BIP 3: DIGG Sett Staking Rewards Improvement

Category: Sett Vault.
Scope: Initial liquidity mining program for DIGG, meant to be improved upon as we go.
Status: Rejected


Objectives:

  • Keep DIGG price close to Bitcoin price.
  • Increase DIGG/WBTC liquidity in a sustainable way.


Overview.

This proposal’s fundamental idea is to use the initial liquidity mining program to the benefit of DIGG’s value as a product.

The more reliable DIGG’s peg to Bitcoin is, the more valuable it is to DIGG holders and DIGG traders.

I propose to adjust the structure of DIGG/WBTC Sett to incentivize the price keeping the peg.



Details.

  • When DIGG price is at the peg, DIGG/WBTC liquidity providers (LPs) get the maximum rewards from the liquidity mining program.
    These rewards get compounded with the same strategy as Badger/WBTC LP Sett uses.
    50% of DIGG rewards are claimable, and other 50% are reinjected into the LP pair.
    LPs end up with 75% DIGG + 25% WBTC rewards.

  • When DIGG price is above the peg, LPs receive 50% of the rewards. These rewards get sold into the market for WBTC. This creates automated selling pressure for the token when it’s needed.
    LPs get 50% of rewards in WBTC.

  • When DIGG price is below the peg, LPs receive 75% of the rewards. These rewards are not sold into the market, so LPs get more DIGG. LPs’ share of the DIGG supply grows during this stage the most, but it is still considerably more profitable for them to keep the peg price.


Implementation.

It makes sense to tie the switches in the rewards to rebase time. For example, if no rebase happens at the set time, the DIGG=BTC program is activated and LPs get 100% of compounded rewards.

As for technical implementation, it is not my area of expertise, so I would wait for the team to comment on the difficulty of this change.

Do you approve the proposed changes to the DIGG/WBTC Sett?
  • Yes
  • No
  • Neutral
  • Not Sure
  • Yes, but with different specifics

0 voters

6 Likes

I’m not familiar with how other projects make things work. But this seems workable.

1 and 3 are great, but rewards in wbtc when above peg is like punishing the LPs, what if the digg always stays above peg price, the LPs wouldn’t be benefitted by digg at all.

1 Like

Due to rebasing mechanics, when the price is above the peg, DIGG holders get rewarded by DIGG due to DIGG printing.

Love this idea and this is all a bit of an experiment tbh. The level of incentives seems well thought out and intuitively feels right which certainly can be adjusted as lessons are learned along the way. If you see the chart of AMPL you can see the seasickness in addition to the IL the LPs are subject too so they should be given a lion share of the rewards as a result. Well done Po and I am supportive of this idea and hope to be able to implement it.

2 Likes

If you see the chart of AMPL you can see the seasickness in addition to the IL the LPs are subject too so they should be given a lion share of the rewards as a result.

I agree with your view on the distribution ratios. It makes sense to compensate for the losses DIGG LPs will have to endure.

In my opinion, it also makes sense to adjust DIGG rewards for other Setts based on how DIGG is maintaining its peg to Bitcoin.

Suddenly, we would get 185 million dollars of TVL interested in DIGG being at the peg.

I really care about this. it’s really good for the process to be smooth

One of the possible Setts in the DIGG launch parameters topic is the Rebalancer Sett:

  • Rebalancer Sett (sells on positive rebases, buys on negative, still being scoped)

The structure of BIP 3 allows for ‘soft’ rebalancing that is done by LPs.

If you do nothing as an LP, over time you accumulate DIGG, WBTC, and LP tokens.

If you’ve been through a long negative rebase phase, you have the ‘bullets’ to affect the price once it goes to the positive rebase realm. And otherwise.

It is not an automated rebalancing, it is rebalancing that is done by choice because it serves LPs’ best interests:

  • they get more rewards
  • their underlying asset becomes more valuable
2 Likes

I find 1 and 3 to be reasonable

1 Like

Thanks for the idea.

It does require some deep thought though. What is disincentive for breaking peg and how easy would it be to do?

Put yourself in the mind of someone who has borrowed DIGG and wants to short it into the ground and make a fortune, not sure if this would hold true:

  1. Borrow DIGG
  2. Sell it at volume to push DIGG price into floor.
  3. LPs get more DIGG. Which they need sell to stay solvent.
  4. DIGG keeps dropping.
  5. Eventually buy back cheap DIGG, repay loan, and profit.
6 Likes

Yes but if they sell wbtc part of lp for digg, they’d get twice the amount of digg through rebase. 50% wbtc rewards may or may not be able to compensate that.
Though I don’t know about feasibility of this - rewards should be given only when price below peg or equal to peg, whenever price is above peg, the rewards are sold for wbtc and locked and whenever price is below pegg, digg is bought back using this wbtc and distributed.

