SDIP #7 : Reducing inflation to support positive trend on SDT
Summary
This proposal aims to seek the community’s feedback on reducing SDT inflation, which is currently at an all-time-high.
Motivation
A reduction in inflation is suggested to focus inflation towards building intrinsic value for SDT and support the positive growth that the DAO has experienced over the last few months.
Specification
Our current inflation stands at 5 SDT per block, corresponding to c.230,000 SDT added to the market every week. This inflation can be split as follows:
- 1.5 SDT (c.70,000 SDT per week) for TVL providers (strategies mainly, and c.0.1 SDT per block are accumulated to reward protocol stakers in the future)
- 0.57 SDT for liquidity providers on Uniswap, Sushi swap and Cometh swap (27,000 SDT per week)
- 0.8 SDT per block for sdveCRV/CRV liquidity providers (c.37,000 SDT per week): this has been stable from the beginning, because users did not have the possibility to exit.
- 1.15 SDT per block to fund liquidity acquisition through Olympus bonds (50,000 SDT per week): this one is critical as once liquidity is acquired, no more need to direct inflation towards liquidity pools.
- 0.9 SDT per block for the sanctuary: this was key to ensure that people entering into bonds were incentivized to stay in the sanctuary rather than sell their SDT to enter again in a bond contract
- 0.1 SDT for Pythia and Tempest holders
Since the last inflation adjustment back in May, the token price was multiplied by 3, and so were the APYs. We started slowly reducing inflation directed to liquidity providers as part of SDIP #5, in order to align with the market and reduce the emission of SDT building limited value in the long term. This proved very efficient as it contributed to a supportive trend on the DAO, in terms of TVL, development of the community, and increase of longer-term engagement. We therefore believe that progressively reducing inflation will help support the DAO and SDT, and actually have a positive impact on APYs. Furthermore, our APYs are constantly the best in the space for each one of our strategies, so as long as we keep this as it is, users should not be incentivised to leave the strategies in the short term (and in the medium term, APYs should increase too).
The main risk of reducing inflation is with regards to our liquidity: if incentives gradually diminish, we could see people removing liquidity from Uniswap. We are therefore pushing very hard in the meantime to acquire our liquidity as fast as we can, in the form of Olympus Pro bonds. Therefore, inflation directed towards Olympus Pro bonds should not be reduced.
Due to the recent success of Stake DAO NFTs and the floor price of Pythia and Tempest on Opensea, we believe that it would not be fair to reduce the inflation directed towards NFT staking.
Finally, we set a very strong inflation rate towards the Sanctuary to incentivise users entering it through bonds to stay in the Sanctuary. However, now that the Stake DAO NFTs are quite liquid, it is relatively easy to compute an average APY for the Palace. Historical figures reflect a c.60%-120% APY for the Palace. We therefore believe that it is quite attractive already, and does not need an excessive additional inflation towards the sanctuary. The team is also working on new utilities for SDT which should be live in the coming weeks. Those new utilities should increase the attractivity of SDT, which should have a positive impact on the percentage of SDT staked versus sold.
All this being said, we suggest progressively reducing inflation to reach a medium term rate of c.3 SDT per block (as it was in early summer) by reducing it all over the board except from Olympus pro bonds and NFT staking.
After several weeks of progressive reduction, and if this policy proves itself to be efficient, the medium term inflation would look like this :
- Strategies: 0.75 SDT per block / 35,000 SDT per week
- Liquidity providers: 0.25 SDT per block / 11,500 SDT per week
- Liquidity bonds: 1.15 SDT per block / 50,000 SDT per week
- PPS: 0.4 SDT per block / 18,500 SDT per week
- Sanctuary: 0.45 SDT per block / 20,000 SDT per week
- NFT staking: 0.1 SDT per block / 4,650 SDT per week
Total SDT per block: 3.10 SDT per block / c.150,000 SDT per week.
Assuming that c. 65% of inflation is fueling SDT selling pressure (which is the figure reflected by the 35% of SDT staked in the Sanctuary), the selling pressure should be halved with this new inflation rate. To put it differently, everything else equal, this should result in a c.18% positive impact on SDT (assuming flat liquidity).
The main risk of this strategy is if liquidity reduces as a result of this drop of inflation, this lower inflation will have a limited positive impact on SDT. That’s why it is key to accelerate on the SDT/ETH LP tokens acquisition. Furthermore, the DAO will support SDT price by market buying SDT with part of the proceeds of NFT sales.
This rational approach of inflation should support the DAO’s recent trend of growth.
For
- Support SDT price by reducing the selling pressure linked to inflation
- Acquire SDT/ETH LP tokens at a more attractive price
- Keep the strategic possibility of increasing inflation further in the future
Against
- Risk of a short term drop in APYs for strategies
- Risk of a lower liquidity in the short term
- Risk of a lower percentage of SDT staked in the sanctuary in the short term