[For Discussion] Incentives for New Upcoming Products (Perp, AF2.0)

Community Discussion & Proposal
1

Background:

In response to the feedback we received from the community in the original forum post, Adjustment to ALPACA tokenomics to support the upcoming (Perp, AF2.0) and future product launches, the team went back to refine the proposal so as to NOT make any changes to the ALPACA tokenomics. Options 1-3 from that post will no longer be considered.

The below discussion thread will instead focus on potential alternative sources of funds we can use to incentivize the launch of Perp and AF2.0, and the mechanics of distribution. First, we’ll summarize the goal of such incentives:

Goal:

By providing incentives, we can increase the chance of returning, existing, and new users to use the new Alpaca products. Many of these users are already using other platforms for these use cases, such as perps and overcollateralized lending. As such, these users have switching costs of leaving their current platforms, which become a hurdle when they consider embracing a new service provider (such costs can include bridging, knowledge accumulation, gas, token swaps, security analysis, increased uncertainty of using a new platform, etc.). Their perceived benefits of our new products need to be higher than the switching costs for new users to use our products, and early incentives can significantly help push perceived benefits higher, thus crossing the obstacle of switching costs.

With successfully implemented incentives, the ultimate goal is to have additional revenue outpace the cost of the incentives, and for that revenue to continue growing over time. In the mid to long-term, superior product design will maintain high retention, and the new users will re-establish new switching costs for Alpaca, where switching costs will change from a negative to a positive for us; in other words, instead of costs to switch to Alpaca, these users will have costs to switch from Alpaca, which will become our strategic advantage, and a hurdle for our competitors.

Proposal

We break down the discussion into 3 sections, which should form a basis for discussion and future votings:

  • How many ALPACA are required?
  • Where would the ALPACA come from?
  • What is the mechanic to distribute these ALPACA rewards?

How many ALPACA are required?

Perp

We would like to incentivize Perp to two main user groups: liquidity providers and traders.

Liquidity Providers:

ALPACA will be used to supplement yields from other fee sources earned by the liquidity providers (borrowing fees, position opening, closing fees, swap fees, etc.), because those fees will take some time to ramp up to a steady level as traders are onboarded to the platform.

  • Target liquidity pool’s TVL: $10 - $15Mn
  • Target APR% (from ALPACA yields only): 10.5-12% - based on the current yields of comparable pools in the market
  • Incentivization period: 2 months

Based on the parameters above, we will require roughly ~$175 - 300k in rewards for liquidity providers. You can see the analysis here.

Traders:

ALPACA will be used as incentives for traders through:

Rewards for trading competition ($50k)

  • We plan to run two trading competitions with $25,000 prize pool per competition

0-fee trading ($0)

  • Users will be able to open and close positions for free or a relatively nominal fee. We may implement this through rebates. There will still be borrowing interest while positions are kept open.
  • This is technically $0 cost required up-front. The cost is to missed revenue during this period, but this should be an effective promotional campaign to get traders to at least try the new product.

Total rewards required for Perp launch is: $225k - $350k

AF 2.0

For the AF2.0 Money Market’s launch, we would like to incentivize lenders and borrowers to bootstrap the activities.

  • Target TVL: $100Mn
  • Target APR%: ~1% higher than the benchmark platform
  • Duration: 2 months
    Total rewards required for AF2.0 MM launch is: $250k - $275k. You can see the analysis here.

In total, we believe the total incentives in the range of $475k - $625k is required to maximize the chance of success for the upcoming product launches.

Note:

  • These figures are preliminary; once we have a total budget number from the Governance, a detailed rewards schedule can be created (e.g., higher incentive in the first month, etc).
  • The incentivization period has to be long enough to make it worth it for new users to switch over, for which we’ve estimated 2 months to be the most appropriate. After the 2 month period, incentives are expected to no longer be required, and any potential additional incentives would have to be discussed in governance based on the status of the products at that time.

Where would the ALPACA come from?

