Summary
In this post, we lay out a path forward to decrease NOTE emissions and increase buybacks over the next 12 months. Additionally we propose an immediate 20% cut to NOTE incentive emissions for liquidity providers on Notional V3.
-
We propose to gradually decrease NOTE incentive emissions from the current rate of 7.5M NOTE per year to 3M NOTE per year by August 1 2025.
-
We propose to increase the current rate of NOTE buybacks by turning on Notional’s external lending capabilities and using the revenue generated from that to directly fund NOTE buybacks.
NOTE incentive emissions
We propose to implement the following incentive emission decreases. The percentage decreases for specific currencies may vary at each date but the cut percentage in aggregate should conform to the below table:
| Cut date | Cut percentage | New Emission Rate |
|---|---|---|
| August 1 2024 | 20% | 6,000,000 |
| November 1 2024 | 20% | 4,800,000 |
| February 1 2025 | 15% | 4,080,000 |
| May 1 2025 | 15% | 3,468,000 |
| August 1 2025 | 13% | 3,000,000 |
External lending
External lending is the capability of the protocol to lend out assets sitting in Notional’s lending markets that are not currently utilized. For more background on external lending, see NIP-31.
External lending has been approved but not yet activated. We propose to activate this functionality with a select number of tokens and use the revenues generated to fund NOTE buybacks.
Here are example calculations showing the amount of revenue that external lending would generate for Notional today using ETH, USDC, and USDT on Ethereum and Arbitrum:
| Token | Available to Lend At Utilization Target | Aave Rate | Annual Earnings |
|---|---|---|---|
| USDC (Mainnet) | $1,200,000 | 6.05% | $72,600 |
| ETH (Mainnet) | $1,500,000 | 1.90% | $28,500 |
| USDT (Mainnet) | $380,000 | 6.15% | $23,370 |
| USDC (Arbitrum) | $520,000 | 7.06% | $36,712 |
| ETH (Arbitrum) | $1,400,000 | 1.76% | $24,640 |
| USDT (Arbitrum) | $220,000 | 5.68% | $12,496 |
| Total | $198,318 |
As a note, the amount available to lend is determined by the amount of tokens which would need to be borrowed to move the variable lending market to kink2 utilization. We will always keep some amount of tokens on the Notional proxy contract to facilitate withdrawals and potential liquidations.
The dollar value of interest earned via external lending is highly variable and depends on Notional’s total TVL, the utilization of Notional’s lending markets, and the interest rates available on external lending protocols.
NOTE buyback projections
Today, NOTE buybacks come from two places - protocol fee revenue and COMP sales. COMP sales will run out in 10 weeks. We intend for external lending revenues to replace and increase that buyback stream.
It’s difficult to project NOTE buyback rates because there is a lot of uncertainty around the growth of the protocol and because external lending revenues are not one to one correlated with protocol fee revenues. But here is a potential path of buyback rates over the next 12 months assuming that the protocol roughly doubles in size and fee revenue over that time from the ~$532k annualized revenue that the protocol generated in Q2:
| Date | COMP Buyback Rate (annualized) | Fee Revenue Buyback Rate (annualized) | External Lending Buyback Rate (annualized) | Total Buyback Rate (annualized) |
|---|---|---|---|---|
| August 1 2024 | $169,000 | $100,000 | 0 | $269,000 |
| November 1 2024 | 0 | $100,000 | $100,000 | $200,000 |
| February 1 2025 | 0 | $125,000 | $200,000 | $325,000 |
| May 1 2025 | 0 | $150,000 | $250,000 | $400,000 |
| August 1 2025 | 0 | $200,000 | $300,000 | $500,000 |
NOTE net emission projections
As NOTE emissions fall and NOTE buybacks increase (hopefully), the net amount of NOTE emissions (NOTE emissions - NOTE buybacks) should steadily decrease.
Net NOTE emissions will depend on the USD price of NOTE. But here is what net NOTE emissions would look like over the next 12 months using the assumed buyback rates and a $0.10 price for NOTE:
| Date | NOTE Emissions | Buyback Rate | Buyback Rate (NOTE) | Net Emissions (NOTE) |
|---|---|---|---|---|
| August 1 2024 | 6,000,000 | $269,000 | 2,690,000 | 3,310,000 |
| November 1 2024 | 4,800,000 | $200,000 | 2,000,000 | 2,800,000 |
| February 1 2025 | 4,080,000 | $325,000 | 3,250,000 | 830,000 |
| May 1 2025 | 3,468,000 | $400,000 | 4,000,000 | -532,000 |
| August 1 2025 | 3,000,000 | $500,000 | 5,000,000 | -2,000,000 |
Initial 20% emission cut
We propose to cut NOTE emissions by 20% effective immediately upon passing snapshot per the following amounts:
| Token | Current Emission Rate | New Emission Rate | Change |
|---|---|---|---|
| ETH (Arbitrum) | 500,000 | 400,000 | -100,000 |
| USDC (Arbitrum) | 500,000 | 400,000 | -100,000 |
| wstETH (Arbitrum) | 100,000 | 0 | -100,000 |
| rETH (Arbitrum) | 100,000 | 0 | -100,000 |
| USDT (Arbitrum) | 300,000 | 200,000 | -100,000 |
| ETH (Mainnet) | 2,000,000 | 1,900,000 | -100,000 |
| USDC (Mainnet) | 2,500,000 | 2,350,000 | -150,000 |
| rETH (Mainnet) | 500,000 | 0 | -500,000 |
| USDT (Mainnet) | 1,000,000 | 750,000 | -250,000 |
| Total | 7,500,000 | 6,000,000 | -1,500,000 |