PIP-21: Tokenomics 2.0 The Reward System

Paladin Improvement Protocol (PIP) PIP - Approved
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TL-DR: Decide on the revenue sharing asset and the vesting duration of PAL

Context:
Since PIP-14’s passing, Mithras Labs has finished the smart contracts for the Vote Flywheel and is moving to the final production phase of the product, with a target launch in Q1-2024.

Before its deployment, several parameters and processed needed to be decided by the DAO:

This proposal is the fourth and last parameter needed before launch.

In PIP-14 we introduced the concept of LOOT as a wrapper batching PAL emissions and eventually, later on, revenue sharing.

Rationale
We recommended the creation of LOOT in order for two reasons:

  • Create a system where the PAL is vested in order to mitigate the high emissions the Vote Flywheel will create;
  • Simplify the system by only distributing one token;

Of course, this creates the disadvantage of an additional friction since users will need to redeem their LOOT into PAL and the reward currency, so there are always trade-offs.

In terms of vesting, we are suggesting a 14 day period, which is the round window for vlToken rewards, meaning that users can claim & vest on the same time-frame. If some people think this is too short or too long, we’d love to hear their arguments, but think it would be good to think in 7/14 day increments.

As for the reward tokens, we should only target the most resilient assets, since they will be integrated into Paladin’s immutable parts. Only 4 tokens make sense in this case considering Lindyness: wETH, DAI, LUSD, RAI & OHM. Since DAI is migrating into a new token, the unknowns are too important for us to rely on it. RAI is not liquid enough considering revenue growth and Olympus’ situation with Cooler Loans still needs a bit more time for us to see its efficiency. So it depends whether we want the system to be dollar based, or following ETH’s trajectory.

Means:

  • None

Next steps:
Launch

Voting options:
Option 1/ Option 2 /…/…. / Abstain

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In terms of vesting, we are suggesting a 14 day period

In my opinion, no matter what you choose, is to postpone the problem until later.
Maybe an oPAL token ? like Bunni is doing with oLIT, that way, if people want to dump PAL, at least we’ll get something out of it.

As for the reward tokens, we should only target the most resilient assets, since they will be integrated into Paladin’s immutable parts. Only 4 tokens make sense in this case considering Lindyness: wETH, DAI, LUSD, RAI & OHM.

Definitely: wETH, the one and only asset where liquidity, usefulness and risk will always be good.

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I’m not familiar enough with Bunni but the oToken system looks promising and is used by several ve33 dexes. Does it have any disadvantages?
Concerning the revenue sharing token, I am for wETH, the most liquid token and in my opinion the most neutral choice.

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Hello,

The big disadvantage is for users to exercise their tokens which is either way very costly in term of gas with a flash loan or non practical as you needs to have x amount of eth before being able to get your rewards.

In the end, I am not super in favor of such mechanism …

Regarding the reward assets, why should it be a immutable list of assets ?

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Is this part going to be immutable as well ? If not starting with 14 days make sense and could be updated later if needed.

I agree with this, more than friction it will increase gas fees for users to manage their rewards. Also agree with Starny that it will just postpone the dump for later, but I don’t think oTokens from Bunni is the solution (too expensive for users)

Others oTokens alternative also exists like Retro, which has 3 choices:

  • Redeem 1:1 for veRETRO
  • Redeem for RETRO with 50% CASH (classic oToken)
  • Transmute oRETRO for CASH (their stablecoin) with penalty

However this works fine because it’s on Polygon, but not sure about the same design on mainnet. Is it possible / is there any consideration to switch on an L2 to manage the distribution (& potentially governance) ?

As for token to distribute, the most logical seems ETH for when the treasury will allow to inject real yield, but imo with the debts to repay and the need to accumulate non-PAL liquid treasury before to cover the DAO costs, we still have some time before it’s possible.

Considering these, would it make sense to start by only distirbuting PAL (potentially vested), and then deploy LOOT when it will include two tokens, or would you rather deploy it from the start even if it only includes PAL ?

Ps: Missing Poll

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I’m personally not a fan of the oToken system as it significantly reduces the amount of liquidity / users coming in. Just look at the Bunni APRs they pay 2x the market average for liquidity because of this system.

Also this. Correcting some inaccuracies from the initial post: LOOT is not a liquid token but a data structure containing 2 tokens, it was simplified under a name for UX purposes. There is no unwrapping gast costs or anything, just claims.

To reduce risk. We need to redeploy the whole tokenomics if we want to change the asset.

Would need @Kogaroshi to confirm this

The could, but not for v1, there is still a lot that needs to happen before we can fully rely on L2s as a main hub. Please check L2Beat to understand what I am refering to.

There are no plans to start injecting real yield before debt is repayed and Paladin can comfortably cover dev cost + more if needed. Even then, real yield would only amount to a % of what’s left after all expenses. So we have at least 3 months before this, and probably 6 to 9 if we are conservative.

This is what will happen at launch, my explanation of LOOT was inaccurate.

PS: Hard to do a poll here considering the massive amount of options

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From a technical side of things, I don’t really understand why not make LOOT a ERC20 and just a custom data structure ? It is a standard that could ease implementation from other teams.

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From another point, if the reward tokens needs to be immutable which is understandable.

I believe the only real choice will be WETH for two reasons:

  • to stay aligned within our ecosystem
  • within the future who knows what happens for other tokens so it is the only option in my opinion which will last for the life of ethereum
2 Likes
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Hi everyone.

