Let’s really try to focus on this from an Economics 101 perspective. We have issues with both supply and demand of H2O. Mind these are tightly connected.
There is too much of H2O and most of it, more than 80%, sits in the Curve pool. Idle. With no real use. This idle H2O gets something like 60-70% of all MELT rewards. We can’t argue that this is to support liquidity because 80% of the supply cannot and must not sit in the liquidity pool. That’s plain non-sense. Even if just 20% of the supply sits in the liquidity pool, that’s more than enough to assure that large (compared to the market cap) orders will have tiny price impact. Currently, we incentivize the ones who contribute most to the de-peg. Plain and simple.
What can be done about it? Pretty much only two things - try to get more other stables (USDC, USDT, DAI) into the Curve pool, and/or try to get as much as H2O out of the Curve pool.
The former seems to be rather problematic. First, incentivizing just the 3crv part of the pool is likely technically challenging. Second, it’s a liquidity pool, so should balance anyway. But probably most importantly, would you put your 3crv into a pool which is more than 90% made of de-pegged H2O? I wouldn’t.
The latter can be done. We have set up the H2O savings pool and the Platypus pool.
Unfortunately, the PTP pool is not one-sided but in pair, which means that half of the rewards go to USDC stakers. This also likely led to people withdrawing USDC from the Curve pool and transferring to the PTP pool, damaging the peg in the Curve pool. We didn’t know this and I assume the team did not know it either as we have not been informed about this during the vote.
We also set up the savings pool but put practically no MELT rewards to it. This was a huge mistake and I still have no idea why has been done like this. We have the savings pool but we don’t really have it because the rewards are too small to be attractive.
Bottom line - there is no good reason to direct so much of the rewards towards the Curve pool, and there is no good reason not to direct much of it towards the H2O savings pool.
So to the points:
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I understand your position on this.
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Even though I’m in favor of the freeze, I think it is a secondary problem. But it all depends on actually incentivizing the savings pool. The fear is that if the savings pool is attractive, people would mint H2O instead of buying it, so that it does not help the peg. This is certainly true to a certain level. But at <$0.9 H2O, why would you mint it when you can simply buy it for <$0.9? In addition, if you mint, you need to burn 100 MELT for each 1000 H2O minted. So if people mint, they must burn MELT, increasing its price, which increases APRs on all pools, hopefully attracting more people willing to stake there. This also increases APR on the savings pool, making it more attractive. It might also attract more 3crv stakers. Both should work towards the peg. However, if this works and we are able to get to more reasonable levels, i.e., closer to the peg, looping will become interesting again. And then it is pretty difficult to predict how the whole dynamics works because looping leads to de-peg, but it also leads to MELT being burned, increasing its price, thus also APRs, which improve the peg. Either way, it will be a better position than the current one.
3.-6. Mostly agree.
Overall bottom line - increasing the MELT rewards of the H2O savings pool is pretty much the only thing we can do now but it has solid basic economics behind it that clearly show that this will help. An additional bonus is that the MELT rewards there will be vested (as opposed to Platypus) and they can be made boostable with SMELT (I believe). It is a super low risk move to make with possibility to actually save the platform during this market. Because even if it does not work, it will certainly not be worse than now. There is practically no way how this can make the things worse. If yes, show/tell me, I don’t see how.
We can discuss the level of rewards. Personally, I would be very aggressive with this. I would actually split the current Curve pool rewards in half and direct them towards the savings pool.
Please really consider this. It is just one change. Easy to implement. No controversy.
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I’d like to see a vote as well.