Summary
We propose to increase NOTE incentives for nETH LPs by 1,250,000 NOTE annually, decrease nDAI incentives by 2,000,000 NOTE annually, leave nUSDC incentives unchanged and cut nWBTC incentives to 0. On aggregate this will lead to a reduction of -10% in NOTE incentives.
This proposal will reallocate incentives from DAI towards ETH in order to deepen Notional’s ETH liquidity ahead of the launch of levered vaults.
Context and objective
In anticipation of the launch of leveraged vaults, we want to maximize the likelihood that liquidity on Notional will be sufficiently deep to allow borrowers to borrow large amounts of ETH with relatively low slippage. Since we will launch levered vaults with a USDC strategy (Balancer/Aura boosted stablecoin LP strategy) and an ETH staking strategy (Balancer/Aura wstETH/ETH LP strategy) we think it is appropriate to update incentives to make sure that the liquidity in Notional’s USDC and ETH pools is adequate.
As a second objective, we want to continue making progress toward reducing the total amount of incentives given to LPs. As outlined in our incentive rebalancing framework published in Q1, it is one of our objectives to lower 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.
Details
Increase nETH incentives
We propose to almost triple the nETH incentive rate from 750,000 to 2,000,000 NOTE per year. This way we expect to triple the current amount of ETH liquidity and reach $10M of nETH TVL.
Given that users of the Balancer/Aura wstETH/ETH strategy will be able to take 7X-10X leverage on their deposits, we need to make sure that the liquidity in ETH liquidity pools will be sufficient to accommodate relatively large borrow trades. For example, a $100K deposit woud allow a user to borrow $700K of ETH. $700K currently represents 40% of the liquidity in the 3 month ETH market. By tripling the amount of nETH liquidity, the impact of a $700K borrow would only represent 13% of the 3 month market liquidity allowing for better slippage for borrowers. Increased liquidity would allow larger trade sizes to be executed on Notional thereby offering a better experience to lenders and borrowers while generating more fees for LPs.
Decrease nDAI incentives
We propose to lower the nDAI incentive rate from 6,250,000 to 4,250,000 NOTE (-32%) per year. This incentive decrease would allow the protocol to increase nETH incentives without increasing the total amount of incentives being spent. We think that the benefit from redirecting incentives from nDAI to nETH will have a positive impact on the protocol’s overall trading volume.
Additionally, we have also historically seen that DAI trading volumes have been lower than USDC trading volumes. Moreover, DAI liquidity has been less sticky and more reflexive during market downturns than USDC liquidity. This is because DAI holders need to repay their CDPs as markets go down. Therefore we think it is a better path forward to allocate more incentives towards nUSDC over nDAI. We propose to continue incentivizing nDAI going forward (4,250,000 NOTE per year), but to a lesser extent than USDC (6,750,000 NOTE per year).
Leave nUSDC incentives untouched
We propose to make no change to nUSDC incentives. We think maintaining strong USDC liquidity going forward is important especially given the upcoming launch of the Balancer/Aura boosted stablecoin LP levered vault strategy. Moreover, USDC trading on Notional has historically generated more volume than DAI and has proven to be less reflexive. We believe that maintaining the current levels of incentives and USDC liquidity will allow users to continue being able to borrow and lend large trade sizes with relatively low slippage.
Cut nWBTC incentives to 0
We propose to cut nWBTC incentives from 700,000 to 0. The market for WBTC lending has proven to be quite small, representing less than 2% of Notional’s trading volume last quarter. We believe incentivizing WBTC on Notional is not a productive use of the DAO’s resources. Additionally, we currently have no plan to launch a WBTC levered vault strategy, which makes the path towards sustainable nWBTC returns significantly harder to achieve.