Summary
We propose to lower the annualized NOTE incentive emission rates for LPs (nToken holders) by -15%.
Context & objective
As outlined in our incentive rebalancing framework published in Q1, it is one of our objectives to update incentive emission rates over time. These updates represent an important step toward more sustainable nToken returns while ensuring the protocol still attracts an adequate amount of liquidity.
This proposal is a follow-up to the April incentive reduction vote.
Proposal
We propose to reduce NOTE incentives for LPs by -15%. More specifically, we propose to lower the NOTE annual incentives rates by -12% for ETH & USDC, and by -18% for WBTC & DAI:
We propose to lower the DAI incentive rate slightly more than the USDC incentives rate as we have historically seen more USDC trading volume ($300M) than DAI trading volume ($200M) on Notional. Thus we believe it is a better use of capital to incentivize higher liquidity for USDC trading pools.
We also propose to lower the WBTC incentive rate slightly more than the ETH incentive rate since the current nWBTC incentive yield (7.5%) is higher than the nETH incentive yield (5.5%).
Advantages
- Less NOTE dilution (more NOTEs being held by the DAO’s treasury);
- Lower NOTE selling pressure from yield farmers.
Disadvantages
- Possible loss of liquidity from short-term focussed LPs.
Even by reducing the incentive emission rates slightly, we believe most LPs will continue to provide capital to Notional as the NOTE incentive yields will still remain highly attractive compared to other opportunities in the markets (ex: Lending on Compound, providing liquidity on Curve).
Ultimately, this reduction in incentives is an important step toward making Notional sustainable.