SIP 0 : Update current veTokenomics

Improvement Proposals (SIP)
1

Summary:

Update APW’s tokenomics to a new emission schedule, in preparation of a migration to the ve(3,3) model.

Context:

For the past months, the Spectra team has thoroughly thought about an update of APW’s tokenomics, to better align the protocol’s various actors.

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 their PT and IBT in the corresponding pool, and are then entitled to yield from the yield strategy, swapping fees generated on the AMM, and additional potential incentives.

In this first bootstrapping phase, there will be no fees taken from the LPs, aiming to maximize their revenues and providing a competitive advantage as a liquidity venue.

It will also enable the protocol to make its initial growth and let the governance gather insights on where to extract the fees for the DAO and voters. We note the possibility to activate different fees at a later stage: liquidity vault performance fee, tokenization fee, swapping fee, fee on the YT yield or even fee on the idle liquidity yields.

To bootstrap Spectra’s launch and prepare for this new feature, we propose to define the incentives for Spectra’s participants.

Proposal :

To support the initial launch of Spectra, we suggest activating incentives for Spectra’s gauges as per the following timeline:

  • In the first week, Spectra will make 87,747 APW available for distribution via the gauges.
  • Subsequently, the weekly incentives will decrease to 98.9% of the amount from the previous week, continuing this pattern for 181 weeks.
  • Starting at the 183rd week, incentives will stabilize at an annual rate of 2% of APW’s circulating supply.

These rewards will be allocated to the gauges based on the proportion of votes they receive relative to the total votes. Additionally, voters will have the option to redirect APWs back to the DAO, the number of returned APW will also be proportional to the votes on this option.

Following these parameters, the upper bound curve for APWs supply would be the following :

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Additionally, Spectra will natively support bribes directed at voters. This feature will empower any user to play a role in the incentivisation of markets.

We think that this new distribution will effectively bootstrap Spectra, and make the protocol ready for the transition to its transition ve(3,3) model.

Voting Options

  • Yes, Use this distribution and emission for Spectra
  • No, do not use this distribution and emission for Spectra
  • Abstain
  • Yes
  • No
  • Abstain
0 voters
1 Like
2

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.

3 Likes
3

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!

1 Like
4

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
6

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?

7

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
8

Hey everyone,

This post has been completely updated to present the schedule of emissions for Spectra’s launch, please read it carefully and let us know what you think of it!

4 Likes
9

What I understand of this proposal:

  1. New emission schedule
  2. veAPW will stay the same but fee distribution will change towards something more ve(3,3) like, i.e. voters receive the fees generated by the pools they vote for.
  3. Bribes will be directly included in the gauge mechanism.

I like the emission schedule. I like the ve(3,3) mechanism as I believe it is what makes the success of Pendle or Balancer. I like that we stay on the same veAPW contract and not move to the NFT stuff of solidly. I like Pendle’s implementation and I think we should take this as an inspiration.

For bribes, I would have loved to be able to deploy a votemarket for them, but if they are bribed natively, that’s too bad…

Overall, will support the proposal.

1 Like
10

While I very much am an advocate of veTokenomics in any case I have two questions. ve(3,3) will be a linear decay of voting power correct? I find this to be the most fair as opposed to a lock for x days and have a linear power. Secondly, i would heavily urge delegations of voting power to optimizing vaults to be an option. Gas intensive ve systems can be cumbersome and have a very high barrier for entry. If veAPW holders can delegate their votes for optimal returns, and optimal returns benefit the protocol then it is a recipe for success. Whether this is an in-house vault or whitelisted third parties can compete for market share; it is worth some thought. No easy task though of course as most ve systems do not permit such a vote delegation.