I’m gonna try to answer to the tech related questions I saw, tell me if I missed some :

  • yes, the vesting duration of Loot can later be updated by Governance if 14 days doesn’t work as expected
  • the LOOT is not an ERC20, but only a data structure. It was considered as an ERC20, that could be tradable and burned to start the vesting of PAL, but the system where the PAL & some extra token vest from a given date at creation was preferred, and this system doesn’t allow to have a nice ERC20 to represent it (it could be as an NFT with ERC1150 tho)
  • the extra reward token does indeed need to be immutable, not to mess with accured indexes and token decimals in the future.
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Yeah I see, but about the vesting period, for me, it doesn’t solve anything… it just postpone the time when you receive the rewards, another system need to be thinked imo, rn I don’t have the idea, but I’m sure that a simple vesting rewards is equal to do nothing

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I share your concern about the vesting period. I fear that a short lock won’t effectively prevent continuous dumping and selling.

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I’m a bit surprised to see these concerns still popping up. I understand that increasing emissions in a systematic way can create a continuous sell pressure, but this is set to be heavily minimized by multiple mechanisms:

  • A boosting system distributing most emissions to aligned stakeholders (~80%);
  • Access to emissions reserved to stakeholders using our protocol (strengthening the alignment);
  • Planned revenue sharing to boost the flywheel’s efficiency and give a soft floor value to hPAL;
  • A 14 day (or other) vesting on PAL emissions that wasn’t designed to delay dumping but rewarding patience. When rev. share is activated, users will have the choice of waiting 14 days to get all their rewards or redeeming early and forfeit part of their PAL emissions back into the system to get the rev. share share.

Furthermore, we are in discussions with actors to build a PAL liquid locker that would absorb another part of these emissions.

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GM Pals ! Late comment on my side sorry. Some thoughts here:

In my view, regarding the reward tokens WETH would be a must as it is the only one that is 100% trustless and have 0 SC risk. Moreover, it will allow to track ETH which is the real benchmark imo

Regarding the vesting I guess there aren’t a lot of other options available. In my view, oToken are really costly in terms of gas and this is going to be worse in the future, this could be a barrier for adoption. Regarding the period of 14 days I don’t really have an opinion, I guess it could be a good starting point but can be useful to have the ability to adjust this on the fly.

This can be definitely an interesting feature that could mitigate the sell of the token. Do you plan to have this live from the start ?

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I don’t think we have an option to change it once deployed, hence the lenghthy discussion.

We aren’t building it, and will let the devs behind it come out of stealth when they feel comfortable with it

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By this:

do you mean simplifying the system from a user perspective or a development/security perspective, I believe LOOT from a user perspective is more complicated than simply claiming PAL and WETH.

When saying the extra rewards need to be immutable, does this refer only to the token list within LOOT or the entire distribution system? I.e. would it be possible to distribute LOOT + randomTOKEN separately but claimable through the same contract?

I believe it is best to keep this flexible. There might come a time in the future where it is in our best interest to make other tokens distributable via this system. Whether to introduce users to different parts of Paladin itself (e.g. WAR), or external projects wanting to utilise Paladin to reach the wider voting ecosystem (e.g. governance token of a PAL liquid locker, airdrop-like distribution of tokens from new ve protocols). With more projects present on Paladin, $PAL should be a unique way to be exposed to the veNarrative as a whole and users will be a diversified lump of governance maxis.

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I mean the token distributed through Loot alongside PAL (note that through this post, I saw a few misunderstandings : LOOT is not an ERC20 token, or an ERC721 NFT, but simply the name of the structure of distribution for the PAL & extra token)

I understand the point were the system needs to be flexible enough to adapt to the future of Paladin products, but this is why the current system called Vote-Flywheel is only part of it focused on Quest, but that could later be complemented by another distribution system, or simply replace Vote-Flywheel if it’s not relevant anymore.

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Honestly, using the word “vesting” can scare a lot of people, whether it’s 14 days of vesting or 3 months, people are just going to see the word “vesting”, they’ll be afraid and won’t buy/lock more hPAL.

The two solutions for me are:

  • No vesting at all
  • Longer vesting

But I like the “slashing” option to get out of vesting faster but, on the other hand, sacrifice rewards, which is why I’d choose the “longer vesting” option, vesting over 2 voting periods (so 28 days).

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The vesting system, applied on the PAL rewards component of the Loot was intended as a way to separate the voters wanting to make a quick buck (that would try to skip the vesting, getting the PAL rewards slashed but with the aim of getting the extra rewards instantly) from the voters more aligned with the Paladin ecosystem, that would prefer to wait for all the PAL to get available to redeem them and reintroduce them in the system (most likely by locking more hPAL to further boost their position).

But indeed, if only a 2 weeks vesting looks more like a nuisance that an effective system, we need to consider if we want to remove it, and simply make all the rewards in the Loot available at creation (which would need some rework of the smart contracts, which would be good to do before the codebase is in audit), or simply extend the vesting duration to make it more meaningful, and further increasing the difference between the voters accepting to wait for the PAL rewards vs the one wanting to exit and get slashed.

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It seems there is a consensus for wETH rewards but a lot of debate on the duration of the vesting. The vote has been posted for wETH rewards with several durations.

https://signal.paladin.vote/#/proposal/0x320230d94b26bd07706d75ee0a1842d55af3101fa48409cd91db8a4d457a6341

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Quorum PIP-21: 983 552 votes

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