[MIP-10] Re-balancing of WELL Token Liquidity Incentives

Title: Re-balancing of WELL Token Liquidity Incentives
Author(s): Xavier D’Mello
Submission Date: 11/25/2022

This proposal has been submitted to governance and is now up for voting! Check it out: https://gov.moonwell.fi/artemis/proposal/6

Summary

Over the past few months, MIP-2, MIP-5, MIP-6, and MIP-9 have adjusted reward speeds and re-balanced the allocations of WELL liquidity incentives across Moonwell’s sister protocols, Apollo and Artemis. This proposal serves as a continuation on Artemis, as reward speeds must be adjusted on a 4 week basis.

The total designated amount of WELL reward tokens, as allocated by the Lunar Technology Foundation, will remain unchanged. This proposal merely calls for a re-balancing of the previously allocated tokens across the three components (Core, Safety Module, and DEX LP), in order to maintain target yield rates despite ever fluctuating TVL.

One focus of MIP-10 is to maintain a rewarding incentive for staking in the Safety Module. The Safety Module serves a vital function in backstopping the protocol in case of a shortfall event and the proposed distribution changes should incentivise additional liquidity. Based on the fluctuating market price of WELL, I am suggesting to further raise the reward allocation to the Safety Module from 35% to 38.5%, which supports a target reward APR of 70.45%.

Similar to the other reward adjustment MIPs, I have also included a one time grant of 100,000 WELL tokens in this proposal to my wallet address. I believe this will set a healthy precedent and encourage other community members to take on the work and responsibility of maintaining Moonwell.

Proposed Changes

Distribution Weighting

  • Safety Module: 35% → 38.5%

  • DEX LP: 35% → 31.5%

  • Core: Unchanged at 30%

Definitions

WELL - The Moonwell Artemis governance token

Liquidity Incentives - WELL tokens that have been allocated for use as rewards to incentivize liquidity growth.

Core - Moonwell Artemis lending protocol (Moonwell: DeFi's Liquidity Well).

DEX LP - StellaSwap’s WELL/GLMR farm (StellaSwap - Leading Moonbeam DEX & DeFi Gateway).

Safety Module - Smart contract that allows users to stake their WELL tokens in order to earn liquidity incentives and help backstop the Moonwell protocol.

Reward Speed - The rate at which WELL tokens (on a per second basis) are distributed proportionally to DEX LPs, wallets staking in the Safety Module, and those supplying/borrowing on Moonwell.

Overview

On November 2nd, 2022, the ratio of WELL rewards between the 3 components was set as follows:

As of November 21st, 2022, a new ratio is recommended. These numbers are based on TVL changes in the DEX LP (StellaSwap farm) and Safety Module:

Safety Module

The first of the three aforementioned components that I will cover is the Safety Module.

The goal of liquidity incentives in the Safety Module is to compensate Safety Module (WELL) stakers for providing their liquidity to help backstop the Moonwell protocol. The Safety Module rewards are configured as the amount of WELL tokens per second that are distributed proportionally to every wallet that stakes in the Safety Module. This is usually referred to as the reward speed.

As of November 2nd, 2022, the last time the Safety Module reward speed was updated, there was ~77.7M WELL staked in the Safety Module, which was valued at $452,410. An estimate was made that the TVL in the Safety Module might grow to approximately $525,000 by December 1st (4 weeks). The target APR for the Safety Module was 80%. Therefore, the reward speed was set to 2.09 WELL per second.

As of November 18th, 2022, the Safety Module had ~93M WELL staked in it, valued at $429,469.60. The price of WELL has dropped from $0.00644 to $0.00462. It is estimated that the TVL in the Safety Module might grow to approximately $475,000 by January 27th. It is recommended that the reward speed for the safety module be increased from the current rate of 2.09 WELL per second to a new rate of 2.3 WELL per second in order to maintain a 70.45% APR at $475,000 TVL.

DEX LP

The WELL/GLMR market on StellaSwap provides useful liquidity to either buy or sell the WELL token. Liquidity Providers, commonly referred to as LPs, earn rewards for adding liquidity to the WELL/GLMR market and staking their LP tokens in StellaSwap’s farm. “Reward periods” are defined in the farm that encompass both a “reward speed,” in the form of the number of WELL tokens per second that are distributed proportionally to all stakers in the farm, and an ending timestamp, which defines when the reward period ends.

As of October 27th, 2022, the TVL in the farm was ~$452,410 and it was estimated TVL growth over the next 4 weeks would result in a TVL of approximately $525,000 on December 1st, 2022. The target APR for the farm was 90%. This resulted in a reward speed of 2.09 WELL per second. An end timestamp of 1669951800 was set, which is equal to Fri Dec 02 2022 03:30:00 GMT+0000.

As of November 18th, 2022, the TVL in the farm was $332,910. The price of WELL had dropped from $0.00644 to $0.00462. It is estimated that the TVL in the farm might grow to approximately $340,000 by January 27th, 2023. In order to maintain healthy liquidity incentives for Safety Module stakers after a significant increase in staked WELL, it is recommended that the target APR be reduced from 90% to 80%. The new recommended reward speed is 1.88 WELL per second, with an end timestamp of 1674790200, which is equal to Fri Jan 27 2023 03:30:00 GMT+0000.

Conclusion

Thank you for taking the time to read through my recommended updates to the distribution of WELL liquidity incentives. Please feel free to provide feedback and commentary and let me know what changes you agree or disagree with.

To date, the decentralization of the Moonwell Artemis protocol has been a success. If passed, MIP-10 will join a series of successful governance proposals that have been executed successfully thanks to insight, feedback and voting from the Moonwell community.

As mentioned in the summary, I have requested a one time grant of 100,000 WELL tokens as payment for the time and effort it took to analyze this data and create the proposal. I would encourage other community members who take on the responsibility of submitting proposals for the betterment of Moonwell to do the same.

Also, please note that though I am an independent member of the Moonwell community, I have consulted with other contributors to the Moonwell protocol in order to source past reward distribution data and sanity check the recommended changes.

2 Likes

Hi not taco,
Do u have a proof or set of a backtest that increasing safety module apy boosts TVL of safety module in long term?

I’ve been watching these “more reward to safety module” plan for a while, and YES for a short term, total amount of staked $WELL increased hard. But afterwards, selling pressure increased hard and resulted in significant decrease at TVL of safety module.

This is also the reason it constantly requires “new increase apy plan”. As a user, I expect this is constantly going to happen. And here’s why.

Current structure of safety module is that users locking up tokens to receive apy. The best choice of their risk management is to sell their APY. So more safety module staked well equals more selling pressure.

I know total emission rate stays the same, but there’s stronger motive for safety module stakers to sell $WELL. Its simple, they have more risk, they sell more. So giving more reward to safety module is making $WELL more inflationary.

Thus, we need a plan to boost safety module TVL not by increasing the amount but by increasing the price. Otherwise, it will end up $WELL becoming too small to cover up moonwell supply TVL.

Either change the structure of safety module(for example locking reward instead of locking supply) or develop new demand for $WELL(adding new utility, deflationary model). Just “more $WELL to safety module” looks bad.

This is why me and others suggest to develop new demand. Making thick safety module is also important to the team. So it requires some development? Why not?

Hey all,

I fully agree with parkhodu.

That’s why if we increase the utility for the well token this “regular” re-balancing won’t be needed.

One ideia of doing this it’s described here:

It would be good if we can get feedback from the team regarding this.

Good idea and very useful!

1 Like