SIP-001: Dynamic emissions

Motivation

Since its inception, Sturdy has offered compelling yields for both lenders and borrowers. For example, USDC lenders have earned over 16% APR over the past 30 days (source). Likewise, borrowers can earn over 80% by leveraging Convex stETH LPs. So why aren’t more users taking advantage?

Having spoken to many prospective users, the most common hesitancy I’ve heard about using Sturdy is the lack of liquidity. Lenders are concerned that (a) making a large deposit would significantly impact rates and (b) that they might not be able to withdraw their deposit. Both of these are a consequence of relatively low liquidity.

Similarly, there typically is very little liquidity to borrow. This is particularly problematic given the high gas costs associated with borrowing, which necessitates that borrowers take on large positions to break even. These issues negatively impact existing users as well. Small withdrawals can cause borrow APYs to spike. While these tend to get arbed out after a few days, it still significantly eats into borrower yields.

As Sturdy considers incentivizing liquidity, how can we maximize the value of the incentives to match the current needs of the protocol?

The traditional liquidity mining solution is to emit a fixed percentage of the token supply over a set period of time. However, this comes with several drawbacks. Oftentimes protocols tend to set emissions too high, resulting in low utilization. This liquidity isn’t being put to work by borrowers, effectively wasting tokens on non-productive assets. Additionally, by giving emissions to collateral assets, users are able to fold or loop. This is a degenerate use case that does not serve the protocol’s users.

Proposal

Rather than emit a fixed percentage of tokens, this proposal seeks to implement dynamic emissions that adjust based on utilization rates. That way, the Sturdy protocol will be able to obtain liquidity without emitting more tokens than is necessary. Additionally, emissions would solely be for lending assets, not collateral, ensuring that users would not be able to fold.

This program would be in effect for a period of 60 days, at which point governance would evaluate its success and make adjustments as needed.

The specific parameters will be as follows (note the total supply of $STRDY is 100,000,000):

Initial emissions per second: ETH: 0.06430041152 (equal to 333,333 $STRDY over 60 days) USDC: 0.03215020576 (equal to 166,667 $STRDY over 60 days) DAI: 0.01607510288 (equal to 83,333 $STRDY over 60 days) USDT: 0.01607510288 (equal to 83,333 $STRDY over 60 days)

Every seven days, the emissions per second for each pool will be adjusted by the following function: Utilization rate under 50%: new rate = previous rate - .1 x initial emissions per second Utilization rate from 50% - 70%: no change Utilization rate over 70%: new rate = previous rate + .1 x initial emissions per second

Note that the utilization rate would be calculated based on an average of the preceding 7 days. Emissions rates for each pool would be hard capped at 1.5 x initial emissions per second.