[Proposal] Replace Incentives between TRU Stakers and LP Lenders

==========CURRENT SITUATION==========

Incentives for staking TRU:

  • More TRU tokens
  • 10% of income generated by protocol

Incentives for LP lenders:

  • More TRU tokens
  • 90% of income generated by protocol

TRU token stakers as of right now only receive 10% of the protocol’s income. This means that as TrueFi grows in TVL and loans given out, the incentive to stake TRU decreases (explained below with math).

So to make money from TrueFi all you need to do is lend to it. Token is seemingly useless.

Staking TRU is not useful at all because you only get more TRU tokens that give you a small 10% of income AND you are at risk of getting slashed. If staking TRU is not useful, then holding it is even less.

Here is the math quoted proving that as the protocol grows, the incentive to stake TRU decreases:

==========PROPOSED CHANGES==========

Incentives for staking TRU:

  • Less TRU tokens
  • 50% of income generated by protocol
    APY remains unchanged.

Incentives for LP lenders:

  • More TRU tokens
  • 50% of income generated by protocol
    APY remains unchanged.

WHAT THIS ACCOMPLISHES:

  • TRU can earn passive income. As we get more borrowers/lenders, TRU will generate more money for stakers, giving people a reason to hold and stake TRU (less people dumping, more people buying).

  • The ONLY way to get the full income is to either buy it on the market (pushes TRU price up), or to farm it and stake it, giving the lending pools capital (more TVL in lending pools).

  • Lenders will want to balance their funds between the lending pool and staking pools. They don’t need to provide to the lending pools to earn a nice APY on the fees generated by the protocol, but they will need to supply capital in order for the protocol to grow. Smart investors will know that they will need to supply both and keep a balance.

  • Less people selling TRU. I can tell you right now that if TRU tokens generated 50% of the protocol’s income, it is a crazy deal because that would mean that the staking pool generates more APY than the lending pool. People including myself WILL buy TRU in order to get that juicy APY from staking it.

TL;DR:

In order to to be exposed to the full potential of TrueFi you will need to own it’s token. If this isn’t a good enough reason then I sincerely don’t know what is.

It simply does not make sense that keeping the protocol secure while staking TRU will only at maximum ever get you 10% of the fees while also be the first-line infantry ready to die in case things get dicey.

==========WHAT WILL HAPPEN IF THIS IS NOT DONE==========

These are the 2 only possible outcomes from the current way things are working:

#1- TRU reaches a price so low that even giving it as incentive is useless, staking is useless. End result: TrueFi takes all the aspects of stkTRU and gives it to the lending pool. TRU token has no more use, which is okay because the protocol can still exist. All TRU holders get rekt though, which is still okay as long as the protocol still works. Just investors will be mad I guess. But in the end the protocol still functions without TRU token.

#2- TrueFi decreases the TRU rewards for LPs as planned. So LPs will re-evaluate whether it’s profitable versus other protocols. Some will move away, the rest will keep farming and dumping TRU until its no longer profitable, then leave. The ultimate outcome still circles back to outcome #1.

==========FAQs==========

Question: But holding TRU does have a use because you get 10% income and we can secure the protocol better, why are you saying there is no use?
Answer: Why would I buy and stake a token to get a measly 10% and get the full blown risk of a default when I can get 90% income by lending? That makes zero sense. On-chain data proves that because most of the farmed tokens are dumped.

Question: Why not grow the lending pools first like our strategy outlines right now, then take care of TRU token’s usecase later when we are stable?
Answer: Because growth isn’t about growing one part at the expense of another. There should be a solution to grow both the lending and staking pools at the same time. Lenders will lend to us as long as they make dollars. This solution lets them make those dollars as long as they keep and stake the tokens they receive after lending us their funds.

Question: insert token doesn’t give any incentives to stakers, why should we?
Answer:

  • MakerDAO uses the income generated to buyback and burn tokens, thus incentivizing token holders. Lenders get 0 income (in fact they pay to use Maker via the stability fee).
  • AAVE is migrating to a new system, the slashing is not even live yet and they can only secure 22% staked tokens because the incentives for tokenholders aren’t live yet either. AAVE has already promised to give stakers part of the income in the future in their new tokenomics plan.
  • Curve divides the income from the protocol between the lenders and the people who lock (like staking) their CRV in a 50%/50% split. Guess what? CRV has close to 67% of tokens locked for an average period of 3.68 years. That % has only increased over time, and will probably still increase.
  • COMP income is given to a Reserve Pool for each token to sustain the security of the protocol in case of cascading liquidations. What they do with the reserves will be up for governance voting in the future when it becomes fully decentralized. The difference between TrueFi is that TRU gives the income to lenders, TrueFi doesnt use this income to secure or help the protocol, we are just giving it to lenders as compensation.

