HLTPs as a New Liquidity Providers Incentivization Primitive With No Dependencies on the Protocol’s Native Asset Rewards Distribution
Abstract
The Hegic long-term pools (HLTPs) is a new incentivization primitive used for rewarding the liquidity providers long-term participation in the protocol which is based solely on the cash flows generated by the protocol.
The HLTPs model is not a native asset-based incentivization mechanism. It doesn’t depend on the protocol’s ability for a continuous distribution of the rewards denominated in the protocol’s asset. This is not a new $HEGIC liquidity mining program but a brand new incentivization primitive per se.
The Hegic long-term pools (HLTPs) are expected to work in such a way:
I. After a fixed period of time (e.g. every 1st day of the month), the total premium rate (the amount paid to the liquidity providers by the options buyers) decreases for a fixed value (e.g. from 100% to 95% in the 1st month).
II. This share (5%) of the total premium — the difference between the previous one and the new premium rate — is then redirected to the Hegic long-term pools (HLTPs) contracts that are holding these funds (the future rewards).
In the example above, 5% of the premium will start to be redirected to the Hegic long-term pools starting the 1st day of the month (e.g. September, 1).
If the total gross premiums generated by the protocol during this month will be $10M, then $500K (5%) will be distributed to the Hegic long-term pools.
III. The period for the ongoing HLTPs should be fixed (e.g. 12 months). After this period is finished, 100% of the rewards accumulated in the Hegic long-term pools will be distributed among the liquidity providers who have deposited liquidity and haven’t made any withdrawals during the whole period.
Note that the rewards in the long-term pools have no downside exposure on selling options. Thus, these funds can be considered as a long-term capital buffer for LPs that is automatically removed from the risk zone (selling options) and put into the “risk-free” zone (HLTPs) for the future distribution.
HLTPs Assumptions & Conditions
Read this part carefully if you are planning to participate in the HLTPs.
● The total premium rate is gradually decreasing monthly
● The Hegic long-term pools rate is gradually increasing monthly
● The share of the total premium is redirected to the HLTPs
● The share of the premium that is redirected to the HLTPs has no downside risk on selling options (acts as a buffer to be received in the future)
● The earlier liquidity is deposited, the higher the share in the HLTPs
● The earlier liquidity is deposited, the higher the gross premiums to be earned as the highest premium rates will be in the first months
● With the growing size of liquidity allocated in the pools, the protocol will be generating more value in the gross premiums monthly
● With the growing size of liquidity allocated in the pools, the protocol will be generating and redirecting more premiums to the HLTPs monthly
● Liquidity providers who have deposited liquidity and haven’t made a single withdrawal till a certain date, will be eligible for receiving a share of all the rewards accumulated in the HLTPs during the whole period
● There are no additional lock-ups of liquidity for those who are planning to hold their liquidity in the pools for the whole period without withdrawals
● Any withdrawal from the liquidity pool (even a partial one) would lead to losing all the future rewards that could have been received otherwise
● If any withdrawals will be made, the other liquidity providers’ (who are still holding their liquidity in the pools) shares in the HLTPs will increase
HLTPs Parameters: Year 1
The parameters below are REAL AND LIVE NOW. The ongoing HLTPs Year 1 will last from August 10, 2021 till August 10, 2022. Study them carefully.
IMPORTANT: You don’t need to do anything specific to start participating in the HLTPs as it is already live. All liquidity providers with funds in the Hegic V8888 are participating in the HLTP Year 1 by default.
The liquidity pools maximum capacity will be strictly limited for the whole period of the HLTPs Year 1 (12 months: Aug 10, 2021 — Aug 10, 2022).
After the launch, the initial total maximum amount of liquidity that could be deposited into the classic (unhedged) pools will be $40M and $10M for the hedged pools respectively.
