Authors: The Warbler Labs team
Summary & Background
Note to the Community
Given GFI’s utility as a governance token and requirement in membership, the community’s input and perspective on how to address the imminent reward depletion is critical; community feedback on this proposal and participation in the discussion of this proposal is invaluable. While this proposal lays out two approaches, alternative proposals from the community are highly encouraged in order for the community to collectively reach the best decision for the protocol. This proposal is based on the facts and circumstances as of March 3, 2023. Various conditions such as the withdrawal queue may materially change the GFI emission rate.
At the current rate of emissions, the GFI rewards for LPs (the StakingRewards contract) will run out at the end of June 2023 and Backer Rewards will run out in mid-April 2023. Those dates are significantly sooner than had originally been anticipated. Also, given the low liquidity environment, which prevents people from easily exiting the position after those dates, we are proposing a way to gracefully extend the rewards, and split the remaining tokens between Backers and LPs.
To that end, we present two options below on how to achieve these goals, using principles of relative risk and liquidity to guide the proposal.
Background on how we got here.
The introduction of withdrawal mechanics (GIP-25) caused a large unstaking of FIDU from the StakingRewards contract. The remaining staked FIDU was far below the current target of 100m FIDU, causing the contract to emit rewards at the max rate. And because Backer staking rewards simply mirror what the LP staking rewards are (GIP for reference), this max rate was then amplified by also providing it for Backers.
Principles for the proposed options
Before diving into the specifics of the proposed options, it’s worth explicitly mentioning the principles upon which the proposal is based. At a high level, we want to do something that is fair for all stakeholders. We believe what is fair will take into account two main things
- Liquidity - If the investor can exit their position easily, then there is less need for token rewards, since they are not locked in, and the market can simply decide whether they want to keep participating in the pool
- Risk - What is the relative risk of the investments? More risk should equal more tokens, and less risk should mean less tokens.
Using those as guides, we can say that LPs have greater liquidity and less risk overall than Backers, therefore remaining tokens should skew towards Backers. Backers are locked into multi-year loans, and sit in the junior position. But to be clear, this is not a lop sided distinction. LPs still have low liquidity as well — the Senior Pool withdrawal pool is substantial right now — and indeed still take on risk. While most deals have 20-25% buffer from Backers, there are some old deals that do not include this. So these principles skew in favor of Backers, but not super heavily.
In addition, we also use the principle that **when it comes to tokenomics, gradual changes are better than sharp cliffs Sharp cliffs can cause highly volatile actions, and have knock on effects that are hard to predict.
As such, this GIP focuses on two options (see summary chart below for APY and saved GFI implications):
Option 1: No change to the StakingRewards or Backer Rewards (based on the current state, rewards for Backers would run out in mid-April and rewards for LPs would run out at the end of June)
Pros: This is the “null” option. It is therefore extremely simple. The argument in favor here might say that the community originally allocated a certain percentage to both Backers and to LPs, and those should just run out. The fact that there are cliffs, and that people cannot easily exit right now is unfortunate, but not relevant.
Cons: The argument against this might say that when those allocations were made, it was assumed that they would last longer, and that especially the LPs would be able to exit at any time. Given that those assumptions have changed, it is reasonable to re-allocate rewards and make them last for a longer duration.
Option 2: Split remaining rewards 60/40 between Backers and LPs.
Details: This would mean that of the roughly 2M tokens remaining in the LP contract, 1.2M would be allocated to Backers. If 60% feels too low for Backers, remember that they have less than half the capital of LPs. Thus the rewards per dollar is even higher than 60/40.
In addition, the rate at which remaining LP rewards are emitted would be gradually reduced by 50% each month for 6 months, so that they extend out for roughly 36 months. Backer Staking Rewards (The LP Reward matching part) would be turned off, while the Backer Repayment Rewards would be increased slightly. The net effect for both LPs and Backers would be a reduction from current levels, but those rewards would extend out over roughly 36 months. Full details can be seen below.
Pros: By splitting the remaining rewards, we are ensuring that both Backers and LPs are continuing to receive rewards throughout the life of their loan, which we think better fulfills the spirit of what the original allocations were meant to do. This approach also ensures a smooth decrease over time, which creates more stability for the protocol. Lastly, if unitranche deals continue (like the new Cauris deal last December), then this means the tokens can be used for new growth of the protocol, which is always good.
Cons: This approach requires some minimal smart contract changes, which brings risk. One could argue it is less fair to LPs, but based on the principles laid out above, we think it’s a reasonable compromise.
As a reminder, alternative paths or parameters are strongly welcome from the community.