Question: But if we give the same incentives to stakers, then the lenders will all run away?
Answer:
If we don’t give the same incentives to stakers, there is no point in having a TRU token. The price will keep falling to eventually adjust to it’s real intrinsice value which is 10% of protocol income. Lending pools will always be bigger than the staking pool and soon we will be lending out hundreds of millions while having a staking pool that won’t be able to cover any of the big loans.

Lenders only care about APY in terms of dollars. If the token’s value increases, then their dollars (APY) increases. Where will they get dollars when you decrease emissions for the lending pools? By staking? Nope, still no dollars there. They will go get dollars elsewhere and ditch TrueFi.

By giving them TRU that can generate dollars, they will have more incentive to keep TRU and to stake it instead of dumping and causing the price to go down. Hell, maybe they will even go buy some more.

So by giving the protocol’s income to TRU stakers, we are eliminating the downwards pressure on price.

Question: But look, the staking pool has doubled in size from 50M to 100M of TRU tokens locked since February, why are more people staking it if you are saying there’s no incentive?

Answer: Yes that is true, but check the price of TRU in February (floating around 0.25-0.50$). Now look at it’s price now. The price has been declining, thus the TVL in USD has not even increased. It has in fact been staying even or decreasing.

==========CLOSING THOUGHTS==========

Please do not disagree only to disagree, I have crunched a lot of numbers and taken my time to provide on-chain and off-chain data as best as I could in order to come to these conclusions (see other topic replies). I am not trying to FUD or be a nuisance to the team, I am a simple investor who did his own research, came up with a point of view and presented it here with a proposal in hopes of making the protocol better.

Please provide data or logical reasoning behind why you are voting for or against this proposal, that is all I am asking.

Here is the Snapshot: Snapshot

  • I Agree with this analysis and think we should give more protocol income to TRU stakers.
  • I Disagree with this analysis and think we should not give more protocol income to TRU stakers.

0 voters

2 Likes

Note that Compound pays out 92.5% of USDC and USDT revenue to its lenders (source: Compound | Proposal Detail #31).

Imo, Compound is a successful case study of a protocol that optimized for creating value for its lenders rather than delivering fees to its native token in the early stages of the protocol.

I’d argue that Compound (the protocol) and COMP (the token) have both been successful without tying fees to its native token.

COMP token is currently 69% off its ATH, which I think speaks to the altcoin market we’re currently living in. If we look at MKR, which employs a buy-and-burn model, it’s also 66% off its ATH.

TL;DR – I’m not convinced that fee structures are driving token prices today.

3 Likes

Compound works with over-collateralized lending. So the borrower needs to give Compound more than what he borrows.

The lender ARE the borrowers. You need to deposit funds into COMP before borrowing funds from it. Our lenders are not our borrowers; you do not need to lend to the LPs to borrow. COMP and TrueFi have very different structures.

I do understand that COMP also does not give incentives to their holders except for governance, but using the case study of COMP to mold TrueFi will not work, unless you tell borrowers that they need to lend a certain amount in the pools (which is not un-collateralized loans anymore).

1 Like

Thanks for the post @MoreNapalm

I think reducing the interest earned for LPs is a bad idea. I do agree though that the TRU token needs more reasons for people to hold and not sell.

We should overhaul the tokenomics, not just for staking, but for farming. We should follow the curve.fi and require locking TRU in order to gain voting power secure higher farming rates in TrueFi. This way, we aren’t reducing the interest you can earn through lending, we are just restricting the boosted rates to people who lock TRU.

Once our dev team finishes the spec for lines of credit, I think we will turn to working out tokenomics. I would love to work closely with the community on this, since there are a lot of good ideas floating around.

5 Likes

You should be paid for the work you do, it’s amazing that just a simple investor does more than many people on a salary

TRU price has shown one of the worst dynamics in a bull market.

