ARC-40: Revise Incentive Framework Guidelines for Allocating ASTRO Emissions

Proposals ARC (Astroport Request for Comments)
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Summary

This post advocates for updating the Astroport Incentive Framework with the following rules for each Astral Assembly proposal aiming to update ASTRO emissions:

  • Remove the 25% cap on changing a pool’s emissions
  • Require that no pool receives more than a 5% of total ASTRO emission increase in their incentives per period

Note that the requirement to maintain a 0.1 ratio between fees and ASTRO emissions stays and should be enforced for each incentivized pool (with the exception of pools that contain ASTRO which can receive more emissions than the rest).

Capital Efficiency in Passive Concentrated Liquidity vs Constant Product

Recently, the Delphi Labs Twitter account posted details about a new passive concentrated liquidity pool type which, assuming it is accepted by Astroport governance, can significantly increase capital efficiency for liquidity providers compared to constant product pools.

According to a comparison done here, when the liquidity in a passive concentrated liquidity pool is centered around the current pool price and trade sizes are small relative to the total liquidity in the pool, a trader can swap two to three times the size for the same slippage compared to a XYK pool. This level of efficiency can be achieved with reasonable parameters in the concentrated liquidity pool (with amplification set at ~10).

Concretely, for a pool that has $10m in liquidity, a trade of $50k will cause a 2% impact in XYK and only 0.6% impact in a concentrated liquidity pool. Similarly, a trade of $100k will cause 4% impact in xyk and 2.6% impact in concentrated liquidity.

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Capital Efficiency and ASTRO Emissions

Given the 2-3x improvement in trade execution for concentrated liquidity compared to XYK, it follows that a concentrated liquidity pool with less liquidity can still be superior if not at least on par with constant product even if it has less liquidity. This shift can bring two main advantages to Astroport:

  • Long tail assets can be served better due to the fact that they won’t need as much liquidity as in XYK in order to offer good trade execution
  • The Astral Assembly can reduce LP incentives for concentrated liquidity pools vs their constant product counterparts while still keeping Astroport competitive compared to other AMMs

The second point here is important as it allows the Assembly to preserve ASTRO for other uses which are not related to emissions. Alternatively, part of the emissions can more easily move to another chain where Astroport is deployed.

In order to allocate emissions efficiently and allow governance to make decisions more rapidly as well as adapt to changing market conditions, we would like to propose a different approach to decrease or increase a pool’s emissions:

  • Remove the 25% cap on changing a pool’s ASTRO emissions in a single on-chain proposal
  • Require that no pool receives more than a 5% of total ASTRO emission increase in their incentives per period

By removing the 25% cap on changing a pool’s ASTRO emissions in a single proposal, the Assembly will have more flexibility to quickly allocate emissions efficiently and reduce the number of cycles to align incentives with the most productive pools.

In addition, we propose that the Assembly maintains a 0.1 fee to emissions ratio when allocating ASTRO rewards to any pool with the exception of pools that contain ASTRO which can receive more emissions than the rest.

Next Steps

The community can debate this proposal on the forum for a week, after which the Assembly should post the proposal on-chain and signal whether they support it.

Copyright

Copyright and related rights waived via CC0.

3 Likes
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I fully support this change to the Incentive Framework.

I anticipate the price of ASTRO will soon increase drastically relative to the prices of tokens being incentivized. Given the current 25% cap on incentives changes in an eight week period, if this happened it would take months and months to get incentives down to the target ratio. Without a cap on changing ASTRO incentives, ASTRO incentives can be fully adjusted to the target ratio every eight weeks. This will make Astroport much more efficient.

What’s more, by removing the 25% cap, we can immediately stop wasting ASTRO on pools where the fee / incentives ratio is far below the target. With the cap in place, it would have taken more than six months to get these pools to the target ratio. But now, we can stop this wasteful spending immediately, and better utilize the saved ASTRO.

Also, thanks for providing insight into the new CPL pool type. Looking forward to it!

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Slow changes might be good because if Astro goes up 100% (like it did between November and February) and then you adjust the rewards to the downside in one go, if the price corrects after that you will still be off on the ratio.

IMHO, the cap should stay. Astro has a small market cap at the moment and the cap is useful to not move too much too fast in a very volatile environment.

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You are echoing my comment that the price of ASTRO is volatile, but you claim this to be a reason to keep the cap in place. Not sure I understand your reasoning. On the contrary, the volatility of ASTRO argues that there should be no incentive adjustment cap.

Consider this scenario. Token “B” is in an Astroport pool, and the pool receives ASTRO incentives at the target ratio, namely 0.1. Then the price of ASTRO increases by 100% against token B, and stabilizes at that price. Therefore, the pool is now at an incentive ratio of 0.2. All else being equal, with a 25% incentives adjustment cap it would take over eight months to get back to the target ratio. In other words, we’d be wasting ASTRO incentives on that pool for more than eight months. This is a simplified example, but still it proves my point. Clearly a 25% adjustment cap doesn’t work.

We need the freedom to fully calibrate pool incentives every eight weeks. ASTRO emissions are valuable, and they need to be spent wisely.

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As I have highlighted the potential price impact for ASTRO swaps in my post here, I suggest that ASTRO-axlUSDC should have a lower ratio of 0.05 rather than 0.1. This ensures that Astroport is able to swap its fees back to ASTRO will the least price impact, and accommodate larger ASTRO swaps.

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Agreed with an exception for the main ASTRO pool. Previously 30% of emission would go the the main ASTRO pool. Currently ASTRO-axlUSDC. Think it makes sense for that to remain in place. However due to having Astroport deployments on multiple chains this pool would get diluted with each new deployment. I’d suggest 2/3 going to the ASTRO pool with deepest liquidity (current the ASTRO - axlUSDC pool on Terra) and the remaining 1/3 distributed equally amongst the other deployments. fyi @stefan

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Don’t think we need to mention how much goes to each ASTRO pool. The proposal mentions that pools containing ASTRO can receive more emissions compared to all the others that have to adhere to the 0.1 ratio.

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“In addition, we propose that the Assembly maintains a 0.1 fee to emissions ratio when allocating ASTRO rewards to any pool with the exception of pools that contain ASTRO which can receive more emissions than the rest.”

It doesn’t mentioned how this rate for pools containing ASTRO is set. Is your intention to just hardcode the alloc points to ASTRO pools and not auto adjust every 8 weeks?

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Not really hardcode. It can be adjusted but not necessarily every 8 weeks like the other pools which don’t hold ASTRO