RFP-4: Dynamic Liquidity Provisioning - Core: Principles

Abstract

• RFP-4 proposes the implementation of Dynamic Liquidity for Radiant v2, in which users who lock up a certain percentage of their LP tokens (relative to the size of their deposit) will receive RDNT emissions as lenders or borrowers.

• The proposed initial threshold for eligibility is 5% of the USD value of deposits. This would mean that for $100 in USD equivalent deposits, a user would need to have $5 equivalent of LP tokens to earn RDNT emissions.

• This threshold will be reviewed quarterly (at minimum), based on the market conditions and preferences of the RDNT DAO.

• Discussion around changes to v2 mechanics is available here.

Motivation

DeFi 1.0 is laden with copycat protocols with limited utility and governance tokens that are used in high-burn emissions programs.

Existing emissions models have failed to retain value over time. For example, the chart shown in the Discourse link shared above tracks DPI, the “DeFi pulse index” of DeFi 1.0 tokens against ETH over time. A vast majority of these protocols have been farmed into the ground.

This trend occurred for several reasons:

1. The tokens did not provide sufficient utility, and “governance-only” tokens were appropriately priced over time relative to the value of governance for that protocol

2. A low barrier exists to earning DeFi tokens for mercenary liquidity providers. LPs could deposit tokens, earn yield, sell off tokens, and then move on once yields compressed. This pattern was seen time and time again with many DeFi protocols.

Since the launch several months ago, Radiant Capital contributors have spent significant time strategizing with community members and advisors about how to address these problems via Radiant V2.

Radiant V2 includes changes to core protocol mechanics, emissions, utility, and deeper cross-chain functionality.

Here is a summary of takeaways from conversations with community members and advisors:

1. Initial emissions were unsustainable and led to too much inflation. While this sparked an early surge in the total value of deposits (peaking at around $500M), mercenary liquidity was not “sticky” and did not further the protocol's capabilities. This emissions model prompted band-aid solutions such as RFP-2 to reduce emissions.

2. Insufficient runway. The original tokenomics detailed how lender/borrower emissions would expire after 24 months, which is insufficient to achieve the long-term cross-chain vision

3. A low incentive to provide liquidity to the protocol. Single-sided staking gave users utility in the form of protocol fees, even with reward tokens distributed at high rates for RDNT LPs

4. Exit penalties were not optimally designed. A user who exits on the final day of a vest shouldn’t be penalized in the same way as someone who exits within the first minute of a vest. This system forces users into a suboptimal binary decision (exit or fully vest). Consequently, this led to a high exit rate in the early days and further highlighted the need for inert liquidity.

5. Fixed unlock periods create unnecessary FUD. Grouping unlock events into universal weekly epochs creates weird game theory dynamics which aren’t particularly helpful or useful.

6. Mercenary capital is incentivized. This is not exclusive to Radiant, but there is a general trend in decentralized finance toward mercenary capital—investors who extract as much value from the protocol as possible, and move on when yields compress.

7. Proposed shift from single-sided locks to LP locks present additional IL risks. Good discussion around this concept lives in Discourse, but given concerns about IL, there is a push from users to provide additional utility to LP lockers.

Discussions with community members and advisors centered around a similar idea: How does a future version of Radiant create a better utility exchange between lenders/ borrowers and the protocol? What should users have to do to earn emissions?

Specifications

Introducing “Dynamic Liquidity” - Rewarding Long-Term Investors

Per discussions with community members, a new mechanism is proposed: Dynamic Liquidity Provisioning. This proposal would mean that only a subset of users would be “eligible” for emissions at any given time based on the value they provide to the protocol.

This is part one in a series of posts originally shared by community members in Discourse outlining various strategies to solve some of Radiant’s initial constraints while ushering in a new ecosystem which our community has colloquially labeled as “DeFi 3.0”.

