SIP 0 : Update current veTokenomics

In line with the recent rebranding, APIPs will from now on be referred to as SIP (Spectra Improvement Proposal).
My name is Viras, and I have been engaged by Spectra to assist in the choice of the new tokenomics and in the crafting of the governance proposals.

Summary:

Proposition to update APW’s tokenomics to a fine-tuned ve(3,3) model.

Context:

APWine rebranded to Spectra during summer of 2023, and as we prepare to roll out the second version of the protocol, we worked on new tokenomics for the APW token.

In V1, the APW token was following the classic ve model, i.e :

  • Voters choose the pool to which they want APW rewards to be allocated
  • Liquidity Providers earn the fees generated by the pool as well as the rewards determined by the votes.

This proposal presents updated tokenomics for the second version of the protocol.

Rationale:

In the V2, users are able to tokenize their Interest Bearing Token (IBT) or its underlying into Principal Tokens (PTs) and Yield Tokens (YTs) to trade them on the AMM. Liquidity of those tokens are handled by LPVaults, defined by the underlying token they receive as deposit (e.g. USDC) and their yield strategy (e.g. Morpho lending), their duration and renewal date. Liquidity Providers (LPs) deposit underlying tokens liquidity in the vault to let users trade their tokens. They are entitled to yield from the yield strategy, swapping fees generated on the AMM, and additional potential incentives. The protocol charges 0.1% as a fee to PT/IBT LPs depositing in the vault and 0.1% upon tokenizing an underlying to PT/YT.

Proposal

We propose to shift the current gauge system to a new one in which Voters choose weekly the vault to which they want APW rewards to be allocated, and earn 70% of the deposit fees generated by the vault, while the remaining 30% of the fees get collected by the DAO’s treasury. We are currently working on another proposal aiming to spread the collected rewards during several weeks, building a more continuous distribution of revenues to the voters and better alignment of incentives between voters and LPs.
Additionally, Spectra will natively support bribes directed at Voters. This feature will empower any user to play a role in the incentivisation of markets. The fees will be converted to ETH upon collection.

The votes will decide the proportion of the weekly APW distribution directed to each vault’s LPs. Moreover, the weekly APW distribution will be adjusted every 4 weeks based on the DAO’s members’ votes.

Overall, these changes would let Spectra’s users earn a bigger part of the protocol’s revenue while better incentivising the voters to choose profitable vaults, and hopefully make parasitic strategies less profitable compared to the incentivisation of useful pools.

The core team proposed the initial percentages for the DAO fees. Using the initial data, contributors within the DAO can propose alternative fee levels or charging methods

Voting Options

  • Yes, Update the rewards model and the additional APW distribution
  • No, do not update the rewards model and the additional APW distribution
  • Abstain
  • Upgrade current ve model
  • Do not upgrade current ve model
  • Abstain
0 voters
1 Like

Overall, I do think the veTokenomics of APW and soon Spectra need an overhaul. However, I have a few concerns and recommendations that I would like to point out.

Firstly, I strongly support the idea of shifting to a new gauge system where Voters choose the vault for APW rewards allocation. This approach, combined with the 70% allocation of earned vault fees to Voters, aligns incentives better and empowers users to make informed choices. The inclusion of natively supported bribes is a noteworthy feature that can further incentivize participation from other protocols and reduce the inefficiencies that an external solidity fork would cause.

However, I have reservations about the upfront fees. Charging a 0.5% fee for depositing to a vault and a 0.1% fee for tokenizing an underlying PT/YT may create unnecessary friction and deter users from exploring the platform. I suggest considering an alternative fee structure, such as a fee on the earned value (profits) rather than an upfront fee.

Additionally, the 0.1% fee for tokenizing an underlying PT/YT and the 0.5% fee for depositing to a vault seem quite low. Instead, I recommend considering a fee on the yield itself for both, deducting a percentage of about 5% from the yield generated for tokenization. Then, a 10% fee on the profits or value earned for the vault deposits. These adjustments would ensure that users receive a fair return on their investments while contributing to the platform’s sustainability, as APW tokens must retain value to serve as an incentive tool for bribing vault liquidity.

These fee percentages are suggested based on the fact that competitors charge around 3%-5%, and it makes sense to stay within that range. Additionally, the 10% fee aligns with Spectra’s role as a hybrid solidity fork without retaining any of the LP profits from swaps, similar to Lido, which charges a 10% fee on staking rewards for its wrapped products.