We list below the sources where the ALPACA can come from:
(calculated based on price as of 16 January 2023)

Previously collected fees that are waiting to be burned $134k

  • Liquidation fee: ~$72k USD (link)
  • xALPACA early withdrawal fee: ~$62k USD (link)

Unclaimed ITAM rewards: $417k (link)

Based on the two sources above (pending how much ITAM rewards will be claimed by the deadline) we will be roughly at the low-mid range of the estimated required ALPACA. We recommend that these two sources should be utilized first. Any additional requirements can come from other sources listed below.

Potential additional sources of ALPACA

Buyback and Burn

  • This recurring revenue sources currently generates ~$20k - $25k per week.
  • We can execute the buybacks as usual. However, the burn will be paused / reduced to save up ALPACA to be used as incentives for the new products.
  • The burn can resume after we have saved up enough ALPACA to an agreed amount.
  • Once the new products are successful, their increased usage would lead to additional burn from the new revenue sources

ALPACA emissions

  • A portion or all of the remaining ALPACA emissions could be redirected to save up for future product incentives.
  • If we save up the entire emissions for February, we would have roughly 240k ALPACA ($64k)

Governance Vault

  • Weekly distribution to the Governance Vault is roughly ~$15k per week.
  • Given that currently 50% of the Governance Vaut yield is already being redirected to cover bad debt, we believe this source should not be used, so that we still provide reasonable APR% and incentive for stakers to keep ALPACA locked.

Warchest:

  • There is ~5.6 million ALPACA ($1.36Mn) remaining that can be minted from the Warchest, which exists to be used as expenses for the next ~2 year period.
  • Unlike other options above, by minting from the Warchest, the circulating supply of ALPACA will increase because Warchest allocation is not minted in advance.
  • Since there is a fixed, limited amount of Warchest that can be used, which is required for operational expenses, and the fact that it will increase circulating supply, it’s the team’s opinion that this should be the last option to consider.

We can fund the upper range of the incentives by pausing the burn for ~ 3-4 weeks. You can view the analysis in this spreadsheet.

What is the mechanic to distribute these ALPACA rewards?

We list some possible options with their pros and cons.

Option1: Distribute rewards as ALPACA

Rewards will be distributed as ALPACA, the same way as it is now

Estimated development time: 1 - 2 weeks

Pros:

  • Simple to implement
  • No audit required

Cons:

  • Rewards more likely to be sold in short-term

Option2: Distribute rewards as ALPACA with a vesting schedule

Instead of giving out ALPACA tokens immediately, users will need to wait for a period of time (e.g., 6 months) before receiving the tokens.

Estimated development time: 2 - 3 weeks

Pros:

  • Relatively simple to implement; we only need to create a new vesting contract
  • Lower immediate selling pressure from the added vesting period
  • Given the simplicity of the contract, an Internal audit will provide sufficient security

Cons:

  • Rewards still likely to be sold after vesting period ends

Option3: Distribute rewards as xALPACA locked for 1 year

This distribution method is what was proposed in the original forum post for ALPACAv2, where instead of giving out ALPACA as token rewards, we will give xALPACA locked for 1 year.

Estimated development time: 4 - 6 weeks

Pros:

  • No immediate selling pressure - new emissions will be unable to dilute ALPACA tokens until they unlock after a year, or until the holder decides to take a significant haircut on their tokens through an early withdrawal (up to -39%)
  • New users are incentivized to hold ALPACA as they receive Governance Vault’s yields
  • New users more likely to extend lockup time
  • New users incentivized to participate in governance, strengthening their belonging to the Herd

Cons:

  • Requires significant development effort. In our opinion,while the effort would makesense if we were updating the entire tokenomics with a 10-year emissions schedule, in this context where the incentives might only be used for several months, the development effort is too high
  • Higher development effort here means less time to improve products
  • Also requires an external audit ($10k - $15k)

Option4: Distribute rewards as esALPACA

For this option, instead of distributing rewards as ALPACA, we give out esALPACA. This has similar functionality to xALPACA but adds an additional vesting layer with the key properties below:

  • esALPACA cannot be transferred or sold
  • esALPACA can be staked for yields in its own staking vault
    • Governance Vault stakers will vote on the percentage of the platform revenue to allocate for esALPACA staking vault
    • At the end of the 3-months period, based on the figure presented above, there will roughly be 2Mn - 4Mn esALPACA (vs. 37Mn xALPACA currently) This means, for example, that if we allocate 5% of the Governance Vault’s revenue to esALPACA staking vault, they would receive a comparable APR% to Governance’s vault stakers
  • esALPACA will have voting power
    • It can be 1esALPACA = 1 vote = 1 xALPACA, or voting power for esALPACA can be lower
  • esALPACA can be turned into ALPACA by going through a vesting period (e.g., 6-12 months.). While vesting, user will not earn any rewards

Estimated development time: 4 - 6 weeks

Pros:

  • Strong incentives to hold esALPACA as stakers will earn yields (as long as a reasonable percentage of revenue is allocated to the staking vault) and have voting power. This aspect is similar to xALPACA
  • Strong incentive to not vest esALPACA as users won’t earn yields during the entire vesting period
  • No immediate selling pressure or dilution of ALPACA
  • Unlike other mechanics where ALPACA tokens must be available for claim right away, this mechanic allows for a “fund-as-you-go” setup because ALPACA is only available to claim 1 year after vesting

Cons:

  • Requires significant development effort. In our opinion, while the effort would make sense if we were updating the entire tokenomics with a 10-year emissions schedule, in this context where the incentives might only be used for several months, the development effort is too high
  • Also requires an external audit ($10k - $15k)
  • Two separate staking vaults and two voting tokens will make our protocol more complicated for users, especially less experienced ones

Voting

While we generally only discuss voting once a proposal gets to an AIP stage, given the complexity of this proposal, we think it is beneficial to bring this up now and share our current thinking for the voting process IF this proposal were to become an AIP. We’re providing this information so the community gets a better picture of how voting will go, and so they can make suggestions regarding the voting process.

First vote

The first vote will be a simple YES or NO vote on whether to incentivize the Perp and AF2.0 for their launches

  • A YES vote would mean we will provide incentives for the upcoming product launches
  • A NO vote would mean we do not provide any incentives to the upcoming product launches and the below votes would not take place

Second vote

If the first vote passes as YES, the second vote will be on the distribution mechanics. The vote will be a single choice where you can choose one distribution method you most prefer. The choices will be the 4 options presented above, a modified version of them, and/or other choices proposed from the community during the discussion phase.

Third vote

If the first vote passes, the third vote will be on how much in incentives to allocate to the Perp’s launch. This vote can be done in parallel with the second vote. The vote will be a single choice where you can choose the $ amount to allocate for Perp’s incentives. For example, given the data above the voting choices could be:

  • $225k
  • $275k
  • $325k
  • $350k

Fourth vote

If the first vote passes, the fourth vote will be on how much in incentives to allocate to AF2.0. This can be done in parallel with the second and third vote. The vote will be a single choice where you can choose the $ amount to allocate for AF2.0’s incentives. For example, given the data above the voting choices could be:

  • $250k
  • $275k

Fifth vote

After the community has decided how much in incentives to provide in the third and fourth vote, the fifth vote will be on funding sources. Please note that the choices here will be dependent on the outcome of the third and fourth vote.

13 Likes
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Option1: Distribute rewards as ALPACA

2 Likes
3

Hi, great to hear the team has decided against changing the existing tokenomcs!

Firstly, I believe it is very important the launch goes well so I am all for providing incentives (Yes to vote 1). However, before we even consider the switching hurdle, people will need to know we exist! Is there a budget for marketing as well? After all, in my opinion we want to attract new and returning users most since as an existing user, I will move my money market deposits onto here and use Alpaca Perps just to support my Alpaca investment, even if the rates/fees are not as good.

Regarding distribution, I believe a simple option 1 to vote 2 will be best. For these new products to work well, we don’t need new holders. However, if these products work well we will naturally get new holders. Therefore, I believe it is imperative to keep it as simple as possible to incentive initial deposits to make sure the launch itself is a success. If someone wants to sell their Alpaca, they can sell it now, in a month or a year, but generating revenue for the buyback and burns create a permanent home for the existing Alpacas, which is great after you get over the fact we’re burning Alpacas :frowning:

Regarding the Perps launch, based on what I understand it is a very unique product and should honestly sell itself. For example, I will use it if the fees and price impact are both lower than PancakeSwap’s Perps. I believe marketing and getting the word out is more important than incentivizing LPs, since more volume will increase LP APRs anyway (assuming we charge a discounted initial fee rather than no fee and a portion of that is given to LPs). I believe $225k is adequate, but a portion of that should be used for marketing as well, on top of the LP incentives and trading competitions.