An ecosystem focused on:

• Sustainable "real yields”
• Legitimate value accrual leading to positive PNLs for the DAO (Profit & Loss statements)
• Higher barrier to entry to earn emissions
• Use cases with real utility for the future and longevity of DeFi (seamless cross-chain borrowing within minutes)

So: how does Dynamic Liquidity Provisioning solve some of DeFi 1.0’s pain points?

TL;DR:

1. Users that provide value to protocol unlock the ability to earn incentivized (RDNT) emissions.

2. Users that simply deposit but don't add value to the protocol will continue to earn natural market rates, but won’t earn RDNT emissions.

Users will need to provide a minimum of 5% of locked LP tokens relative to the size of their deposits (in USD terms) to the protocol in order to unlock RDNT emissions on deposits & borrows.

User 1: Puts 1M USDC on Radiant and has $0 of LP tokens locked. The user would earn a base deposit APY but would NOT earn incentivized emissions.

User 2: Puts 1M USDC on Radiant and has $50,000 of RDNT/BNB dLP locked. This user would be eligible for RDNT emissions (assuming the minimum 5% threshold is met).

The first discussion around shifting from a single-sided lock to an LP lock will have the impact of improving on-chain liquidity across-chains. The hope is that this will be an additional incentive, given some of the fair points mentioned by community members regarding IL risk

This dichotomy fosters a healthy flywheel of value capture & new game mechanics. Farmers will be attracted to the higher yields, since only a few participants will initially qualify for the dLP-boosted emissions threshold. This could, in turn, drive demand for dLP.

As demand for dLP increases, the market cap rises. Thus, emissions for eligible RDNT yield farmers will rise, driving additional demand to meet the dLP requirement.

A fun potential game mechanic can emerge where selling pressure is met by natural buyers who wish to remain eligible for RDNT emissions by defending their 5% eligibility threshold.

In this model, an ecosystem emerges where distributions (company expenses) only grow as “value to protocol” (liquidity, borrowing & buying) grows.

Here is how the proposed mechanism would function:

What is the net effect of this? When we looked at the existing lenders/borrowers on v1 of RDNT, most of the largest lenders and borrowers had 0 RDNT locked. Therefore, in v1, most TVL would be “ineligible” for reward emissions.

This change means eligible users would receive meaningfully higher emissions, assuming the same number of RDNT emitted per second. So there becomes an exciting feedback loop that can be constructive in helping to attract long-term liquidity and rewarding those most aligned with the long-term success of the protocol.

What happens if LP tokens reduce in value or deposits increase in value, thus taking a user from “eligible” to “ineligible”?
This is part of the equation that a user needs to consider– how close to the threshold they will be, relative to the total value of their deposits. If the LP value / total value deposited falls below the threshold, then emissions will cease to that user, and are redistributed to all eligible users. This reallocation would happen dynamically.

Won’t TVL decrease?
Mercenary TVL adds little value to the protocol in the form of larger markets, does not promote long-termism, and this type of capital is fleeting.

Users who wish to deposit collateral with zero exposure to RDNT, can earn market rates (paid in the deposited asset). However, if this same user wishes to borrow USDT to invest in an NFT project on AVAX, they can still do so while paying market borrow rates (just like a bank).

The protocol is better suited for long-term liquidity providers and those looking to add value to the protocol. Also, if TVL leaves, the APR for the remaining eligible lenders and borrowers will proportionally increase. This will have the net effect of attracting new lenders/borrowers again–but this time, users who are comfortable with adding liquidity to the protocol through LP on a DEX.

Steps to Implement

• Smart contract logic for Dynamic Liquidity has been developed and beta tested
• Code will need to be reviewed by PeckShield
• Upon successful audit, RFP-4 would be part of the v2 Radiant deployment

Overall Cost/Impact

• Likely some maintenance dev cost, no additional structured costs beyond existing time/resources spent in development

Timeline

• Implementation would go into effect upon launch of v2, and would deploy on all Radiant Protocol chains (current + future)

Voting

• In Favor: In Favor of implementing Dynamic Liquidity for v2 with 5% initial threshold
• Against: Against implementation of Dynamic Liquidity
• Abstain: Undecided, but contributing to quorum