[BIP-11] - Realigning Inflation Incentives and Introducing Protocol Reserve

Authors: @Ashwin , @Freddie Farmer, @yyctrader and @Morty

As fans of the original Basis Protocol and long-time investors in the DeFi ecosystem (Ashwin an Investor @ Dragonfly Capital and Freddie prev DeFi @ Wintermute Trading) we’ve supported and participated actively in the protocol’s development since launch. Having seen the strength and resilience of the community we’d like to do our part in helping restore the protocol’s long term stability.

Problem

• All issues with the current Basis Cash system stem from the protocol's inability to dynamically adapt itself to a new equilibria. This has lead to a few problems:
• The protocol over-incentivizes liquidity pools during contractions, increasing the amount of capital required to restore the peg
• The protocol is unable to dynamically use its power over BAS emissions to execute rebalances, whether directly or indirectly via incentive. (ex. Redirect minted BAS to purchase BAC directly)

In response to these concerns, the Basis Cash team laid out a plan to help restore the peg and bring the system back to a preferred equilibrium.

• BAS will be migrated to BASv2. This will allow rewards to be dynamically adjusted.
• Incentivized BAC pools will be migrated to Curve

However, we believe these changes introduce a few structural problems:

• BAC has yet to prove itself stable, migrating liquidity to a curve metapool exposes LPs to excessive risk, even if BAS is dynamically redirected to other stablecoin LPs when BAC trades below the peg.
• It relies on a trusted oracle system and fiat collateralized stablecoins, reducing decentralization and resulting differentiation from other ‘decentralized stablecoins’ (This can be mitigated if Andre’s Curve PR is approved)
• The system is still not aware of its current state (eg. when BAC is below, at, or above the peg)

Solution

In response, we propose the following changes/additions:

• Continue using Uniswap as the primary AMM venue for stablecoin trading as stability must be proven via the market and not forced to a curve already representative of historically stable assets.
• Migrate the share token from v1 to v2 as intended, allowing the protocol to have fine-grained, dynamic control over share token distribution. The current 75/25 split of BAS emissions is proposed to be reallocated as below:

When BAC is below peg:

• 60% dynamically allocated between BAC/DAI and the BAC Vault
• 10% to BAS/DAI
• 15% to BAS Boardroom stakers
• 5% to a BAB staking pool
• 5% to Strategic Pairs
• 5% to to the CDF/Vision Fund to build a strategic BAS reserve that may be used for various future purposes (buyback and burn/incentives for new partnerships etc)

When BAC is above peg:

• 60% dynamically allocated between BAC/DAI and the BAC Vault
• 10% to BAS/DAI
• 5% to BAS boardroom stakers
• 10% to Strategic Pairs
• 15% to the CDF/Vision Fund to build a strategic BAS reserve that may be used for various future purposes (buyback and burn/incentives for new partnerships etc)

We additionally propose that 5% of all future BAC seigniorage be diverted to the protocol controlled reserve, allowing the protocol to sell BAC for DAI when BAC trades above the peg, and use DAI/BAS to buy back BAC when BAC trades below the peg. Note: This would only take effect once outstanding bonds are redeemed, thus not diluting current BAB holders.

When BAC trades below the peg, the 60% supply of BAS will be dynamically allocated between the BAC/DAI pool and BAC vault. For more details about the formula, please refer to the Medium post.

We also propose a change to the protocol treasury. The protocol reserve should implement a buyback module to allow the protocol to dynamically perform BAC reweights. This should work as follows.

When BAC is below the peg.

• The protocol should use its treasury controlled BASv2 + DAI to market buy BAC until the peg is restored

When BAC is above the peg.

• The protocol sells its seigniorage earned BAC for DAI.

Nam gloria in stabilissimam.