Warden Finance <> Moonwell Base Rewards Optimization
Summary
Warden Finance proposes to manage market rewards allocation for the DAO on Moonwell’s Base deployment.
This additional role complements the risk management and analytics services that we already provide to the DAO. This role will enable us to further optimize the protocol’s growth and simplify interest rate model parameter updates.
Context
Following MIP-B0’s vote and the successful deployment of Moonwell on Base chain, the protocol has been incentivizing markets using WELL. This snapshot indicates that the DAO wants to redirect 217,500,000 WELL from the ecosystem development funds to Base as incentives.
Currently, changes to the incentive distribution go through governance. Over time these frequent updates will lead to governance fatigue. The protocol’s governance contracts allow an admin to make those changes without overloading the governance process.
The admin role grants permissions to set reward stream settings (supply and borrow reward speeds, reward end and admin) for every market and reward token.
This proposal aims to enable the Warden Finance team to propose and implement the reward emissions changes on behalf of the community.
About us
Warden Finance is a team of software engineers and financial analysts that have extensive experience in crypto, finance and software. We specialize in helping DeFi protocols manage risk and surface meaningful data with the help of custom tooling and in depth on-chain analysis. We strive to make DeFi more secure, comprehensible and empower its users to participate along with us.
In the past years, not only have we been closely collaborating with the Moonwell team, but we’ve also been working with multiple other notable projects and DAOs like AAVE, Compound, Uniswap, Euler, and Notional.
Our biggest contribution to DeFi is our open risk & analytics platform.
We currently provide bi-weekly analysis of Moonwell’s risk parameters and propose parameters for new asset onboardings to Base in efforts to foster Moonwell’s growth. We believe that we have the right expertise and tools to help the DAO allocating incentives on Moonwell’s Base deployment.
Proposal
Objectives
Our rewards distribution methodology aims to fulfill the following objectives:
- Help bootstrap new markets: Provide incentives for users to participate in markets that have initially very low liquidity.
- Incentivize sufficient liquidity: Provide incentives to attract and maintain sufficient liquidity to allow borrowers to interact with the protocol at scale.
- Generate sustainable growth for the protocol: Attract new lenders and borrowers and increase Moonwell’s lending market share on Base.
- Minimize friction: Minimize the frequency of interest rate curve updates and minimize the frequency of rewards changes. Previsible updates will help borrowers and lenders to confidently deploy funds to the protocol.
Key Principles
- Quantitative-based approach: Our rewards optimization methodology takes into account specificities of individual markets and adapts to evolving market conditions.
- Predictability: In order to provide better user experience, our rewards distribution model aims to be as consistent as possible through time.
- Transparency: Data points along with methodology documentation will be available for the community on the Warden Risk & Analytics platform.
Methodology
In order to optimize rewards for the above goals, our methodology takes into consideration multiple factors.
Market utilization and IRM concerns
The effective supply and borrow interest curves are determined by both interest rate curve models and reward rates. The resulting interest rate curve aims to maximize borrowing activity while mitigating risks associated with high utilization levels.
While interest rate model changes are sometimes necessary for conducting major changes to the curve, reward adjustments offer an additional lever to influence the supply and borrow demand for individual markets.
Elasticity (responsiveness of suppliers & borrowers to changes in rates)
Rewards should be allocated to markets where the impact of rewards on supply and borrow rates is most likely to help generate sustainable growth.
For example, borrowing demand for WBTC and LST assets has historically been very inelastic to rates across most lending protocols.
On the other hand, demand for lending and borrowing stable assets is usually more elastic to rates.
Distribution of lenders and borrowers
Rewards may be useful to improve the distribution of lenders and borrowers by attracting new users to specific markets. A more diversified lender and borrower base can lead to more stable rates across time as no individual actor can heavily influence rates.
Scale of the market
Reward rates should be set to some extent proportionally to market size.
Competitiveness with other lending protocols on Base
In order to capture market share, the protocol needs to offer competitive rates across different markets. This is especially true for markets that are used for popular strategies amongst DeFi users and are susceptible to attract big volumes.
Specific considerations for individual markets
For example, rewards should be optimized with consideration for specific leveraged yield strategies. This logic can be applied to multiple market pairs.
Under normal market conditions, we propose rebalancing incentives on a monthly basis. Rewards may need to be changed under exceptional circumstances (i.e collateral downfall event)
Scope
Warden Finance is offering to manage the incentives distribution for the next 12 months, or 13 epochs of 28 days to follow the current Moonbeam and Moonriver schemes. A governance forum post will be put up before each period for discussion and transparency.
All current and future markets for the Base chain are in the scope of this proposal.