Summary
We propose to lower the annualized NOTE incentive emission rates for LPs (nToken holders) by 15% across all listed currencies.
Context & objective
As outlined in our incentive rebalancing framework published in Q1, it is one of our objectives to update incentive emission rates on a more frequent basis going forward in order to ensure the incentives the protocol gives to its LPs are sufficient to attract an appropriate amount of liquidity at all times.
More frequent rebalancings will allow the protocol to compensate LPs in a more dynamic fashion while avoiding overpaying for unnecessary liquidity. Rebalancing activities are expected to benefit long-term focused LPs and will likely decrease the variance of liquidity inflows and outflows which should improve the user experience for lenders and borrowers.
Proposal
We propose to reduce NOTE incentives for LPs by 15% across all available currencies.
Potential advantages
- Less NOTE dilution (more NOTEs being held by the DAO’s treasury);
- Lower NOTE selling pressure from yield farmers.
Potential disadvantages
- Possible loss of liquidity from short-term focussed LPs who are actively farming and dumping NOTE in the open market.
With nToken incentive yielding upward of 12% for nUSDC and nDAI, 7% for nETH, and 3% for nWBTC, we believe the current incentives are sufficiently high to sustain a 15% reduction. 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.
Moreover, let’s note that the protocol has already reached its target amount of liquidity to enable trades of $2M with less than 0.3% slippage. The protocol is therefore not seeking additional liquidity at the current time.
Ultimately, this reduction in incentives is a first important step toward making nToken returns self-sustainable.