Here is an analysis of the impact of each option on LP or Backer APYs as well as the potential GFI savings that would result (see table in Summary), based on the current state.
|Option 1||Option 2|
|Overview||No change to the StakingRewards or Backer Rewards||Gradually reduce the StakingRewards max rate by 50% each month for 6 months; disable Backer Staking rewards while reallocating 1.2M GFI to Backers and setting the Backer repayment target to $34M.|
|Date LP rewards would end||End of June 2023||March 2026, or later|
|Date Backer rewards would end||Mid-April 2023||March 2026, or later|
|Base USDC APY Impact||None||None|
|LP Total Est. APY (w/ GFI)||Next 2 months: 20.7%; Months 3 to 6: 12.9%; Months 7 to 36: 7.8%||Next 2 months: 12.6%; Months 3 to 6: 8.6%; Months 7 to 36: 8.0%|
|Backer Total Est. APY (w/ GFI)||Next 2 months: 25.5%; Months 3 to 6: 16.9%; Months 7 to 36: 16.9%||Next 2 months: 21.0%; Months 3 to 6: 20.6%; Months 7 to 36: 18.6%|
In any scenario in which StakingRewards is reduced or removed, Goldfinch’s base USDC yield opportunities still remain competitive for new LPs and Backers when compared to RWA protocols and well-established lending protocols (see below, further details at rwa.xyz). Most other RWA protocols are not providing any native token rewards currently, with the exception of ClearPool and Compound.
|Avg. Base APY (USDC) as of February 24, 2023||Reward APY, as of February 24, 2023||Total|
|Goldfinch Senior Pool (LP)||7.8%||Assume >0||~7.8%|
|Goldfinch Borrower Pool (Backers)||17% average||Assume >0||~17% average|
Early on in the lifetime of the protocol, GFI liquidity rewards may have attracted significant TVL (see chart below). There was roughly $75,000,000 USD growth and 122,476 GFI distributed by the StakingRewards contract between the launch of the liquidity mining rewards in January 2022 and the end of April 2022 (source). However, the rate of TVL growth on the protocol has slowed to near zero despite distributing rewards at reasonable levels.
Furthermore, TVL or staked FIDU growth may not be possible until the $30M+ in withdrawal requests have been fulfilled so the current StakingRewards emission rate could remain at max emissions; if that happens, the remaining StakingRewards (~2,000,000 GFI) will run out by the end of June and the remaining Backer rewards (~350,000 GFI) will run out in mid-April. This rate of depletion is much faster than the rewards forecasted when originally designed, and therefore the parameters must be revisited in order to protect the protocol’s most at-risk investors.
|Jan ‘22 - April ‘22||May ‘22 - Feb ‘23|
|Overall TVL Growth||$75M||-$11.8M|
|New Loans||$61.8M||$2.1M (unitranche)|
|GFI Emissions (by token amount)||122,476||6,966,593|
|GFI Emissions (by cost)||$275,571 (at $2.25 / GFI)||$4,179,955(at $0.60 / GFI)|
|Emissions / Overall TVL Growth||0.16||-59|
Option 1: No change to the StakingRewards or Backer Rewards
- Backer rewards run out mid-April and LP rewards at the end of June
Option 2: Split remaining rewards 60/40 between Backers and LPs.
- Every month for 6 months, reduce max rewards emitted for Senior Pool LP liquidity mining by 50%.
- Reallocate 1.2M GFI from the Senior Pool LP liquidity mining rewards allocation to the Backer Rewards allocation.
- Disable the Backer Staking rewards system introduced in this GIP.
- Increase Backer rewards for interest repaid by decreasing the max number of interest dollars eligible for rewards from $100M to $34M.
Data for calculating rewards emissions: https://docs.google.com/spreadsheets/d/1Tgn3NI7Thcqp8o2iJfdJ5is5CehWHKd7-BTlI7toe8o/edit?usp=sharing
Data for calculating impact on APYs and GFI savings: https://docs.google.com/spreadsheets/d/1UUWKuuWK_GE7L7FmLFIALdX71i_jmBNChuVG2hPnXCQ/edit#gid=795845629
Senior Pool Liquidity Mining: After depositing into the senior pool, senior pool LPs can stake their Fidu to earn GFI rewards. The reward rate is variable.
See the Senior Pool Liquidity Mining docs.
Backer Rewards After depositing into the junior tranche of a tranched pool, a backer earns rewards from successful borrower interest repayments. The amount of rewards is directly related to the amount of interest repaid.
See the Backer Incentives docs.
Backer Staking Rewards: After depositing into the junior tranche of a tranched pool, a backer earns rewards as if they had deposited into the senior pool and staked the FIDU they would have received.
See the Backer Incentives docs.
See the Backer Participation in Staking Rewards docs.
Note: protocol experienced no change in capital inflows when the protocol did increase liquidity rewards by removing the vesting schedule (GIP-10), there is evidence to suggest that no reasonable increase in GFI rewards will sufficiently incentivize senior pool capital supply in the current low liquidity, high withdrawal demand environment.