Regarding AF 2.0 rewards, I believe the current calculations may fundamentally be flawed. For starters, do we plan to launch with all the assets listed here? If so, I believe we may be spreading ourselves a little bit too thin initially. Is it possible to launch with the assets we already have listed, then integrate more as time passes? Furthermore, the APY calculations are based on their current utilization rates, but from what I understand AF1.0 will be replaced by AF2.0, so wouldn’t we have a sizable initial liquidity already for AF2.0? Or will AF1.0 exist in tandem with AF2.0? If so, why are we not integrating LYF into the money market? Either way, I am still leaning towards the higher rewards of $275k for vote 4, but with a heavier distribution of rewards towards core assets like BUSD and BNB, and perhaps over 3 months instead. It may also be worthwhile having a non-linear distribution with slightly decreasing rewards per week/month.

Finally, I believe the source of these rewards should be in this order (and leftovers burned):

  1. ITAM rewards ($417k): although I have been monitoring the smart contract holding these rewards every now and then, eagerly waiting for the burn, I believe it may be better used for this.
  2. February Alpaca emissions ($64k): they’re meant to end in Feb anyway, surely ending 1 month earlier won’t hurt. On a side note, I am interested to know how the team plan to reward AUSD liquidity providers after emissions finish. Despite being someone who thought AUSD would take me to the moon and still holding a very large portion of the pool, I think AUSD is honestly pretty dead at this point. Perhaps it’s time to just end the rewards and increase the interest rate until all positions are closed honestly. I still have faith in the AUSD Commercialization Plan, but perhaps not today.
  3. Buyback and Burn funds ($134k): right now I understand we are burning ~100k Alpaca per week which is about 35k more Alpaca than emissions, great! Once emissions end (as in 1st of Feb onwards) perhaps we could reduce that to 60k Alpaca, which brings us up to a 2% deflation rate, higher than it is now. This should also be sustainable without using any (or very small amounts) of the current Liquidation Treasury and early withdrawal fees since we were able to burn 65k Alpaca organically last week.

These three sources should cover both AF2.0 and Perps incentives.

Disclaimer: I have not kept up well with the AF2.0 and Perps launch details as I have been on vacation for a couple months, so I may have some wrong assumptions. Please feel free to correct them and I will edit my response.

5 Likes
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Is there a budget for marketing as well?

If people want to make a case for providing additional marketing funds at the start of the promotional campaign, you can discuss it here.

AF1.0 will be replaced by AF2.0, so wouldn’t we have a sizable initial liquidity already for AF2.0? Or will AF1.0 exist in tandem with AF2.0?

Users will have to migrate liquidity from AF1.0 to AF2.0 so they will both exist until AF1.0 no longer has enough liquidity.

why are we not integrating LYF into the money market?

LYF on AF2.0 will not be part of the first deployment. Initial deployment of the money market will only have overcollateralized lending.

how the team plan to reward AUSD liquidity providers after emissions finish

Since everyone didn’t want to extend emissions, there will be no emissions source to reward AUSD when emissions end.

5

What could be a good marketing budget/plan for perps/LYF2?

6

50k-80k for each product. I won’t mention specific marketing channels. Anyone in crypto knows what the available ones are.

2 Likes
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thank alpaca team’s new proposal. new proposal makes much sense. I feel my confidence in Alpaca is back.
I totally agree with cryptoeater’s comments.

  1. let’s keep incentive simple, I vote for option 1 and Option2. the core mission here is to make launch successful. selling pressure of alpaca is short term thing. if the launch is a success, new stream of revenue is coming in. the price of alpaca will rocket.
  2. Alapca is wonderful product. we still need to get words out. marketing campaign is necessary and definitely worth the spending.
  3. I didn’t see new revenue distribution mechanism, like what portion of new revenue will be used to burn up alpaca etc. if this is specified clearly. I believe there will be no selling pressure at all.
3 Likes
9

I totally agree with you. Yes, please share with us the new revenue distribution mechanism.

