[Gauntlet] Monthly Protocol Rewards Allocation Recommendation - Oct 2024

[gauntlet]

Summary

Gauntlet consistently monitors the ROI of rewards distribution. Should the community choose to proceed with the reward budget renewal, Gauntlet recommends further adjustments based on our September recommendations to better align with evolving market conditions. The recommended rewards allocation is provided below, along with an in-depth analysis.

Additionally, we encourage the community to periodically adjust the IR curve to maintain competitive rates and promote balanced growth on both sides.

We included a protocol profitability assessment, which led us to conclude that a slight increase in esSEAM rewards allocation is feasible.

Token Symbol	Reward Token	Side	Current Daily Reward Emission Amount	Recommended Daily Reward Emission Amount
USDC	esSEAM	Supply	2,318	2,318
WETH	esSEAM	Supply	502	330
AERO	esSEAM	Supply	359	359
wstETH	esSEAM	Supply	49	98
cbETH	esSEAM	Supply	12	34
SEAM	esSEAM	Supply	7	7
DAI	esSEAM	Supply	5	14
AERO	SEAM	Supply	12	12
USDC	esSEAM	Borrow	2,616	2,947
USDC	SEAM	Borrow	116	116
WETH	esSEAM	Borrow	300	300
AERO	esSEAM	Borrow	365	365

Token Symbol	Reward Token	Side	Current Daily Reward Emission Amount	Recommended Daily Reward Emission Amount
cbBTC	esSEAM	Supply	0	225
cbBTC	esSEAM	Borrow	0	90
EURC	esSEAM	Supply	0	135
EURC	esSEAM	Borrow	0	115

• Total Recommended Daily Reward Emission: 7,465 (Current: 6,661)
• Total Recommended Daily esSEAM Emission: 7,337 (Current: 6,533)
• Total Recommended Daily SEAM Emission: 128 (Current: 128)
• Total Recommended Daily Reward Emission for Suppliers: 3,498 (Current: 3,264)
• Total Recommended Daily Reward Emission for Borrowers: 3,967 (Current: 3,397)

Our protocol profitability assessment indicates that a slight increase in esSEAM rewards allocation is feasible.

Analysis

Retro

We assess the protocol’s profitability by measuring the net growth in daily reserves.

Net daily reserve growth is calculated by subtracting daily SEAM distribution costs and time-weighted esSEAM distribution expenses from daily reserve gained, covering the period from September 21 to October 17.

Given the one-year linear unlock period for esSEAM, their expense are not realized immediately but instead gradually over the lock duration. The time-weighted cost for any given day is calculated as follows:

The chart below highlights the protocol’s profit performance from Aug 18 through Oct 17, showing positive momentum in profitability during the recent evaluation cycle, with a recovery from mid-September lows. Daily net reserve growth has ranged around $140, with SEAM distribution being the largest expense. Despite the substantial esSEAM distribution, its impact is reduced after accounting for the lock period and time-weighting adjustments.

The positive net profit suggests that the protocol has the flexibility to increase reward expenses, particularly esSEAM rewards, as an option to further support growth if needed.

Supply Incentives

To determine rewards allocations, we utilize the historical growth metric. This metric is defined as the incremental growth in the objective function (Total Value Locked, TVL) per dollar spent. The formula for this metric is as follows.

esSEAM ROI

Using the ROI metric above, we can calculate the ROI gained from esSEAM incentives for all incentivized assets from Sep 21 through Oct 17. Below shows ROI trends and density plots.

The table below shows the distribution statistics of ROI distributions.

symbol	mean	std	min	25%	50%	75%	max
AERO	27.04	387.18	-760.31	-140.37	-11.77	140.78	1018.63
DAI	30.03	237.44	-436.3	-3.5	3.49	14.25	1112.71
SEAM	-2444.43	73562.3	-112010	-26962.6	-1421.11	7090.9	276814
USDC	51.59	254.36	-731.8	-34.57	16.63	104.89	740.44
WETH	48.52	552.07	-1191.28	-206.7	-34.63	374.39	1183.43
cbETH	145.54	1127.29	-1603.15	-383.48	15.67	339.35	4531.94
wstETH	-72.69	1096.28	-4176.82	-137.21	34.32	236.31	2044.07

We use the mean value to assess general ROI over the period in question. However, we recognize that ROI exhibit highly skewed distributions with large standard deviations, especially for wstETH, cbETH and SEAM. This implies that the mean value may not accurately represent the underlying distribution and can be significantly affected by outliers. Therefore, we scale the mean value with standard deviation as adjusted ROI.