The classic (unhedged) pools maximum capacity breakdown:
● $24M / month — ETH Calls Classic Pool (ETH Liquidity)
● $8M / month— WBTC Calls Classic Pool (WBTC Liquidity)
● $4M / month— ETH Puts Classic Pool (USDC Liquidity)
● $4M / month— WBTC Puts Classic Pool (USDC Liquidity)
The hedged pools maximum capacity breakdown:
● $6M / month — ETH Calls Hedged Pool (ETH Liquidity)
● $2M / month — WBTC Calls Hedged Pool (WBTC Liquidity)
● $1M / month — ETH Puts Hedged Pool (USDC Liquidity)
● $1M / month — WBTC Puts Hedged Pool (USDC Liquidity)
Every 1st day of the month (on September 1st, October 1st etc.) the liquidity pools maximum capacity will be doubled. Thus, every month the maximum pools capacity would increase for+$40M for the classic (unhedged) pools and +$10M for the hedged pools respectively.
Pools Limited Monthly Capacity (raised x2 every month):
Every 1st day of the month the total premium rates will be decreased for a fixed value. It means that the gross premiums earned by the liquidity providers will be the highest in the first months.
After the launch, the total premiums distribution will be the following: the classic (unhedged) pools liquidity providers will be earning 100% of their gross premiums and the hedged pools liquidity providers will be earning 20% of their gross premiums (with 80% of premiums paid for hedging as per the hedged liquidity pools participation rules).
The total premium rates will start to decrease monthly on September 1, 2021 and will finish to decrease on May 1, 2022 (after eight months).
The Total Premium Rates in the Classic (C) and Hedged (H) Pools:
Every 1st day of the month the HLTPs rates will be increased for a fixed value. This share of the total premium will be redirected to the HLTPs contracts and it won’t be under the downside risk on selling options.
The HLTPs premium rates will start to increase monthly on September 1, 2021 and will finish to increase on May 1, 2022 (after eight months).
The Share of the Total Premium Redirected to the HLTPs:
The share of future rewards received by the liquidity providers from the HLTPs will depend on the month of their deposits. The earlier the deposit was made, the higher the rewards could be on August 10, 2022.
Liquidity providers are free to withdraw their funds from the pools. There are no additional lock-ups required for participating in the HLTPs.
However, even a partial withdrawal of the liquidity will lead to losing 100% of the liquidity provider’s share in the future HLTPs rewards. Only those LPs who haven’t made a single withdrawal during the whole period (till August 10, 2022) will be eligible to receive a share of the HLTPs rewards.
LPs Shares in the HLTPs Depending on the Month of Deposit:
100% of all rewards accumulated on the HLTPs contracts will be distributed among the liquidity providers with no withdrawals on August 10, 2022.
50% of all rewards accumulated on the HLTPs contracts will be distributed pro rata among those liquidity providers who will deposit funds into the liquidity pools in August, September or October (2021) and who won’t make any withdrawals from the pools till August 10, 2022.
● Deposits made in August, 2021 will have a x1.1 reward multiplier.
● Deposits made in September, 2021 will have a x1.0 reward multiplier.
● Deposits made in October, 2021 will have a x0.9 reward multiplier.
35% of all rewards accumulated on the HLTPs contracts will be distributed pro rata among those liquidity providers who will deposit funds into the liquidity pools in November, December (2021) or January (2022) and who won’t make any withdrawals from the pools till August 10, 2022.
● Deposits made in November, 2021 will have a x1.1 reward multiplier.
● Deposits made in December, 2021 will have a x1.0 reward multiplier.
● Deposits made in January, 2022 will have a x0.9 reward multiplier.
10% of all rewards accumulated on the HLTPs contracts will be distributed pro rata among those liquidity providers who will deposit funds into the liquidity pools in February or March (2022) and who won’t make any withdrawals from the pools till August 10, 2022.
● Deposits made in February, 2022 will have a x1.0 reward multiplier.
● Deposits made in March, 2022 will have a x1.0 reward multiplier.
5% of all rewards accumulated on the HLTPs contracts will be distributed pro rata among those liquidity providers who will deposit funds into the liquidity pools in April or May (2022) and who won’t make any withdrawals from the pools till August 10, 2022.
● Deposits made in April, 2022 will have a x1.0 reward multiplier.
● Deposits made in May, 2022 will have a x1.0 reward multiplier.
Deposit Month Reward Multipliers for the HLTPs Rewards Distribution:
Conclusion: Making Sense of HLTPs
The HLTPs model starts with an assumption that the protocol generates cash flows (premiums) that are accumulated in the risk zone and these premiums could be lost if options are exercised in-the-money (ITM) with losses for LPs.