Thanks.

10

option 2 is ok，but all of them is acceptable～ good job team！keep building！

1 Like
11

I prefer to simple and low-cost solution

2 Likes
12

Definitelly huge support for this new and updated proposal.

I do not mind lowering burn in order to secure funds for succesfull launch of new products! Alpaca FTW

2 Likes
13

I would go for Option 1 which sounds like a “Keep It Simple Stupid” option.

The Alpaca rewards would be distributed across a window of 2 months so it is pretty much like a reverse Graze project (in this case rewards given to the other party). The selling pressure is usually low even with many Graze partner tokens with low liquidity.

3 Likes
14

Nice to see this refreshed proposal!

In my opinion, it makes more sense to keep it simple and distribute rewards as $ALPACA for the following reasons:

Takes 0 time and effort;
Might attract more people since we are not limiting them;
Some of them will jump in $ALPACA staking on their own;
Selling pressure is already low and rewards might not change that significantly.

I also like the idea of taking ITAM rewards to cover a good portion of the new platform rewards. All of this is staging AF2.0 and Perp for a great launch!

3 Likes
15

If you want to make the launch a success and use financial incentives for that, the correct option would be option 1 - Distribute rewards like Alpaca. Option 2 is also interesting, but the period has to be reduced to a maximum of 4 weeks.

New users need to feel the power of the new tools and the incentive from the first moment, otherwise, there is no need for financial incentive.

1 Like
16

I love that you guys ask for our feedback and actually listen. I have say the previous proposal felt like a punch in the guts, this one feels like a breath of fresh air.

I agree that we should avoid impacting the return for the governance vault further at least until the bad debt is paid back.

We should also avoid minting funds from the Warchest at such a low price.

There seems to be enough incentives already between the liquidation fees, xALPACA early withdrawal fees, unclaimed ITAM rewards and future ALPACA emissions (which should definitely go towards promoting the new platforms).

For the distribution option, my vote is that we keep it as simple as possible and go with option #1.

Option #2 is very similar to option #1 but requires development time so we should go with option #1.

Option #3 and #4 both take a long time to develop, require money to be spent in addition to the incentives discussed previously and might deter people from actually trying the platform. I know I would not switch platforms for LOCKED rewards. Locking tokens is something you do when you understand a protocol and want to support it, not when you’re just trying out the protocol.

Going forward, I would love to see protocol revenues used in such a way for more product (AUSD perhaps?).

I am very impressed with this proposal and I thank you for taking the time to put it together.

4 Likes
17

I personally like 3rd option, because:

  • it provides a barrier for selling pressure by initial government lock when user gain AF2/perp rewards
  • it show new users a part of our project without excluding them from the community, so they might stay
  • it has additional incentives in form of governance %
  • new users can simply wait for the lock to end (while still collecting government rewards)
  • If users don’t want to wait they can withdraw it with some fee (depends on the lock duration left) so there is no hard cap

But there are consequences going this way, that were already mentioned by other members of the forum in this thread:

  • more time to build
  • additional costs (code audit)

Both audit and additional code to write will move the release date further, they both take time to do.
Which is something a lot of people are against of.

But maybe we can release AF2/perps make rewards countable but unclaimable.
And when contract is ready we can transfer (or mint) rewards to modified xALPACA contract and make rewards claimable.

Let me explain.

  1. We announce rewards pool but we will keep it “vested” for a month (or needed time to make changes)
  2. We release perps, trading/LP rewards are counted while being unclaimable
  3. When code and audit is ready we make perps rewards available at governance
  4. Perps users get their rewards at governance and free to choose what to do with them

That way we can shorten release time to the 1st option time range and get the benefits of the 3rd option.

Possible risks:

  • merging code to a already working process
  • code might take more time to be audited
  • people might think this is too complicated
  • other unforeseen consequence that I’m not aware of

That’s only an idea, but I’ll be glad to read everyone opinion on that.

Alpaca to the moon!

18

Hi everyone. This discussion is now moved into an AIP [AIP-15] Incentives for New Upcoming Products (Perp, AF2.0) where we also provide more information on the voting timeline.

Please continue any discussion and feedback in the new thread. This thread will now be closed.