards to this pool will sufficiently move the needle and just waste efforts of the team, and disincentivize the H2O crv pool, which is a major backbone of the platform. I do suggest a possible solution at the end, which may be continued in a seperate thread if people like it.

lr:
Primary Motivation

  • What is our ultimate goal here? High MELT price? I argue it is TVL in vaults. This is because defrost’s business model is providing utility, and TVL is a direct measurement of this utilization. MELT derives its value from the success of defrost, and it’s price will appreciate as a direct result of the protocl’s success.

MELT’s LP has too low liquidity

  • I do not think adding MELT reward will fix this. If anything it will cause a ‘chasing our tail effect’. The LP pool is actually very high, at around 20% of the MC. Compared to analogous tokens like PTP, SPELL, BLZZ, FXS, this is huge. I’m surprised it’s not lower, because of all the benefits of holding MELT. Boosting, profit share, and staking. Yes incentives in LP is somewhat equivalent as both cases result in people holding MELT, but staking and boosting gives them much more ‘skin in the game’, and staked MELT doesn’t need to half to be sold when compounding.

New comers can’t buy MELT efficently

  • I believe this is the fair pain point. I mean a $50k buy moves the price 20%, and I get that that rubs people the wrong way. When MELT’s market cap dipped to $200k, I wished I could have bought all of it, but actually it would have cost over $7M to buy it all due to the LP price slippage.

  • But this is actually interesting, because for me (and anyone I should say), the most efficient way to get a lot of MELT is to join the pools with their high MELT APR. This benefits defrost because it directly supports H2O (in the crv or in the LP), which facilitates the vaults, which increases TVL, which goes on to increase participation, profit share, and MELT value. The majority of MELT is unemitted, and the fact of the matter is that buying MELT in the open market is going to be tough no matter how you slice it.

  • I agree that it is only fair LP’d MELT should have compensation at a level similar to staking it. I believe at present the compensation is sufficient, because you do get the profit share, and the LP actually has a really high fee due to the volatility and volumes (160% APR in the last week or so), and you get the JOE farm rewards.

Price Volatility

  • This is a fair issue as it directly impacts the posted APR of farms and affects the public image and impression. But again, the small LP pool is a secondary effect of the main issue which is that MELT’s market cap is just low. This main issue is a growth problem that resolves itself naturally over time. Defrost is young and has the majority of tokens unemitted.

H2OCrv reward is too high

  • As there is no cap on the liquidity in this farm, the market has decided the reward is not too high. If it was too high, more $ would go in and dilute the APR. If the issue is marketing, then we need to work on that (not move emissions to different pools)

All problems and no solutions makes a sad MELTER -

  • In thinking through this problem and constructing my arugment, I think it is very reasonable to seek a solution to the problem of new comers being unable to acquire MELT easily to participate (in boosting, etc.) As mentioned already, due to the low MC I think moving incentives is a bit friviolous, as if a newcomer wants to buy some reasonable amount of MELT, even if 50% of the MC is in the LP, it will still be high slippage.

  • I think a possible solution is to allocate some MELT emission to bonding / presale. For example people can buy some replenishing allocation of ‘locked MELT’ at a fixed price with no slippage. This lMELT (which I just made up and is not a real token currently) would unlocks over time into MELT, so some time in the future it is redeemable for 1 MELT. The key though, is that LMELT would work the same way as sMELT for boosting, profitshare, and governance. Proceeds from these sales can be used to compensate the pool emissions were removed from, or used for something else like burning MELT or offering MELT buy backs (a non LP way for the market to sell at 0 slippage).

2 Likes

I support this suggestion.
But I believe the non-boosting APR in the H2O curve pool cannot be adjusted solely.
I suggest we can move some of the basic rewards in the H2O curve pool to AVAX-MELT pool, and start a boosting mechanism in the same.

The USDC rewards will not be that important IMO

How about contributing the H2O fees or USDC fees in the pool and transfer them to the burnt 0x000000 address?

I like this a lot. We don’t have much supply but we’re already burning which feels premature. The burnt MELT could go to work as protocol owned liquidity, paying rewards back to holders.

1 Like

I think the emission rate for MELT is already high, so the burning, right now, doesn’t have a significant effect.

