HXIP 01: Staking and Liquidity Incentives

Hxro Improvement Proposals
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HXRO Proposal 01

Authors: Tom Shaughnessy (Delphi) and Sasha Fleyshman (Arca)

Abstract: HXRO has achieved what other crypto projects have historically failed to do; create real, digital asset products that attract users. The protocol offers users a dead simple, few click experience to interact with crypto options to express a view on price, hedge risk and trade digital assets. We believe HXRO can evolve from a project to a protocol, and potentially fuel growth through a few key enhancements including time locked staking, direct incentives for users in the form of dynamic liquidity incentives and several governance changes to decentralize the protocol.

Staking: Allowing HXRO holders to stake, for a portion of network fees is a use case that currently does not exist. These rewards would be funded by network transaction fees, not perpetual inflation, which makes the rewards more valuable as they are network use driven, not printed. We also propose increasing the percent of fees shared on the platform to HXRO holders from 33% to 100% to increase rewards and to decentralize. Of this 100%, we propose 73.33% flowing to stakers, with 16.67% to liquidity providers and 10% to a treasury. Initially staking rewards may be low as they are a function of fee revenue, although they will grow as HXRO’s platform grows.

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Those staking will have the option to lock their stake for up to 3 years for a max multiplier of 3x. Naturally those who lock will have a higher weighted stake and thus a higher portion of rewards. This multiplier doubles for governance, where holders can express their view on votes using their weighted stake that gives more power to long term holders. Rewards will vest in an opposite fashion, those who lock for the minimum amount of time will have their rewards vest in 1 year time (max), while those who lock for the max amount (3 years) will have their rewards vest immediately. Between these time periods is a sliding scale. Legacy LPPs will interact with the same UI for simplicity and any existing lockups will be reflected in the same lockup timer booster.

Fees will be distributed to stakers based on their weighted stake on each distribution period (weekly) as a basket of the tokens users used to pay fees on the HXRO platform (stablecoins, HXRO), etc. This allows users to stake HXRO, and earn stablecoins or whichever tokens are deemed valuable and used to pay fees on the platform, keeping HXRO’s fee form dynamic based on what users determine are valuable (HXRO, stablecoins etc), and eventually likely transition to fully HXRO over time as the token gains continued acceptance.

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Liquidity Incentives: We propose adding a 75M HXRO (7.5% of supply) liquidity incentives pool to incentivize new and existing users. To insure liquidity incentives are not wasted by granting them arbitrarily, rewards are dependent on the daily gross volume at HXRO in any given day. The number of HXRO granted per day will scale depending on total platform volume in USD and max out at 102,740k HXRO per day if gross volume is over $1B. A sliding scale will cover rewards between these amounts. Users will earn a pro-rata portion of these fees depending on their pro-rata volume on the platform. Rewards will be time-locked for 90 days, and vested linearly for simplicity. A sliding scale of rewards ensures the platform isn’t over rewarding is usage drops or is limited.

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Staking and Liquidity Incentives Interaction: These initiatives are long term in nature; liquidity incentives in the form of HXRO are locked for users for 90 days with linear vesting, staking rewards are locked depending on how long users stake for and fee revenue is used to market buy HXRO each day.

Protocol Changes: We propose the following enhancements to bolster HXRO.

  • The introduction of a Snapshot.page to vote on governance changes, with a forum to discuss changes. This post will be the first HXRO improvement proposal.
  • HXRO to expose its code/API to allow builders to access the projects liquidity and products and to create a virtuous liquidity cycle. HXRO should not compete for users, it should compete for integrations to drive liquidity which offers better product pricing with greater market depth and adds fork defense as protocol controlled value (funds within contracts) can not be forked.
  • The introduction of a farming leaderboard to allow users to compete and track their liquidity mining rewards.
  • In a future iteration, the ability to borrow against staked HXRO (LP shares) to use within the HXRO ecosystem which will drive additional protocol volume.

Conclusion: HXRO has the potential to leverage tried and true DeFi enhancements to bolster a platform that has real products and users, the time is now.

