Renewed Liquidity Incentivization Mandate

--Background-- On May 6, 2022, Stargate DAO voted to leverage its STG holdings to incentivize liquidity. This strategy involves paying out STG to veCRV holders, CVX holders, and Redacted Cartel (https://snapshot.org/#/stgdao.eth/proposal/0x456c84b723da125d1a4e7b53630b280228c5f2139c40f5dbc56fd3ace5b332ef).

On May 23, 2022, Stargate DAO voted to stake its STG/USDC LP on Convex to earn rewards (https://snapshot.org/#/stgdao.eth/proposal/0x48b26abbc97d94910503e65f02dbbc13f60a07265e49c2986405778978a9559d). The rewards are locked to further amplify the rewards earned, producing a compounding effect.

Through this mechanism, Stargate accumulates rewards in the form of CRV and CVX. Ideally, for every $1 of STG paid, Stargate earns greater than $1 in rewards.

Since then, several other proposals have passed that have diversified Stargate’s LP position into Yearn, StakeDAO, Aura Finance, BeethovenX, and most recently Velodrome. Rewards earned from these protocols are being staked and compounded in a similar fashion to Curve/Convex. As a result, Stargate is now accumulating additional assets such as yCRV, SDT, AURA, VELO, etc.

Over one year has passed since the initial governance vote and the DAO should reevaluate the effectiveness of this strategy.

The ultimate goal of liquidity incentivization is to generate additional POL for the DAO. Ideally, for every $1 of liquidity incentivization Stargate should earn greater than $1 in rewards. At the time of incentivization this is often the case. However, rewards are paid out in the token of the protocol (CRV, AURA, VELO, etc.) and are then locked up to compound rewards, earn additional yield and/or provide incentives to LP. This exposes the Stargate treasury to token price risk while accumulating assets that do not actively work within the protocol to reduce the amount of liquidity required to be rented via incentivization to allow Stargate to function smoothly.

The POL benefits of this strategy is highly volatile and heavily varies on a day-to-day basis depending on the price of STG and the price of the reward tokens. At any given point in time, Stargate may be up or down millions of dollars depending on individual token prices and the value of those tokens relative to STG. Profitability also depends on how it is measured: using the current STG price, or the STG price at the time of incentivization. At various points through the incentivisation strategies, Stargate has had hundreds of thousands of dollars in unrealised profits, or losses (depending on when token prices were observed).

--Proposal-- The current liquidity incentivization strategy exposes Stargate to unnecessary token price risk. Stargate as a protocol also does not benefit from holding these assets in the long-run, and should focus on accumulating POL that contributes to reducing the need for rented liquidity.

Instead of accumulating and compounding all rewards earned from liquidity incentivization, Stargate should periodically swap these rewards. Stargate should at current point sell all of it’s accumulated and unlocked rewards for ETH, where the mandate allows for it. Not only does this reduce token price risk, but also accumulates useful POL for the protocol, further reducing STG emissions paid out to LPs. As Stargate seeks to launch on various new L2s in the near future, accumulating ETH POL should also be a priority to enable ETH swaps between L2s without needing to incentivise as much liquidity.

Henceforth, Stargate should swap any accumulated rewards on a monthly basis into ETH, as the mandates allow for it. Should ETH not be available natively on the chain in question, stablecoins should be the accumulation priority.

This proposal also recommends that Stargate continue to allow up to $10M worth of STG per annum to be used for incentivisation, on the condition that a return of 1.5X ($1.50 for every $1 spent) can be achieved with any such strategy.

-Exceptions below- Stargate has (at time of writing) $660k worth of locked $AURA tokens. Upon unlocking in November 2023, Stargate should aim to keep ~$500k worth of $AURA so as to maintain significant voting power to incentivise rewards to be directed to the STG-stables pool.

In a case where selling such a position would result in greater than -1.0% market impact, the position should be split into tranches over a suitable amount of days, such as to minimise the market impact.

Stargate currently holds various locked positions (e.g. SDT, VELO) where it should continue to hold these positions and by mandate may accumulate future long-term locked positions.

--Summary-- The profitability of Stargate DAO’s current liquidity incentivization program is highly volatile and subjects the DAO to large token price risk as it accumulates reward tokens (CRV, AURA, etc.). At this point, Stargate should swap the currently accumulated rewards into ETH so as to accumulate ETH help in POL, reducing the need for STG emissions, and reducing token price risk. Going forward, Stargate should do so on a monthly basis.