Liquidity Mining Reinvented

The purpose and design behind SIP-001

Sturdy has been extremely active in the past two weeks, launching the $STRDY token with an airdrop, initializing DAO governance, and voting on our first proposal. The proposal passed unanimously and centered on establishing a liquidity mining program. Here’s an overview of the motivation behind this proposal, the logistics of emission incentives, and how Sturdy designed the program to avoid pitfalls typically encountered by liquidity mining initiatives.

Once again, a huge shoutout to the community for outstanding participation early in the governance process, and for accompanying Sturdy into this new era!

SIP-001: Dynamic Emissions

March 20th marked the debut of our first Sturdy Improvement Proposal, putting forth a plan to improve liquidity conditions on the protocol through $STRDY emission incentives. While Sturdy has been able to achieve a $20M+ TVL before even launching a token, we’ve often heard that potential lenders are concerned about the depth of liquidity available. With low liquidity, large deposits and withdrawals can greatly impact the yields of both lenders and borrowers. Combined with low liquidity, borrowing demand has frequently been high, leading to scenarios where interest rates kick in due to high utilization. The motivation behind using $STRDY emissions to incentive deeper liquidity is to:

1. Stabilize rates for both borrowers and lenders.
2. Ensure availability for withdrawals, making lending at larger sizes more attractive.

High utilization >80% due to limited liquidity can cause borrow APYs to spike

Potential Issues with Liquidity Mining

The basic idea of incentivizing liquidity with token emissions is relatively simple, but the execution can be tricky. One of the main concerns is the “stickiness” of liquidity the protocol is attracting. Are new depositors only going to provide liquidity as long as the token incentives are available? This issue of so-called mercenary capital flooding in to scoop up LM rewards can adversely affect a protocol’s long-term health and success.

Another big concern for protocols leveraging liquidity mining is token dilution, as balancing the amount of emissions is critical to maintaining a healthy balance of voting power within the governance system. If the rewards are too heavily front-weighted, then large depositors can amass a disproportionate amount of the token. Unbalanced rewards make later entry into the LM program less attractive and dilute the voting power of existing token holders.

Beyond general issues with liquidity mining initiatives, there are additional concerns related specifically to lending & borrowing protocols.

1. Over-incentivizing liquidity to the point where available assets outstrip borrowing demand, and utilization rates fall below-desired levels. Over-incentivizing wastes the token rewards on excessive liquidity, and with $STRDY having a capped token supply, the goal is to maximize value from emissions.
2. Which deposits should be eligible for rewards? While borrowers deposit collateral when taking out a loan, these deposits generate yield through staking rather than contributing to liquidity. Additionally, rewarding borrowers opens up the possibility of gaming the rewards system by looping leveraged borrows together. For these reasons, emission incentives will be solely directed to lenders.

Note for borrowers: while your collateral deposits won’t receive emissions rewards, you’ll still directly benefit from the LM program. Increased liquidity means Sturdy can handle higher borrowing capacity without utilization based interest rates kicking in!

Creating a well-balanced and sustainable emissions schedule is essential to solving these common liquidity mining challenges — Sturdy’s solution: dynamic emissions. Many LM initiatives run into issues because of a lack of flexibility, as emissions are set up to a fixed percentage of token supply distributed over a preset period. This method doesn’t allow adjustments if the initial schedule doesn’t produce results, giving mercenary capital a clear window for farming rewards.

Here’s how Sturdy has reimagined the practice of liquidity mining.

The Dynamic Emissions Model

To avoid typical LM pitfalls and direct rewards towards maximum beneficial liquidity, $STRDY incentives will be based on utilization rates. The program is initially set to last 60 days, at which point the governance system will reevaluate it. The design parameters for emissions are as follows:

Emissions per second by asset

• ETH = .06430041152 (equal to 333,333 $STRDY over 60 days)
• USDC = .03215020576 (equivalent to 166,667 $STRDY over 60 days)
• DAI = .01607510288 (equivalent to 83,333 $STRDY over 60 days)
• USDT = .01607510288 (equivalent to 83,333 $STRDY over 60 days)

Dynamic adjustments for any given asset

• If utilization rate <50%: new rate = previous rate -.1 * initial rate
• If utilization rate 50% < 70%: no change
• If utilization rate >70%: new rate= previous rate +.1 * initial rate

If the average utilization for a given asset over the previous week falls below 50%, rewards will decrease by 10% for the following week. If the average utilization for an asset exceeds 70%, rewards will increase by about 10%. Dynamic emissions maximize the value of the LM program by not wasting tokens on unneeded liquidity and attracting additional liquidity to assets close to the 80% utilization mark where interest rates kick in.

With this emissions schedule, give or take a few thousand tokens depending on dynamic adjustments, the 60-day program will result in 666,666 $STRDY being distributed to lenders. This equates to .66% of the total $STRDY token supply of 100,000,000. Since the majority (60.5%) of the token supply is held in the Sturdy DAO treasury, future incentive programs like this are up to the vote of the community. As of now, $STRDY is non-transferable from the address receiving the tokens, so rewards from the LM program will remain with the address that earned them until the DAO votes on when to enable transfers. The idea here is to attract more permanent liquidity to the protocol instead of the mercenary capital that would typically be found farming LM rewards to dump.

In Summary

Emissions rewards can be a valuable tool for incentivizing liquidity. From our conversations with current and potential lenders, liquidity levels are a huge consideration, especially for large lenders. However, achieving the desired results requires purposeful design, and we believe the dynamic emissions model is well suited to Sturdy’s needs. For any further LM questions please head on over to our Discord, and if you’re interested in shaping the future of Sturdy through our DAO governance check out our recent post on How To Create a Proposal.