Malt’s early adopter LP bonus
A core question of any protocol, stablecoin or otherwise, is how to facilitate initial adoption. High initial incentives are often necessary to reward the risk that is shouldered by early adopters. Additionally, for algorithmic stablecoins, initial growth is vital to establishing stability, and in particular growth of liquidity, not just market cap. This is because high levels of liquidity contribute directly to stability by allowing high volumes of trading with relatively low-impact.
However, many commonly used early incentives lead to significant dumping as profits are taken. This introduces instability, at least in the short- to mid-term. For example, FEI’s genesis phase, while excellent for raising liquidity, led to significant dumping upon launch. High initial yield on farms often lead to significant increases in the price that then crashes.
With Malt, we want to introduce early incentives without the downside of instability. Ideally, we believe, the best mechanism would not only facilitate early growth and avoid the downside of acute instability, but also facilitate protocol strength and stability. That’s how the subsidized reinvestment option was conceived.
The Subsidized Reinvestment
As LP rewards are distributed to liquidity providers (in DAI), these liquidity providers are given the option to reinvest their rewards back into LP.
Typically, the protocol will offer the user two reinvestment options:
(1) Provide: provide additional Malt to use alongside the DAI rewards to create LP tokens
(2) Split: the protocol will split the DAI rewards to and use half to purchase enough Malt to create LP tokens
Both these options will automatically bond LP tokens for the user.
However, for the first week only, a third “subsidized” option will be offered, where the protocol will mint enough Malt to match the DAI rewards to be reinvested. Again, this newly minted Malt and reward-reinvested DAI will be automatically bonded. This effectively doubles the reinvestment for the user.
For example, if a participant opts to reinvest 10 DAI, the protocol will mint 10 Malt and lend it to that participant for 0% interest and no fee. This is then pooled with the DAI and bonded.
The user earns and owns all future rewards from this reinvested LP, as long as the subsidized LP remains bonded to the protocol. Earning rewards on this additional LP can go on indefinitely if it remains bonded.
However, although the participant earns all rewards earned by this subsidized LP, the half of the value that is contributed by the protocol is not owned by the user.
Instead, once the user unbonds any amount of their LP, the part of the LP that was contributed by the protocol becomes permanent liquidity to the protocol. It is no longer bonded to any user and just exists as liquidity.
Implications
The advantages of the subsidized reinvestment feature include:
- Significantly increased reward opportunity for early adopters. This will lead to increased participation and growth for the protocol.
- Because this early incentive operates directly on the liquidity pool, the incentive is both good for the profitability of early adopters and for increasing the liquidity in the pool. Simply put, incentives for early adopters and protocol stability are aligned.
- When profit-taking occurs from subsidized LP, the protocol gains permanent/protocol-owned liquidity. Thus, the act of a speculator leaving and taking profits (that would usually be a net negative) is now improving the protocol in some way when they do so.
- The proportion of the LP pool owned by other LP providers significantly increases when any subsidized LP is unbonded. This is because the protocol-owned liquidity does not gain LP rewards.
In summary, the subsidized reinvestment option is another feature of Malt that we believe better aligns incentives for the participants and the protocol. It creates a situation where early adopters are rewarded for their risk, and profit-taking by those early adopters builds permanent liquidity into the protocol.
That liquidity accrued via the process above is owned by the protocol, but will not be used directly in the initial version of Malt. It will be dormant liquidity that simply exists in the pool. However, in future updates to the protocol that liquidity can and will be actively used to help further improve the stability of the protocol.
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