In summary, while I support the proposed changes to tokenomics, I believe there’s room for improvement in the fee structure to reduce friction and incentivize users to participate from the outset. These adjustments can lead to a more user-friendly and attractive platform.

2 Likes

Hey @CoolGuy! Thank you for taking the time to respond in a very constructive way. I’ll try to lay out everything from our end (core team) to explain the mechanisms and values proposed here.

First splitting the subject in two:

  • PT Tokenization fee: we want our tokenized asset (PT&YT), to be universally used in DeFi and across different protocols & apps. This implies a clear denomination of value for both of those tokens:PT is 1 unit of future underlying / 1 unit of discounted underlying, YT is the yield generated by this underlying, that’s why even if we have technically the possibility of taking a fee on YT yield, we are not proposing to use this for now. Putting (very small fee) on tokenization helps taking a fee on “volume transited through the protocol” without forcing any market / predefined protocol AMM to be able to capture revenue on it. Even if it is very low, should this fee represent any integration barrier, we will always be able to make a vote afterwards to reduce it for any particular address.
  • LP Vault fee: the complicated one ;p. For full transparancy we had a lot of back and forth on it, first idea being indeed to take a performance fee on it. Under the hood the vault represents IBT and LP positions, and a share value that could be oscillating a bit, creating more complexity/inefficiency with chain collection of those. In the future we have a lot of ideas on how to improve this part which would make revenue distribution work a bit different, easier to “take a cut” on it. For now they are a first abstraction of one simple LP activity on the protocol, aiming to be incentivized (and managed for the rollover). A deposit fee was not only simple to implement and anticipate as a user, but it would also incentivize LP that stay longer, while the “low value of the fee” was something we could observe elsewhere, either as a flat deposit fee, or as a combination of swapping/zapping fee needed to “get in”, hence not representing a notable barrier for exploration. That being said, the path of building and managing a different LP activity is always accessible to the user (and maybe through another vault protocol, and here the 0.1% tokenization would be the “cut”). Finally, we note that the first focus is to gain liquidity and traction on the protocol, and if those fees represent any notable barrier, it would make sense to reduce them (even completely if needed), while we iterate and build different mecanisms.

Let me know if I can clarify anything, let’s definitely continue that discussion!

Ah! Thank you for shedding light on the fee structures and strategies of Spectra.

While I do agree that the upfront fee system might seem advantageous initially, it may lead to users avoiding asset withdrawals, potentially resulting in a revenue generation plateau. Ironically, in attempting to maintain TVL for a vault, this could lead to reduced capital movement between vaults. Consequently, the impact of bribes and APW reallocation might be diminished. Thus, the upfront deposit fee might inadvertently discourage users from reallocating their assets to different vaults with potentially better rewards.

In the crypto space, it’s been observed that users are willing to pay higher fees for quality services. The initial allure of low fees might attract users, but balancing their engagement and ensuring revenue growth is crucial. As you mentioned, “the first focus is to gain liquidity and traction on the protocol.” However, it’s critical to consider the long-term implications of the fee structure in achieving these goals.

Therefore, I believe it’s essential for Spectra to consider starting with moderately high fees and then strategically lowering them over time. This strategy aligns with market norms and provides a clear pathway for marketing fee reductions as a benefit to users. It’s about setting the right expectations from the start and then exceeding them, rather than starting low and risking user dissatisfaction with subsequent increases.

Looking forward to continuing this discussion and finding the best path forward for Spectra. :slight_smile:

2 Likes

Hi @CoolGuy, thank you for your response. It seems that the goal now would then be to find the optimal value, where it shouldn’t be too high as it would discourage LPs, but not too low as, as you mentioned, it would be harder to increase than to decrease. Some users contacted me in private related to this, mentioning that for example if it was 0.15% it would be okay because it could be equivalent to swap fees (that often you’d also end up paying for a deposit, without having it called “deposit fee”).

I’m curious what your thoughts are on this?

After thoughtful discussions with several liquidity providers following the concern raised by @CoolGuy, we have decided to revise the 0.5% deposit fee that was initially proposed to 0.1% as we think it would encourage more users to participate in liquidity providing and reduce friction for existing LPs.

6 Likes