Reward locking: Reflections and a plan for growth
Tldr; Across has established a set of loyal liquidity providers through its novel reward locking strategy. Now, the protocol should fine-tune the mechanism’s parameters to attract new capital and prepare for cross-chain interoperability’s upcoming growth.
Key takeaways:
- Across adopted a new strategy called reward locking to encourage long-term LP adoption, which successfully established loyalty, but should look to attract new capital.
- As cross-chain bridging is set to grow and Across is an ecosystem leader, it could benefit from more LPs.
- Increasing base emissions while reducing additional loyalty rewards should help the protocol move forward.
Since the advent of DeFi in early 2020, projects have used a variety of strategies to incentivize adoption. Most notably, the ecosystem saw huge growth thanks to yield farming and liquidity mining during DeFi summer. But for all its benefits, yield farming mania encouraged short-term PvP games built on unsustainable yields and token dumping. Other projects have taken new approaches such as vote escrowing to attract users. While such strategies have proven popular, they also have drawbacks.
To attract liquidity providers, Across employed a new strategy known as reward locking in late 2022. This approach sought to build on other strategies, encouraging loyalty without subjecting LPs to extended lock-ups. This analysis explores its effectiveness and an adjusted strategy focused on helping Across prepare for its next stage of growth.
A new strategy to build protocol loyalty
Reward locking is designed to establish protocol loyalty. Liquidity pools have a base emission rate, but LPs also have a unique multiplier for each pool. This means the longer LPs commit their capital to a pool, the faster they earn rewards. To enable reward locking, Risk Labs deployed a staking contract that tracks an LP’s journey with a protocol from staking tokens to claiming rewards.
Reward locking seeks to address common issues in other popular adoption strategies. Yield farming attracts users, but it doesn’t stop mercenaries dumping tokens. Vote locking prevents token dumping, but it favors protocols over individuals and typically involves extremely lengthy lockup periods.
Reward locking invites users to get paid for the amount of time they show support to the protocol.
Across launched the first reward locking program, which introduced a multiplier of 3 for any rewards left unclaimed (and unsold) after 100 days.
Across’ reward locking program aimed to achieve long-term protocol support and encourage LP engagement. It also introduced a gamification dynamic not seen in other strategies by highlighting the most loyal Across supporters.
How reward locking increased Across loyalty
Across initially committed 75,000,000 $ACX for its reward locking program. The rewards multiplier increased linearly from 1 on day zero to a maximum of 3 for LPs that left rewards unclaimed for 100 days. Risk Labs’ data team looked at Across’ LP activity since the program launched, and the numbers show that reward locking has been a major success.
After the program launched, LPs were offered an NFT if they left their rewards unclaimed for 100 days. A second NFT was then distributed after 200 days. These assets were only available to the most loyal LPs, creating a group of celebrated community members. Of all LPs that had deposited funds to Across, 99% of unique addresses were eligible to claim the NFT, and their capital represented 99% of the total value locked in the protocol. While this figure is skewed by the large number of ACX-LP holders, a healthy proportion of the protocol’s most heavily used liquidity pool (USDC and WETH) participants also met the criteria.
What’s more, many LPs stuck with Across after the 100-day reward multiplier window. After 250 days, over 90% of ETH depositors had kept their funds staked and rewards unclaimed, representing about 70% of the TVL.
In summary, reward locking has established a set of loyal LPs.
However, there are other important points to consider. Of the protocol’s most loyal LPs, the top 10 whales accounted for the bulk of the TVL, in most cases representing over 70% of a pool’s capital. This means that capital is generally concentrated among a small group of users. Additionally, though the protocol has retained the majority of its locked assets in the face of adverse market conditions, the number of Across LP token holders has grown at a relatively slow rate.
Since the reward locking program launched, Across has made significant strides in the cross-chain ecosystem. Across accounts for about 30% of bridge volume and has recently added support for popular Layer 2s like zkSync and Base. But these developments are currently not reflected in the number of new LPs.
While Across has a group of loyal LPs, it should focus on attracting new ones to continue its success.
Preparing for growth
Across is preparing for its next growth phase. Today, it’s one of the top bridges offering significant speed, transaction fee, and gas optimization advantages over other solutions. As the cross-chain ecosystem expands, these advantages could help Across become the number one bridge. To make this happen, Across should focus on attracting new capital.
While Across has loyal LPs, it could benefit from welcoming new ones to grow its liquidity pool. This would ensure capital utilization rates remain stable, help prevent fee spikes, and allow Across to capture a higher proportion of the volumes flowing through the bridging space. Cross-chain bridging volumes are likely to soar in the next two to five years, something Across should prepare for today.
To help Across move forward, I presented a plan to adjust the reward locking program in an August 23 proposal to the Across DAO.
The adjustment would see base emissions increase by 50%, while the rewards multiplier would be capped at 2.
In the short term, this should attract new LPs without hurting the protocol’s loyal supporters. New LPs can expect to receive higher returns due to the increase in base emissions, and existing LPs will have the 3x to 2x multiplier reduction offset by the increase in base emissions.
This move has potential tradeoffs. In the long term, existing LPs could see their yield decrease as they share emissions with more users. Some users could pull their liquidity or dump their $ACX.
Despite the risks, there’s good reason to believe that an adjustment will pay off for Across and its LPs. If successful, it could result in higher TVL, more adoption, and greater interest in the $ACX token. Although loyal LPs stand to share their returns with more users, they could enjoy a portion of a bigger pie.
As the Across community has shown strong enthusiasm for the update, the proposal has now proceeded to a Snapshot vote. So far, almost all respondents have voted in favor.
A path forward
Reward locking has benefited Across and its LPs. Now, adjusting the program will help the protocol attract more capital ahead of the cross-chain ecosystem’s expansion. As with the original program, it could also inspire other protocols looking to test out new mechanisms to attract liquidity.
The crypto ecosystem is already going multi-chain, and bridging is set to play an increasingly important role in its evolution. Across is poised to play a starring role in this story.
To learn more about how reward locking changes could impact Across, head to the Snapshot proposal.
The data for this piece was compiled by Across Protocol’s data and research team in August 2023.