Link To Model

Disclosures: HXRO is a tokeneconomic client of Delphi Digital and was compensated for their analyst time to help consult the HXRO team. This is not a solicitation to buy or sell any token or security or to make any financial decisions. This proposal may fail, may not produce the desired effects and HXRO is subject to numerous platform and token risks.

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We appreciate the time and effort on the proposal put forth by the HXRO team and analysis done by Delphi Digital within the model. Although the structure of the Staking and Liquidity incentives makes sense, we believe that the token yield afforded by the current platform volumes (modeled by Delphi team) could have trouble attracting the amount of interest desired to make this proposal a success. Current quarterly BTC implied rates are well north of 30% and Eth rates even higher. As a potential solution, some centralized exchanges have seen success in offering an introductory staking yield that is higher to gain market share and attract new users. This sort of “teaser” rate can help spur early adoption for some time until other proposed platform enhancements hopefully allow for more organic volume growth, which eventually could lead to a more market driven attractive token yield.

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Hey CMS,

We totally agree on this being a potential short term point of friction but are hopeful that people see the rewards they are earning by using the platform or staking is based on a low FD market cap right now, and could be worth more later (not fin advice, just thinking out).

HXRO could set aside even more HXRO to boost yields but frankly they would have to go through a good amount. Instead we think the best approach is to set the stage to drive platform usage with HXRO rewards, which drives fee revenue up to ultimately increase rates.

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I’m all for staking. It aligns incentives well. I don’t know what numbers offer the right mix, but I think the analysis from Delphi Digital offers a good start that can be changed via governance if needed.

The liquidity incentive also appears to be well thought out, especially having rewards tike locked and rewarded over time. Good thought!

I think this is a great place to start, let’s not get bogged down by analysis paralysis. Snapshot offers a really flexible governance solution that is free to use, with gasless voting (free). Assuming stakers get xHXRO or similar to represent voting rights (may I suggest forking Curve’s/mStable’s voting weights?), this has been shown to work well elsewhere.

Truly I think the biggest friction point will be getting people to vote, so having the ability to delegate voting rights to others in the near future would be ideal.

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A staking model which introduces new supply to market (via staking rewards) as a function of network transaction fees, instead of perpetual inflation, is advantageous in aligning network participants and HXRO token holders. By moving the revenue share to 100%, the token is placed firmly at the center of the HXRO ecosystem, allowing it to directly benefit as the network/platform/ecosystem continues to grow.

A variable token lock in of itself is an interesting topic of discussion - by creating an inverse relationship between lock periods and vest periods, you allow users of the network to make a conscious decision on which side of the curve they wish to be on - if there are liquidity concerns, one operates in the traditional model (re: SNX), where tokens can be unstaked at any time, but rewards vest in a year. If there are no concerns as to the availability of the assets staked, one can actively receive the revenue stream in real time, allowing for better risk management.

Concerns over the token yield (relative to other yield instruments currently available to this space) are well heard - it is of my opinion that when a project has product market fit to the degree that the HXRO team has, there is a valid argument against setting a teaser rate in the beginning to attract temporary adoption. While this has proved successful in the past (for obvious reasons), there has to be an understanding that staking yields are in the native asset (HXRO), and long term models can’t be projected against the current price of the asset. Users will come to the platform because the product itself is sound, which will drive volumes higher and increase yields. The growth will be more organic in nature, allowing for a more stable discovery phase for the project (one can assume that user retention will be higher when short term yield-boosts are omitted from the token model). Long term, this looks to be the best path.

Arca supports the proposal put forth by Delphi Digital and looks forward to the evolution of HXRO’s token design to better align user and protocol incentives.

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This is a well thought out proposal and would go a long way to driving long term user growth and platform interaction. The release of platform fees to stakers could be handled a number of ways. You may like to investigate what the Quantfury team have done in their distribution of spread revenue to holders of the QTF token. It offers a simple portal for redemptions and is straightforward to use.

Whatever the model chosen I would recommend keeping all value / fees / incentives represented in $USD, as well as the base asset, for ease of understanding.

Looking forward to where HXRO goes next!

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can you please help me to know how to get benefit of this ?