With the new tokenomics proposal officially voted in, it’s time to decide on how the fees should be split. The parameters that we’re looking to set are as follows:
- LP Fee Percentage: the percentage of fees that go to LPs
- Insurance Fund Percentage: the percentage of fees that flow to the insurance fund. After the insurance fund threshold is hit, then funds will flow to the treasury. This number is simply 1 - LP Fee Percentage
- Insurance Fund Threshold: a USDC dollar value that once is hit, funds will stop flowing into the insurance fund and will then flow into treasury
- vePERP Distribution Percentage: once the insurance fund threshold is hit, this is the percentage that is sent to vePERP holders, with the rest flowing to the DAO Treasury
For more information on the tokenomics, please see @tongnk’s proposal https://gov.perp.fi/t/proposal-perp-v2-tokenomics/642
There are a few main objectives we’ll need to balance between:
- Sufficient capitalization of the insurance fund, to provide insulation for large market moves
- Attractive rewards for LPs, to attract more capital into the pools
- Yield for vePERP holders
- Growth of the DAO Treasury
Trading fees are first split up between two buckets: the insurance fund, and LPs. This is a delicate balance; fees are a large part of the yield that LPs receive, incentivizing them to provide liquidity to the markets on perp. Sufficient liquidity here is essential for growth of the protocol. If takers experience excessive slippage when they go to trade, they will eventually go somewhere else. At the same time, having a healthy insurance fund is extremely important, especially in times of stress to the system. In a chaotic market when things are moving fast and positions need to be liquidated, there is always a chance that the system cannot liquidate fast enough and we’re left with bad debt to cover. In some systems this has led to socialized losses for users of the platform, which is something we want to avoid. An efficient margin & liquidation system helps here, but it’s an ongoing effort, especially as the protocol and general crypto market grows.
This might be more of an art than science for now, but I think something like an 80%/20% split between LPs/IF is a good starting point. This would correspond to 8 bps to LPs and 2 bps to the insurance fund per trade.
This should be a USDC number that once hit, funds will stop flowing into the insurance fund, and instead flow into the DAO Treasury and to vePERP holders. This should be sufficiently large enough to cover potential bad debts. Keep in mind this doesn’t only come into play when the market goes down. If much of the OI is short and the market roars upward, the same liquidation cascades can happen to the upside.
For now I think it makes the most sense to think about this number as a percentage of OI — which means this should be set on some cadence as OI changes. To minimize governance votes, we could vote on a methodology to implement, and authorize a multisig to make the updates accordingly. For example, say we decide on an insurance fund threshold of 10% of 30 day average open interest, to be set every 30 days by the multisig. If the average open interest over the previous 30 days was $100m, we would target an insurance fund threshold of $10m. We could also look at using something like an exponential moving average to weight recent days more. The calculations used to come to this number should be published for everyone to view and verify.
As far as the specific number we choose here, I think it should be set conservatively for now (meaning higher % of OI). We can always vote to change this later if we find that it is excessive.
I suggest 10% of 30d average OI, set on-chain every 30 days.
Once the insurance fund hits its target, the fees will be directed to the DAO Treasury and vePERP holders. Actions of the DAO and how the treasury is utilized is up to PERP holders.
I think it is important to set a precedent of direct value accrual to vePERP holders. How the number we choose here translates to a specific APR for vePERP holders depends on a number of other factors, like the proportion of total PERP vote-locked and for what duration, fees generated, and the other parameters set in this proposal.
I suggest starting with a split of 50%/50% between the DAO/vePERP holders. As the protocol grows and matures, we’ll be able to re-evaluate with more data to fine tune this parameter. The Treasury already controls a large number of PERP tokens, so we don’t need to be overly aggressive in allocating fees to it.
Vote 1: Liquidity Provider / Insurance Fund split
- 80% LP / 20% IF
- 90% LP / 10% IF
- 75% LP / 25% IF
Vote 2: Insurance Fund Threshold
All numbers expressed as % of 30D average of open interest, to be reset every 30 days
Vote 3: DAO Treasury / vePERP split
- 50% DAO / 50% vePERP
- 75% DAO / 25% vePERP
- 25% DAO / 75% vePERP
I have tried to provide both conservative and some slightly more aggressive options here, but the specific amounts are certainly open to discussion.