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 August 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.
| Token Symbol | Reward Token | Side | Current Daily Reward Emission Amount | Recommended Daily Reward Emission Amount |
|---|---|---|---|---|
| USDC | esSEAM | Supply | 2,318 | 4,636 |
| WETH | esSEAM | Supply | 502 | 1,004 |
| AERO | esSEAM | Supply | 359 | 718 |
| wstETH | esSEAM | Supply | 49 | 98 |
| cbETH | esSEAM | Supply | 12 | 12 |
| SEAM | esSEAM | Supply | 7 | 7 |
| DAI | esSEAM | Supply | 5 | 5 |
| USDC | SEAM | Supply | 0 | 124 |
| WETH | SEAM | Supply | 0 | 40 |
| AERO | SEAM | Supply | 12 | 24 |
| wstETH | SEAM | Supply | 0 | 2 |
| USDC | esSEAM | Borrow | 2,616 | 0 |
| USDC | SEAM | Borrow | 116 | 0 |
| WETH | esSEAM | Borrow | 300 | 100 |
| AERO | esSEAM | Borrow | 365 | 200 |
- Total Recommended Daily Reward Emission: 6,970 (Current: 6,661)
- Total Recommended Daily esSEAM Emission: 6,780 (Current: 6,533)
- Total Recommended Daily SEAM Emission: 190 (Current: 128)
- Total Recommended Daily Reward Emission for Suppliers: 6,670 (Current: 3,264)
- Total Recommended Daily Reward Emission for Borrowers: 300 (Current: 3,397)
Gauntlet recommends allocations based on the current daily expense amount. A moderate increase in SEAM allocation is suggested to support the recovery of withdrawn capital. Should the community opt to follow the reward budget, allocations can be proportionally increased as necessary.
Analysis
Retro
The chart below highlights the reward ROI trend from August 20 to September 20. The most notable drop occurred on September 13, driven by substantial withdrawals following a reported hack on the protocol. Although the ROI rebounded by September 18, the full extent of the losses has not yet been recovered. Additionally, ROI remained limited throughout the period, likely due to technical issues with the esSEAM rewards claim process and the broader market downturn.
To optimize the restoration of withdrawn capital, we recommend prioritizing supply-side incentives.
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 Aug 20 through Sep 20. 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 | -58.85 | 369.52 | -1876.03 | -93.77 | -5.71 | 49.87 | 561.19 |
| DAI | -130.48 | 1566.42 | -3527 | -212.33 | -0.25 | 4.04 | 4716.06 |
| SEAM | -8749.76 | 19367.7 | -57052.6 | -15728.1 | -10363.4 | -2704.88 | 32822.8 |
| USDC | -124.88 | 1246.86 | -5196.21 | -115.96 | 3.44 | 68.05 | 3656.33 |
| WETH | -196.38 | 1126.07 | -3660.99 | -523.42 | -191.74 | 311.17 | 2915.3 |
| cbETH | -665.11 | 2665.68 | -13737.4 | -689.22 | -152.42 | 370.87 | 1801.67 |
| wstETH | 36.02 | 1189.04 | -4332.97 | -269.01 | 83.21 | 410.5 | 3394.73 |
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 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 | -0.1593 | 0.3088 |
| DAI | -0.0833 | 0.1172 |
| SEAM | -0.4518 | 0.0004 |
| USDC | -0.1002 | 0.0375 |
| WETH | -0.1744 | 0.0241 |
| cbETH | -0.2495 | 0.0166 |
| wstETH | 0.0303 | 0.0296 |
The adjusted ROI for all assets, except wstETH, was negative during the observed period. As noted in the Retro section, we propose prioritizing supply-side incentives to accelerate the replenishment of withdrawn capital. We recommend implementing the following strategies:
- Doubling rewards for USDC, WETH, AERO, and wstETH to encourage greater liquidity provision and attract more suppliers to these assets.
- Maintaining rewards for DAI, SEAM, and cbETH to provide consistent returns and stability for suppliers of these assets.
By implementing these targeted measures, we aim to enhance capital inflows. We recommend increasing rewards for wstETH, not only due to its positive ROI but also in response to the growing demand for borrowing WETH using Liquid Staking Tokens (LSTs) as collateral. This increase in rewards is intended to attract more wstETH suppliers and boost the borrowing demand for WETH.
