Summary
We propose to lower the annual NOTE incentives by 3,000,000 from 13,000,000 NOTE to 10,000,000 NOTE on the next quarterly roll occurring June 21st 2023 according to the following schedule:
| Currency | Current incentives | Proposed incentives | Change (%) |
|---|---|---|---|
| ETH | 2,000,000 NOTE | 2,000,000 NOTE | 0.0% |
| DAI | 4,250,000 NOTE | 2,500,000 NOTE | -41.0% |
| USDC | 6,750,000 NOTE | 5,500,000 NOTE | -18.5% |
| WBTC | 0 NOTE | 0 NOTE | 0.0% |
| Total | 13,000,000 NOTE | 10,000,000 NOTE | -23.0% |
Context and objective
As we approach the launch of Notional v3, we want to continue making progress toward reducing the total amount of incentives given to LPs. As outlined in our incentive rebalancing framework, 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 for lenders and borrowers.
With the launch of Notional v3, we anticipate higher organic nToken returns due to:
- Higher variable rate returns on nToken accounts net prime Cash holdings
- Higher trading fees due to leveraged fCash trading
- Higher fees from leveraged vaults
Moreover, the redesign of Notional’s AMM curves in v3 will increase the capital efficiency of liquidity pools by (1X to 3X). Higher capital efficiency means that fCash slippage will be lower for traders in Notional v3, assuming liquidity is constant.
This makes us confident that we can proceed with an incentive reduction, as the incentive yield reduction will be compensated by higher organic returns over time.
Proposal
ETH
We propose to leave ETH incentives untouched as ETH liquidity will be primordial for ETH based leveraged vaults. Moreover, with the launch of v3 we plan to list multiple LSD markets (ex: wstETH, rETH, cbETH) enabling users to open leveraged long or leveraged short positions between ETH and LSDs. Therefore we want to continue heavily incentivizing ETH LPs over the coming months.
DAI
We propose to lower the nDAI incentive rate from 4,250,000 to 2,500,000 NOTE (-41%) per year. As mentioned in the previous NOTE incentive update, we have 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 for now. Once v3 is deployed and has been live for multiple months, we think it will be worthwhile to consider applying for a Maker D3M that would allocate DAI liquidity directly to pDAI (Notional’s variable rate DAI market). In the meantime, we think the DAO should continue to incentivize nDAI but at a slower pace.
USDC
We propose a slight reduction in nUSDC incentives from 6,750,000 to 5,500,000. The nUSDC NOTE incentive yield has averaged 11.5% over the past 30 days. We feel a 20% reduction would still present an attractive return (9.2%) for USDC LPs.
Resources
- Governance parameter documentation: Incentives - Notional Governance Parameters
- Notional v2 docs: About Notional - Notional V2
- How Notional works: How Notional Finance Works - Fixed Rates in Crypto