Isn’t that what the selling pressure idealistically would do? But I get what you’re saying though…

Is it possible that applying 50% rewards to create sellling pressure does not create enough downwards pressure on price? Also how do the reward switches/rebasing work synergistically to align Digg <-> wBTC price?

I believe it’s important to note that BIP 3 addresses the additional staking rewards granted through the initial liquidity mining program.

I do not suggest automatically selling the supply extensions that are granted through rebases.

The thing I suggest is selling DIGG staking rewards that are distributed through the liquidity mining program when we’re in the positive rebase phase.

Another essential thing is that LPs do not get punished during the positive rebase phases when their additional rewards get sold into the market for WBTC.
They receive the same amount of value they would get if they received them in DIGG.

The only different thing is the form in which this value is received.

They can buy DIGG with it or provide liquidity to the pair - and it would be good if Badger UI had one-click options to do so.

The important thing at hand here is what happens automatically.
Manually, by choice, all the options are available for anyone at any time.

1 Like

These are good questions to think about moving forward, @shakeshack

Is it possible that applying 50% rewards to create sellling pressure does not create enough downwards pressure on price?

In my opinion, it is quite possible.
I’m only addressing the initial liquidity mining program rewards, so the incentives are mild overall.
I think there are things that we could do with the DIGG product to help it reach the peg more quickly that we could do with the Sett, but they’re out of the scope of this proposal.
And there needs to be much more analysis and development put into it.

BIP 3 is not intended to keep the price at peg always, it creates some additional incentives for it.

That’s why I think the effect would be multiplied if we distribute DIGG staking rewards for other Setts in the same fashion.

For example, if as renBTC Sett staker you would get:

  • 100% of DIGG rewards when DIGG is at peg
  • 50% of DIGG rewards when it’s not

I believe this could help to stabilize the price a lot.

2 Likes

I’m wondering if the rewards should mirror badger. As in, 50% are reinjected and 50% are claimable. Having everything shot back into LP could have people removing/adding liquidity in a very unstable manner in order to lock some profit.

Also, are you picturing this on Uniswap or Sushi? I’ve been a fan of trying a Digg Sett on Balancer, perhaps with a basket of other BTC products.

1 Like

I’m wondering if the rewards should mirror badger. As in, 50% are reinjected and 50% are claimable. Having everything shot back into LP could have people removing/adding liquidity in a very unstable manner in order to lock some profit.

Very good point. I think the structure that mirrors Badger is definitely viable and is better for the long term.

There might be an opportunity to maximize liquidity during the initial liquidity program due to the demand we get from external factors, i.e. how other Setts are rewarded. And then switch it to the Badger model based on performance and as the rewards decline.

I wouldn’t mind at all to start with the Badger model, though. I’m not sure.
Maybe a vote can help?

Dou you think it’s better to start with the Badger 50% claim 50% reinject model for DIGG when the price is at peg?
  • Yes
  • No
  • Neutral
  • Not sure

0 voters

Also, are you picturing this on Uniswap or Sushi? I’ve been a fan of trying a Digg Sett on Balancer, perhaps with a basket of other BTC products.

It’s not an easy choice, as there are not only quantitative but also strategic considerations. I think maybe setting up a survey to get the community’s sentiment on that would help. And we’d probably need a snapshot vote as well.

2 Likes

From what I can tell in the Digg Launch Parameters post, the community is leaning towards Sushi at the moment. Perhaps in the future we can look at Balancer as it will be more complicated for sure.

I think the suggestion @Justsomeguy has made is completely reasonable, and the vote seems to second that. So I’ve changed the BTC = DIGG reward structure in the first post.

Now we end up with:

  • DIGG > BTC -> 50% WBTC rewards
  • DIGG = BTC -> 75% DIGG + 25% WBTC rewards
  • DIGG < BTC -> 75% DIGG rewards.

This way during the “accumulation phase” LPs get similar DIGG rewards if they do nothing. So when we enter the positive rebase phase, they’re better off.

We also end up with quite reasonable automated reward selling pressure:

  • 0% below BTC,
  • 25% at peg, and
  • 50% above the peg.
3 Likes

Let’s discuss the possibility of something of this nature or similar. Thank you

1 Like

I disagree that the closer the peg, the better. There needs to be deviation from the peg imo. Envision a rebase coin that keeps a perfect peg all the the time, what’s the use of that?

Having a deviation both over and under the peg is what it makes attractive for many, from smaller timeframe traders, hype driven volume, to strategic/ longer timeframe investors, imo.