With growing liquidity size allocated in the pools (and with appropriate incentives for the liquidity providers), the gross premiums generated by the protocol will be increased as more options could be acquired.
For protecting a share of the liquidity providers’ total premiums from losses on selling options, it can be removed from the risk zone (selling options) and put into the “risk-free” zone (HLTPs) for the future distribution. In order to do that, the pools total premium rates will be decreasing monthly:
These curves above are looking strange. Is there an assumption that the liquidity size allocated in the pools will grow with time while the premium rates will be… lower and lower?
Does it mean that liquidity providers are expected to deposit more liquidity into the pools for earning less premiums?
Sounds crazy.
And here’s where HLTPs come in to make sense of it.
In fact, the premiums won’t be lower. Instead, the total premium will be divided into two parts: the gross premium (received by LPs right after options expire out-of-the-money, acts as a short-term source of returns) and the HLTPs premium (received by LPs who haven’t made a single withdrawal during the whole period, acts as a long-term pool of rewards and capital buffer).
Those who will deposit liquidity into the pools and won’t make any withdrawals till August 10, 2022 will be eligible to receive a share of the total rewards that will be accumulated in the HLTPs. The earlier the deposit will be made, the higher could be the liquidity provider’s share in the future rewards.
In the long run, the HLTPs model should work the following way.
With pools limited capacity and the highest gross premiums earned in the first months, it might be a rational move for the liquidity providers to deposit funds into the pools as early as possible.
Furthermore, the earlier the deposit was made, the higher will be the LP’s share in the Hegic long-term pools (HLTPs). If the liquidity provider decides to leave liquidity in the pools for the whole period, the future rewards received from the HLTPs could be higher if the deposit was made earlier.
The amount of rewards accumulated in the HLTPs might be gradually increasing as the liquidity size allocated in the pools will grow, the HLTPs share will be increasing and the growing options trading volume would lead to the higher future rewards to be accumulated on the HLTPs contracts.
From this article you have learnt about a new incentivization primitive called Hegic long-term pools (HLTPs). It will be be used for rewarding the liquidity providers long-term participation in the Hegic protocol.
The HLTPs model is based on the cash flows generated by the protocol, thus, it doesn’t depend on the protocol’s ability for a continuous distribution of the rewards denominated in the protocol’s asset.
Liquidity providers can start depositing liquidity into the pools now because the rewards will start to accumulate on the HLTPs contracts starting September 1, 2021.
The HLTPs Year 1 parameters were also described in this article. Study them carefully in order to master your knowledge about HLTPs.
August, 2021: HLTPs
August, 2022: Yes
DISCLAIMER: Hegic V8888 is an experimental open source protocol in beta built on Ethereum. Use it at your own risk. If you will lose any money using Hegic V8888, you won’t be compensated or refunded. Only use Hegic V8888 with money that you can 100% afford to lose. You can lose 100% of your funds provided to the Hegic liquidity pools. Hacks, security bugs and economic abuses can happen because of an experimental nature of beta version of the protocol. You won’t be compensated in case of any losses related to the Hegic protocol. If you do not agree with any part of this disclaimer never use the Hegic protocol / Hegic V8888.
ACQUIRING/HOLDING/OWNING/USING HEGIC TOKENS DOES NOT PROVIDE/GUARANTEE YOU OR ANYBODY ELSE DIVIDENDS OR ANY KIND OF RETURNS. ACQUIRING HEGIC TOKENS DOES NOT PROVIDE YOU WITH ANY RIGHTS IN ANY JURISDICTION. HEGIC TOKEN IS NOT A CURRENCY BUT AN INTERNET DIGITAL UNIT OF NON-FINANCIAL UTILITY THAT CAN BE USED SOLELY IN THE HEGIC PROTOCOL. THE HEGIC PROTOCOL SHALL NOT BE LIABLE TO YOU OR ANYBODY ELSE FOR ANY DAMAGE OR(AND) LOSSES IN ANY CONNECTIONS WITH HEGIC TOKENS. IF YOU DO NOT AGREE WITH ANY PART OF THIS DISCLAIMER NEVER ACQUIRE/HOLD/OWN/USE HEGIC.