This adjusted metric allows us to normalize the mean ROI, making it less sensitive to outliers and providing a more accurate representation of the performance of each asset. By doing so, we can better compare assets with varying levels of volatility and ensure that our rewards distribution more accurately reflects their “uncertainty-adjusted” returns.

symbol	Adjusted ROI	Current APR
AERO	0.0698	0.1772
DAI	0.1265	0.0808
SEAM	-0.0332	0.0004
USDC	0.2028	0.0317
WETH	0.0879	0.0209
cbETH	0.1291	0.0139
wstETH	-0.0663	0.0319

Best performed assets are USDC, cbETH and DAI.

To allocate incentives for assets, we analyze their current reward APR alongside their adjusted ROI. We then scale those values by USDC equivalents to ensure comparability. We compare the ROI weight and the current reward APR for each asset. If the ROI weight is significantly higher than the current APR, it suggests that the asset is performing well and might benefit from increased rewards to attract more deposits. Conversely, if the ROI weight is lower, it may indicate that the asset is underperforming, and rewards might need to be adjusted downward.

After scaling by USDC equivalents, the values are as follows. During the observed period, all assets have generated positive ROI, with the exception of wstETH and SEAM.

symbol (Scaled)	Adjusted ROI (Scaled)	Current APR (Scaled)
AERO	0.34	5.59
DAI	0.62	2.55
SEAM	-0.16	0.01
USDC	1	1
WETH	0.43	0.66
cbETH	0.64	0.44
wstETH	-0.33	1.01

The adjusted ROI-based allocations are as follows:

token_symbol	Current Daily Reward Emission Amount	Recommended Daily Reward Emission Amount	Current APR	Target APR
USDC	2318	2318	3.2%	3.2%
WETH	502	330	2.1%	1.4%
AERO	359	22	17.7%	1.1%
wstETH	49	0	3.2%	0.0%
cbETH	12	17	1.4%	2.0%
SEAM	7	0	0.0%	0.0%
DAI	5	1	8.1%	2.0%

To promote sustainable growth and optimize incentives, we make discretionary adjustments to assets with negative returns. We see the negative ROI of wstETH in this cycle as a reasonable decline following the strong ROI performance in last cycle. Additionally, we recognize the gap in wstETH rewards between Seamless and another leading protocol. As a result, we recommend doubling the rewards allocated to wstETH, in order to narrow this gap and to address the growing demand for using Liquid Staking Tokens (LSTs) as collateral. At the same time, we suggest maintaining the current reward allocation for SEAM as a strategic approach.

The difference in AERO supply rates between Seamless and another leading protocol (see chart below), where Seamless rates have been lower, has stayed below 10% over the past 25 days. This suggests that the current 17.7% rewards APR is effectively bridging the gap. In comparison, back in July, the difference was around 30%. This trend suggests a correlation between the rewards APR and the narrowing rate differences across platforms, as higher rewards appear to reduce the spread between competing rates. As a result, we recommend maintaining the current emission rate for AERO.

Given DAI’s strong ROI and low reward distribution costs, we are adjusting its reward emissions to target a 20% APR to close the rate and rewards gap with another leading protocol. The same approach is applied to cbETH, with a targeted APR of 4%.

The final recommendations are as follows:

token_symbol	Current Daily Reward Emission Amount	Recommended Daily Reward Emission Amount	Current APR	Target APR
USDC	2318	2318	3.2%	3.2%
WETH	502	330	2.1%	1.4%
AERO	359	359	17.7%	17.7%
wstETH	49	98	3.2%	6.4%
cbETH	12	34	1.4%	4.0%
SEAM	7	7	0.0%	0.0%
DAI	5	14	8.1%	20%

Note: Target APR is calculated using most recent supply and price data. We expect it to dilute over time if supply increases.

SEAM ROI

Using the same methodology, we have SEAM ROI as follows:

symbol	Adjusted ROI	Current APR
AERO	0.0698	0.0059

The chart below illustrates that Seamless USDC and WETH supply rates have remained competitive, mainly due to high kink rates and increased utilization. Notably, WETH supply APR has improved significantly since September, with the spread advantage over competitors growing. As a result, we do not see the need to allocate additional SEAM rewards to these two assets.

AERO rates have fluctuated due to volatile utilization, but overall they have remained in line with those of another major borrowing/lending platform on Base. Aside from the exceptionally high rates driven by utilization spikes, the gap has narrowed significantly compared to September. To maintain this trend, we recommend continuing the same SEAM reward allocation to AERO asset suppliers.

The final recommended allocations are as follows:

token_symbol	Current Daily Reward Emission Amount	Recommended Daily Reward Emission Amount	Current APR	Target APR
AERO	12	12	0.6%	0.6%

Note: Target APR is calculatd using most recent supply and price data. We expect it to dilute over time if supply increases.

Borrower Incentives

As stated in our initial rewards allocation recommendation, encouraging borrowing is crucial for several reasons: it enhances the utility of supplied assets, stimulates economic activity, and can result in higher organic returns for both borrowers and suppliers. Since initiating borrow incentives during the last emission round, we have observed improved utilization for WETH, reflected in higher levels and reduced volatility.

