The simple path to fixing the peg and keeping it fixed

Since my platypus suggestion was not well received, here is my alternate suggestion.

We are incentivizing the H2O in the curve pool. That simply makes no sense. If we dont want to double down on Platypus, then maybe we need to create an av3crv only incentivization, nearly freeze H2O minting, and strictly control supply going forward, and split the rewards currently in the curve pool between av3crv and the savings pool. It just makes no sense to keep incentizing that H2O in curve while we remain under peg

If we incentivize the av3crv side in combination with supply restrictions and h20 savings incentivizations, then looping is a non issue. People can’t loop if we restrict the supply available to mint. And if we want a big chunk of that h20 to leave the curve pool, we need to quit paying them to keep it there, and not paying others enough to purchase it and remove it, at least the majority of the incentives need to migrate. This can be flexed back based on need, our need currently is to have it removed.

And simply don’t increase available supply until it’s safe to do so, and then only by small amounts, not this 20 million at a time nonsense.
I’m talking 100s of thousands at a time. And publicize these availabilities heavily once we get to the point that we decide to increase supply, never increasing more than is safe for the peg to handle. There is your marketing, your inventive to pull h20, your incentives for depositing other stables, your looping prevention, and a fomo machine each time a small amount again becomes available to mint since supply is lower than demand.

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I agree we need to stop incentivizing the H2O in the 3crv pool. It doesn’t make sense. Why are we incentivizing something that is/has been hurting us? It’s like handing someone a really big fish and they come back and smack you in the face with it…and then we hand them another big fish…again and again. All we get is no fish and smacked faces.

Pulling the incentive from H2O and putting it on the AV3crv side or the H2O savings pool is great.
I also like the idea of further incentivizing the PTP pools. I know that hasn’t made anyone overly excited, but it is one of our biggest marketing areas right now, where we can get a lot of visability. Put more incentives there and draw more wallets into the Defrost ecosystem. Or maybe create a rotating incentive? Example: increase incentives in ptp for a month, the take the extra incentive and move it to the H2O savings pool for a month, then move it to 3crv for a month. I don’t really know if that would be of any use or even feasible, just a random idea :bulb:.

A minting freeze on H2O or at least a severe bottle neck on its minting would create huge Fomo if the we handle the release of new minting opportunities correctly. People want what they can’t readily get :woman_shrugging:

Bottom line, we need to stop incentivizing what is hurting the protocol.

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I agree with this. We have moved 1/4 of the original Curve pool rewards to PTP. Let’s leave them there. If technically feasible to create the 3crv part of the H2O3CRV incentivized without some obvious side effects, let’s put 1/3 of the remaining Curve pool rewards there. Put the next 1/3 rewards to the H2O savings pool. This will leave 1/3 of the current rewards in the original H2O3CRV pool which is probably fine. Leave them all boostable with SMELT (no extra emissions as the H2O3CRV pool is currently boostable). If the separate 3crv incentives are difficult to do technically or for some other reason, get more aggressive on the savings pool. And the freeze on H2O minting, i.e., lowering from current tens of millions to be minted to just a few hundred thousand, is a MUST. We can then make the new H2O to be minted as a nice marketing thing, as noted in the original post. Most of this seems very doable, shouldn’t take long. Let’s just vote on it and get it done. Doesn’t seem like a rocket science any more.

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Bump. Please keep this going as we go into the new week :pray: I’d like to see a vote as well.

Hey guys, thanks for the discussion above and sorry for the late engagement.
It hurts that the market is bleeding but the building never stops.
As for the items discussed above:

  1. We have discussed the possibility of incentivizing the USD part only, rather than the H2O part, on the curve pool and the conclusion is that it will not work. Curve is a trading venue, and it will not work well to incentivise only one side of the underlying traded assets.
  2. We have eliminated some of the H2O deprecated vaults and left only 4 vaults online now. If you check the H2O circulation, it has been shrinking. It is not good and pointless to totally freeze the H2O minting IMO.
  3. As for the platypus incentives, as passed by the last proposal, the initial trial is one month. It is unwise to make any arbitrary moves under this market condition.
  4. Though it seems that Platypus H2O pool has one single coin staking, it is working exactly like a curve pool, in terms of a trading venue. Also, we are not crystal clear on how the H2O is priced there. (we have witnessed that H2O is traded below the peg, even when USDC and H2O have some similar TVL in the pool). Therefore, even if there is more H2O in the platypus pool, it is questionable if it is helpful for the peg.
  5. The current distribution of MELT incentives is dependent on the Platypus mining contract.
  6. The factory pool on PTP is highly experimental. They can easily pause or terminate the H2O trade, or change some important parameters for trading. It may lead to other uncertainties if we drive the liquidity there.

These are some thoughts from The MELTER.

@Mountainking
The curve pool is a trading venue, so incetivizing only av3crv may not work in itself, but it certainly should if no additional H2O can be minted. What am I missing? How would this not be effective?

We would be forcing users to trade to obtain H2O, and eliminating the ability to abuse the incentivized av3crv system.

I don’t agree at all with your first two points. Not even in the slightest.

We have spent significant amounts of time as a community going over paths forward. One thing is crystal clear - DeFrost as a platform will not be viable if it stays the way it is right now. If the team is not putting forward ideas then we need to move on these.

Crypt0x is correct. We need to do whatever we can to incentivize balancing of the curve pools. If we freeze H2O minting and provide value to both buy out H2O (due to being under peg significantly) and to add assets to the av3crv pool - it literally cannot do anything but help.

We are way under peg. Embarassingly so at this point. Freezing H2O ensures that folks do not loop when provided the additional incentive(s) discussed with the av3crv incentives. We ended up here due to looping and need to be proactive until we have additional use cases and a higher TVL of av3crv to H2O deposits so freezing H2O minting must happen and minting must be trickle released as we regain health.

I cannot understand or comprehend a sit and wait argument at this point. The purpose of this entire platform is to mint against LP. If you have to eat a near 20% loss right now to mint, this is not a useful platform and we’ll go out of business. Given our available resources we need to place them where we can make a difference. In the market conditions having places to park stablecoins has value and we must use that to our advantage.

Stating that this is a bad idea or you disagree, after months of “wait and see” without any other ideas or viable alternatives presented is not acceptable.

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Im inclined to agree. I dont think any of us expects any positive melt movement until a drastic market shift. The focus needs to be on maintaining a semblence of peg until then so there is at least a chance of future recovery, and this does that.

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:

  1. I understand your position on this.

  2. 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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The current H2O savings pool contract is not compatible with the boosting mechanism or the MELT 60-day releasing function.

Therefore, we may try to initiate a vote on moving part of the Curve’s incentives to the savings pool, without vesting and boosting.

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Shame but still better than leaving it like this. It’s in a way good because you don’t have the vesting but you can’t boost. Let’s vote! :ballot_box:

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https://snapshot.org/#/defrostfinance.eth/proposal/0x706ddeb627558b6d40254c0e6e85746de1883f68e01c2186ecd78b0a2c6a753d

https://snapshot.org/#/defrostfinance.eth/proposal/0x14c18b289243cbfaa5596260eaf23a608056aac32a6a76bff53edc385612fac8