As a process, I look at protocol changes in order of importance to the MELT mission:

  1. Incentivize increased H2O use
  2. Incentivize using the platform itself
  3. Incentivize holding and using MELT, rather than selling it

In this context, I am not sure that adding MELT rewards will fix this. We have a MELT liquidity problem already from the standpoint of purchasing. Slippage de-incentivizes large purchases. We have a lot of MELT being emitted and limited ways to purchase it efficiently without making it more desirable to sell it. We do that through H2O usage and use-cases, and we need to improve the peg of H2O.

The MELT-AVAX pool offers USDC and JOE rewards. As in crypt0x’s response, everything in that LP aligns with the MELT mission. We are doing nothing to negatively impact MELT price, and I don’t think we should insert MELT rewards into that equation without tying it to other use of the MELT platform.

I wholly support Phoenix_Risen’s thoughts. Burning MELT, over time, has positive price pressure. Better MELT price means more desire to use the platform, etc. But right now, with emission high, the burning isn’t doing much. I think we need to deploy the burned MELT to support H2O, and changing the non-boosted rewards to be “good” but far inferior to boosted rewards is an avenue to do this.

I would be in favor of:

  1. Using the allocated burned MELT to support H2O liquidity
  2. Reducing the non-boosted rewards and re-allocating those to make boosting more impactful at lower MELT/sMELT quantities, which would involve sliding the rewards scale, of course.
  3. Using the premise from (1) - use the burned MELT (or a portion thereof) to help the H2O peg (USDT/USDC, etc.nto the Curve pools to help the peg) when need be. Taking the remainder and using it as a rewards incentive for H2O users that are in LPs like the MELT-AVAX pool.

For example, if you have 1000 H2O minted, you’d get an additional x% rewards in MELT that would otherwise be burned. 10,000 H2O minted, you’d get x+y%, etc.

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When talking about APRs and what we think they should be, remember that MELT price fluctates. You could target 20% APR now, and if the price dips 75% it could be 5% APR tomorrow and all of a sudden no one is providing stablecoin liquidity.

What a discussion, what a community!

We need to realize that the main aim of the project is to have a lot of H2O with an exchange rate close to the peg (soft peg for me means ideally between 0.975 and 1.025). That’s primary target. MELT price and liquidity is secondary, maybe tertiary (having the soft peg as secondary). These are, of course, all intertwined. But keep in mind that liquidity and price are also “communicating vessels.” The liquidity also seems low because the price and mcap are low. And the price goes up when the buys are high (obviously). So saying “there cannot be high purchases because of low liquidity” is not really on spot in this case. Why? Because when the mcap is 3m, a 30k buy is a buy of 1% of the circulating liquidity. That’s a lot. So it should move the price. That’s not a problem, that’s what’s supposed to happen. I bought 30k worth of MELT when the mcap was 200k or something. Did it move the price? Hell yeah. From 0.16 to 0.27, if I remember correctly. But that’s what is supposed to happen. The current liquidity to mcap ratio is actually pretty good, like 1:5. That’s reasonable. And that’s why it makes sense to try adding to the liquidity now rather than later but ideally without further incentivizing dumping.

Personally, if it comes to a vote, I will vote against moving MELT rewards (even partially) from the stablecoin pools to liquidity pools. And if the vote doesn’t go through (which I hope it will not as I think it would hurt the whole tokenomics), I will start a thread on the “liquidity boosting” mechanism that I laid out earlier and try to push it for a vote.

2 Likes

If we migrate some of the MELT from the boosting pool to AVAX/MELT liquidity pool, the emission will not become higher.

Now, one of the concerns for MELT holders is that they are reluctant to contribute to the MELT/AVAX pool, considering the IL, especially when one is bullish on MELT.

Therefore, moving some MELT as LP incentives is reasonable, accompanied by the existing boosting mechanisms.

1 Like

Let’s have a vote.
I think we can lower the sMELT rewards a bit and reallocate these to the MELT/AVAX pool.

MC is c. 2x higher though - supply of sMETL and MELT is c. 4m.

I really like your first proposal on buring though as an addition to mine, or to reduce the reallocation.

And 100% agree this discussion shows how strong and thoughtful the community is.

2 Likes

I would wait to see what happens during the next week when the new LPs with ELK come.