USDC utilization overall has stayed above 80% most recently.

AERO utilization remains volatile and has been trending downward recently. We believe this is due to overall market conditions, as similar patterns are observed across other protocols.

The spread between borrow and supply rates reflects the platform’s efficiency in balancing supply and demand. A large spread might indicate an inefficiency where borrowers are disincentivized to borrow, and suppliers may not be earning optimal returns. By providing targeted borrower incentives, we can narrow this spread, promoting a more balanced and efficient market.

We rank the assets based on the size of the spread and utilization rates, focus on assets with the largest spreads and lowest utilization and create borrower incentives aimed at reducing the spread.

USDC

The spread between borrow and supply rates has returned to its late-August level, now just below 1.2% after briefly dipping below 1%. To bring this spread under 1%, we recommend continuing with our August strategy, setting the target APR for SEAM at 0.2%. A 2% APR for esSEAM rewards would effectively cover the remaining spread.

The gap between USDC borrow rates on Seamless and another leading borrowing/lending platform has widened slightly, now at 3.5%, up from 3% in September.

To further encourage borrowing and drive more liquidity, we suggest increasing the esSEAM rewards with a target APR of 5%. This approach should provide the necessary incentive to attract more borrowing activity.

token_symbol	Reward Token	Current Daily Reward Emission	Recommended Daily Reward Emission	Target APR
USDC	esSEAM	2616	2947	5%
USDC	SEAM	116	116	0.2%

Note: Target APR is calculatd using most recent supply and price data. We expect it to dilute over time if supply increases.

WETH

The spread for WETH has consistently stayed below 1%. Borrow rates for WETH on Seamless are now about 1.5% higher than those offered by competitors, up from 1% in September. Given these conditions, we recommend setting the esSEAM rewards target APR at 2%. This approach should help maintain Seamless’s competitive edge while keeping the spread stable.

token_symbol	Reward Token	Current Daily Reward Emission	Recommended Daily Reward Emission	Target APR
WETH	esSEAM	300	300	1.6%

Note: Target APR is calculatd using most recent supply and price data. We expect it to dilute over time if supply increases.

AERO

The spread for AERO has been reduced by half, dropping from around 25% to 10-15%, and its borrow rate is now competitive compared to other platforms.

We recognize AERO’s contribution to reserves, which justifies maintaining its rewards allocation strategically to continue supporting its growth.

token_symbol	Reward Token	Current Daily Reward Emission	Recommended Daily Reward Emission	Target APR
AERO	esSEAM	365	365	40%

Note: Target APR is calculatd using most recent supply and price data. We expect it to dilute over time if supply increases.

New Assets - cbBTC and EURC

cbBTC

Below is a summary of the cbBTC market from other leading protocols. Based on this, we anticipate a peak supply of approximately $10M (excluding BTC price effects) for cbBTC on Seamless during the next reward emission cycle, with utilization ranging between 10-30%. Recognizing the long-term strategic value of cbBTC, we recommend a substantial reward emission for this asset.

We propose allocating esSEAM rewards to cbBTC suppliers with a target APR of 1% and to borrowers with a target APR of 2%. SEAM allocations will be considered once cbBTC begins contributing to reserve growth.

token_symbol	Side	Reward Token	Current Daily Reward Emission	Recommended Daily Reward Emission	Target APR
cbBTC	Supply	esSEAM	0	225	1%
cbBTC	Borrow	esSEAM	0	90	2%

EURC

Below is a summary of the cbBTC market from other leading protocols. Based on this, we anticipate a peak supply of approximately $3M (excluding EURC price fluctuations) for EURC on Seamless during the next reward emission cycle, with utilization expected to range between 60-80%. Considering the long-term strategic value of EURC, we recommend a substantial reward emission for this asset.

We propose allocating esSEAM rewards to EURC suppliers and borrowers with a target APR of 2%. SEAM allocations will be considered once EURC begins contributing to reserve growth.

token_symbol	Side	Reward Token	Current Daily Reward Emission	Recommended Daily Reward Emission	Target APR
EURC	Supply	esSEAM	0	135	2%
EURC	Borrow	esSEAM	0	115	2%

IR Curve Review

We believe that accurate Interest Rate (IR) curve settings should, among other objectives, achieve the following:

1. Enable Market-Driven Rates: Ensure that market-implied rates are accurately reflected to allow a balanced equilibrium between borrowing and supply activities.
2. Maintain Rate Stability: Promote low volatility in interest rates to enhance the overall user experience by providing predictable and stable returns.
3. Remain Competitive: Ensure that the rates offered remain competitive in the market, attracting both borrowers and suppliers to the platform.

We have observed consistently higher volatility in AERO rates/utilization and encourage the community to assess the current AERO IR curve.