| token_symbol | Current Daily Reward Emission Amount | Recommended Daily Reward Emission Amount | Current APR | Target APR |
|---|---|---|---|---|
| USDC | 2318 | 4636 | 3.8% | 7.6% |
| WETH | 502 | 1004 | 2.4% | 4.8% |
| AERO | 359 | 718 | 30.9% | 61.8% |
| wstETH | 49 | 98 | 3.0% | 6% |
| cbETH | 12 | 12 | 1.7% | 1.7% |
| SEAM | 7 | 7 | 0.0% | 0.0% |
| DAI | 5 | 5 | 11.7% | 11.7% |
| DEGEN | 0 | 0 | 0.0% | 0.0% |
Note: Target APR is calculated using most recent supply and price data. We expect it to dilute over time if supply increases.
esSEAM ROI in Token terms
We recognize that price volatility can impact the analysis during the time period in question. As a result, we also refer to an alternative ROI metric. This metric measures the change in Total Value Locked (TVL) in token terms relative to the incentives (rewards) spent. It is defined as:
Applying the same logic used for ROI in USD terms, we derive the adjusted ROI in token terms.
| symbol | Adjusted ROI | Current APR |
|---|---|---|
| AERO | -0.1861 | 0.3088 |
| DAI | -0.0833 | 0.1172 |
| SEAM | -0.066 | 0.0004 |
| USDC | -0.1001 | 0.0375 |
| WETH | -0.1902 | 0.0241 |
| cbETH | -0.2374 | 0.0166 |
| wstETH | 0.0227 | 0.0296 |
We conclude that the insights from ROI in token terms are consistent with those in USD terms.
SEAM ROI
Using the same methodology, we have SEAM ROI as follows:
| symbol | Adjusted ROI | Current APR |
|---|---|---|
| AERO | -0.1593 | 0.0103 |
As previously noted, despite the negative ROI, we recommend strategically allocating SEAM rewards to USDC, WETH, AERO, and wstETH to aid in the recovery of withdrawn capital.
The chart below demonstrates that Seamless USDC and WETH supply rates have remained competitive, primarily due to high kink rates and increased utilization following recent withdrawals. AERO rates have fluctuated but stayed close to those of another major borrowing/lending platform on Base, until recently. Meanwhile, wstETH rates have consistently been lower, with spreads widening from around 100bps to 200bps.
Although the supply rates are already competitive, we recommend a discretionary target reward APR of 0.2% for USDC and WETH to help restore withdrawn assets. Considering the slow recovery AERO in supply, we propose doubling AERO rewards
AERO Supply Trend
For wstETH, we recognize that even a modest rewards allocation could significantly enhance its rewards APR. Our goal is to leverage this increase to further incentivize wstETH supply and bring its supply rate in line with those offered by other protocols.
The final recommended allocations are as follows:
| token_symbol | Current Daily Reward Emission Amount | Recommended Daily Reward Emission Amount | Current APR | Target APR |
|---|---|---|---|---|
| USDC | 0 | 124 | 0.0% | 0.2% |
| WETH | 0 | 40 | 0.0% | 0.2% |
| AERO | 12 | 24 | 1.0% | 2.0% |
| wstETH | 0 | 2 | 0.0% | 0.13% |
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 implementing borrow incentives in the last emission round, AERO utilization has improved, consistently staying above the kink level with reduced volatility, until recent hack reports impacted user sentiment.
WETH utilization has maintained a steady pattern since the last reward cycle, averaging around 60%. Apart from an unusual utilization spike in the second week of September, overall volatility in utilization has improved.
USDC utilization has returned to levels near the kink, although this is due to recent capital withdrawals.
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.
The rate spreads for WETH and USDC are shown below. As outlined in our previous report, our goal is to maintain the spread for WETH and USDC below 1%, a target that has been successfully met in the most recent period. Therefore, with our focus on restoring deposits and incentivizing suppliers, we recommend discontinuing USDC borrow incentives. This recommendation is further supported by USDC’s notably high utilization compared to other platforms. In addition, we recommend that the community carefully review the USDC interest rate curve and consider lowering the kink rate to help reduce borrowing costs for users.
To further enhance WETH utilization stability, we suggest continuing WETH rewards with a target APR of 0.8%, which fully covers its borrow spread. Note that the gap between WETH borrow rate on Seamless and on another leading B/L platform is within 20bps.
| token_symbol | Reward Token | Current Daily Reward Emission | Recommended Daily Reward Emission | Target APR |
|---|---|---|---|---|
| WETH | esSEAM | 300 | 100 | 0.8% |
| USDC | esSEAM | 2616 | 0 | 0.0% |
| USDC | SEAM | 116 | 0 | 0.0% |
The spread for AERO has recently fluctuated around 20%, as shown below. We recommend setting a target reward APR of 40% to not only fully cover the spread but also to further incentivize borrowing and enhance asset utilization.
| token_symbol | Reward Token | Current Daily Reward Emission | Recommended Daily Reward Emission | Target APR |
|---|---|---|---|---|
| AERO | esSEAM | 365 | 200 | 40% |