Would not want to decrease the interest earned for LPs, just pay them in TRU instead of stables, that’s it. Same APY but they get more TRU instead. Stakers will earn less TRU and more stables.

The smart farmers will keep the TRU to be exposed to our growing TVL and protocol, the ones who do not believe in us will keep dumping.

Right now both the smart and the non-believers are both forced to dump due to TRU having no incentives to keep.

EDIT: I edited the proposal to add that the APYs of staking and lending pools should remain unchanged with the changes. TRU tokens will be distributed more to lenders to replace the lost APY from protocol income.

1 Like

Thanks for posting this, and for the ton of work that obviously went into it. Feels like there’s one point that is getting missed here: TRU rewards are coming from a (finite) incentive pool. If we want to build a protocol that continues to build value long term, we need to have economics that work even when those incentives are minimal or gone entirely. From that perspective, I don’t see how you have a viable protocol when lenders get only 50% of the interest paid. The risk/reward doesn’t make sense to me. So, I’m firmly in the camp that 90% of the interest goes to the lenders, 10% to the protocol (stakers).

There is a separate question, in my mind, which is how do we allocate TRU incentives to drive growth of the protocol. We have experimented with trying to incentivize borrowers, lenders, and stakers with differing amounts. We know many lenders simply liquidate their incentive tokens, and we’d like to reduce that sell pressure. One way to do that, which I do support, is to pay incentives in stkTRU, not in TRU. This probably should apply to both stakers and lenders, and should reduce sell pressure since there’s a 14-day cooldown.

Once again, love that we’re having this discussion. We’re all on the same team, working together to build a protocol that creates real value in the defi ecosystem.

3 Likes

Thank you for the input, as you guys can see I’m pushing for more aggressive changes which would change the tokenomics to a pretty big degree and I am sorry for that aggressiveness.

I also understand where Tyler is coming from when they believe that the incentives do not correlate with the token’s price. Maybe now is not the right time to be giving more incentives to token holders, and I don’t really know what the correct time is, but I do admit that I see the arguments from both sides concerning giving more protocol income to holders.

I believe rewarding lenders with stkTRU would be a very positive step and I welcome that proposal with open arms.

One thing that does sound disastrous to me would be TRU continuing it’s downtrend and bringing the APY down with it, in which case the APY will not be satisfactory to lenders anymore, thus we will lose TVL, which will most probably end up starting a vicious cycle with APY going down further and the token’s price following.

It would be a different story if TRU’s price was not tied in with the APY going to lenders, but in TrueFi’s case, it is.

Maybe I am over-alarmed and that vicious cycle is purely in my imagination because of other external forces, but I wanted to state my points nonetheless. Maybe a bullish recovery for crypto as a whole will float the token up regardless, but I would like some protection measures in case that fails to hold (such as the change in rewards for lenders from TRU to stkTRU).

3 Likes

Indie dev from Compound and large TRU staker here.

I agree that the incentives should be changed in a fashion proposed by @MoreNapalm.

I hold and stake TRU because I highly believe in the protocol, want more of a share in it, AND because doing so generates revenue.

There’s a caveat with that last point. In order to utilize the revenue that my staked TRU generates, I must sell TRU as the tfUSD generated is miniscule.

There’s also the argument about the risk of staking which is very high. There’s currently $21M worth of TRU staked. What happens when a $21M loan defaults? How much staked TRU will be slashed? What effect will slashing have on the price of TRU?

Stakers take on a lot of risk… but this deserves a topic of its own.

I think the question in regards to this topic is who should own the protocol?

I believe it should be a combination of lenders, borrowers, and early adopters/supporters. These are our key stakeholders.

So therefore, I think we should distribute TRU equally among these three stakeholders.

Let’s look at Compound’s USDC market: https://compound.finance/markets/USDC.

$2.4B being lent at a net rate of 3.25%. 1.2% in the form of USDC interest, and 2.05% in the form of COMP distribution. USDC lenders on Compound earn more in COMP than in USDC.

So all in all, I agree with this proposal. Keep the APYs the same, but change the revenue composition. More TRU and less stablecoins for lenders. More stablecoins and less TRU for stakers. Maybe even incentivize borrowing by distributing TRU to borrowers.

1 Like