Tokenomics Proposal - veSILO
With thanks to: Afirebrand, Nueenis
Related Discussion: [see here]
Submission Date: 4/4/22
NOTE: Please see addendum at the bottom for revised token model design.
The goal of SILO tokenomics is to strengthen Silo’s business model. As a permissionless, base-layer money protocol, Silo can eventually capture value by extending credit lines through its stablecoin (dubbed USDs for now). However, capturing value through credit lines is dependent on the protocol’s ability to create vibrant money markets for long-tail and esoteric token assets.
We hypothesize that the pillars of Silo’s business models are:
- Borrowing drives lending; lending drives TVL
- A stablecoin bridge asset drives borrowing & efficiency
- Silo’s stablecoin being unit of account captures value
The token model we propose in this post is the catalyst of Silo growing into the largest lending and credit protocol on the market.
- $SILO can be vote-escrowed as veSILO which becomes the governance token.
- Implementation of gauge system where $SILO is emitted to USDs borrowers only.
- $SILO incentives directed to USDs borrowers creates a flywheel effect ensuring sticky TVL.
- Higher borrowing of USDs opens doors to various value accrual choices.
veSILO is short for vote-escrowed $SILO. veSILO tokens endow holders with voting power over all aspects of the protocols. When $SILO is locked, veSILO is minted. Voting power is a function of the size of locked $SILO tokens.
veSILO token holders:
Allocate treasury’s funds, including holdings of $SILO tokens.
Allocate $SILO emissions based on weights vote.
Determine where $SILO emissions go within Silos (borrow/deposit side, borrowing USDs/ETH).
Vote on other voernance functions such as adding/removing bridge assets, changing risk parameters, and deciding on what assets can back the stablecoin.
$SILO emissions essentially subsidize borrowing cost to borrowers and boost lending rates to lenders - this is what will drive larger borrowing volumes and TVL. As seen with Curve and Convex, veToken can be highly lucrative for governance tokens. In future, protocols could bribe veSILO holders to direct more $SILO emissions to their silo to create a lending/borrowing market with deeper liquidity.
Distributing $SILO to borrowers ensures that our governance is driven by parties that actually use the platform. It also creates a flywheel effect where borrowers receive $SILO tokens. Those tokens can be locked and used to direct emissions to their Silos which ensures that TVL remains sticky.
Why not incentivize lenders?
Incentivizing USDs or other lenders ensures TVL but it does not inherently encourage users to use the platform which can create a situation where there is significant TVL on the platform but no borrowers.
Since borrowers are the users that potentially generate revenue to the DAO, they are the party we need to cater to. In addition, incentivizing borrowing means that utilization rates will be higher than our competitors which results in greater raw APY for lenders - this will be used to drive TVL.
We propose that veSILO program only lock tokens for 16-week. This is similar to the system implemented by Convex Finance that allows holders to exit and new users to enter in a more timely manner without any skews towards either parties (incumbents or new entrants).
Why not implement a time-lock multiplier?
One of the major shortcomings of veToken models is correlating voting power with lock duration. Correlation concentrates power perpetually, limiting the protocol from expanding its governance base as the protocol grows. In addition, offering longer locks creates an inflexible emission system that would not accommodate changes in the business model.
Looping is where an individual deposits collateral, borrows Token A, deposit/sell Token A for collateral and then repeats the process to increase their leverage. Since stablecoins are pegged to 1 USD, we can expect them to have very little volatility and high collateral factor which would allow users to loop borrowings of USDs in a highly capital efficient manner. This would allow stablecoin depositors to farm $SILO emissions with very low risk. To prevent this, we propose that stablecoin silos should not receive $SILO emissions.
veToken models use high emissions to drive TVL, which is not ideal for token holders since circulating supply is necessarily diluted. In contrast to Curve, however, Silo can generate more revenue streams that can accrue to the DAO’s treasury.
A brief outline of revenue streams:
- Borrowing premiums: difference between borrowing rate and lending rate which can be paid to treasury. Note that the greater the premium, the less competitive our APY which has implications for TVL.
- Liquidation fees: portion of liquidation penalty distributed to SiloDAO.
- Credit lines: see discussion for a more detailed explanation. A smooth-brained explanation will be prepared eventually.
The greater our TVL, the greater the value accrual to our treasury. This means that the treasury will have more funds to conduct buybacks of $SILO from the open market which will further offset any sell-pressure from USDs borrowers liquidating their $SILO emissions. Bought SILO can be redirected to the veSILO emission program, accommodating the growing number of SILO and increasing the overall subsidy.
In tandem with buybacks, the protocol can distribute revenue to veSILO holders. This creates more incentive for $SILO holders to lock their tokens while the DAO maintains its buy-back ability.
Conducting buybacks of $SILO from the open market has the same/similar net effect on token holder value accrual since it increases demand for the token. Distribution of revenue is also not ideal for a protocol that aims to support all tokens as indeterminate amounts would be paid in ‘dust’. The treasury can aggregate fees and conduct buybacks in a more gas-efficient manner.
- Implement a vote-escrow model where $SILO can be locked for 16 weeks for the governance token veSILO.
- veSILO will be used to direct $SILO emissions to USDs borrowers in different silos.
- Stablecoin silos will not receive emissions to prevent looped farming of $SILO.
- When the protocol captures value, revenue earned by the protocol can be used to conduct buy-backs of $SILO from the market, distribute value to veSILO holders, etc.
After much discussion, we have devised an alternative token model that aims to address some concerns expressed about the above iteration. Namely, using a 16-week model with no multiplier bonus does not align with partners in the ecosystem that would want to plug liquidity into protocol.
The new model we propose is notionally upgraded $SILO ( nuSILO ) which will involve the same 16-week lock period. However, from initiation of lock, nuSILO holders will also receive multiplier points that vest linearly that will increase their voting power and boosts to $SILO emissions received by nuSILO holders that choose to borrow with multipliers capping at 2.5x at 1 year (the same as Curve).
nuSILO can be unlocked every 16 weeks which will allow holders that wish to exit their positions to do so. However, those that choose to unlock will lose all multiplier points. This provides an incentive for ecosystem partners that would be long-term holders of SILO to maintain their positions and benefit from boosted rewards and governance.