AIP6: ARTHB: Redemption auction and staking

I think the biggest challenge for most elastic supply coins currently is the contraction phase. Too often the projects get in the contraction period for an extended period of time and the community loses their enthusiasm. If we can address this and align the incentives for investors with the goals of the project, the MahaDAO ecosystem can grow quickly.

Problem 1: There was one redemption period and the funds available are limited. Only $37,500 worth of ARTHB were redeemed and the highest gas txns were rewarded. Also this requires investors to constantly monitor the website. A race to redeem bonds is a bad experience for all parties involved. The winners are forced to use high gas, which eats into their profits and everyone else gets rejected.

Solution:

We should have an automated bond redemption process that involves an auction. Being automated will free people from their computer screens and having a auction will allow those willing to forgo some returns to get their redemptions in first while also allowing the smart contract to use the minted funds for more efficiently.

Users can select how much of their bond discount they want to forgo to their bond redeemed first. It would range from 20% all the way down to 0%. At 20% they would break even and not benefit from buying the bond at a discount but they would be first to receive their ARTH or DAI tokens back. They may still come out ahead because if the 1hr TWAP price was 0.80 and their ARTHB price was 0.64, by forgoing the 20% bond discount, they will be getting ARTH at a price of 0.80 when the 1HR TWAP currently is at $1, still giving them a 25% return.

The system will automatically redeem the bonds that forgo the highest discount rate and work it’s way back to a full redemption, where the user keeps the full 20% bond discount. People will no longer need to race and pay high gas fees, or monitor their website at critical times during the day. The fund will be able to service more debt because people are willing to accept less to free their funds first.

Problem 2:

I have noticed that fewer people are willing to by ARTHB with each contraction phase. This is due to the inability to redeem their bonds, which require the price to be above $1 and new coins to be minted. This uncertainty leads to hesitation when bonds are on sale, even with an attractive discount.

Solution:

Allow bond holders to stake their ARTHB just like they would stake ARTH for MAHA while they wait for redemption. This will allow them to earn while they wait instead of constantly worrying about getting their redemption because they feel their funds are stuck doing nothing.

Combining proposal 1 and 2 will have a major effect to encourage people to buy more bonds.

Problem 3:

Right now it’s very easy to game the system. Everyone knows that during a contraction period, the system whill buy bonds and and immediately use the DAI to buy from the the LP creating a price spike. This encourages people to buy ahead of time and sell into the price spike damping the effects of bond purchases and prolonging the contraction period. This creates short term gains for them but becomes a systematic problem for the ecosystem when it’s scaled up.

Solution:

The funds that are received from bond holders shouldn’t be used immediately. It should be stored and used to gradually buy from the LP over time to smooth out any price spikes. This will discourage buying and dumping since the price difference will be spread across a large time horizon. I suggest that it be prorated. For each hour a maximum of 1/12 of the bond fund available/sold will be used for purchases. I would even break it down to 6-12 purchases an hour, but at random intervals so people can’t anticipate when it will occur.

Problem 4:

When someone redeems their bonds, they have an option for ARTH or DAI. Most people will choose DAI, which results in the system to sell the newly minted ARTH for DAI driving down the price. Now we don’t want unnecessary downward pressure that would create another contraction period of we just got out of one. We need to incentives people to choose the ARTH option instead of DAI. We want their funds to stay in the ecosystem so that more expansions can occur.

Solution: We should create a pool for people to stake and make sure they have yields at a higher rate than those who stake without earning the funds from a bond redemption. They helped the ecosystem by buying a bond and should be reward with a higher rate. Only the ARTH earn through bond redemption would be eligible for this higher rate. This will cause people to intentionally buy bonds just to get a higher yield and limit the downward pressure from selecting the DAI option.

Conclusion:

I believe that the right incentive makes all the difference in the world. Hopefully these suggestions will help the project get going in regards of awareness and adoption. This is all I could think of today. If I have anymore ideas, I’ll be sure to share. Let me know what you think of my proposals.

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I think you are heading in the right direction with your suggestions. I particularly like solution 4. Could possibly present the user with a third option upon redemption of their ARTHB: add to ARTH vault and earn x%. If there was a way that we can implement a vault strategy that could leverage some of the DAI in the pool to earn ETH or more DAI as a special reward for people locked in the vault.

This has been addressed in AIP3: AIP3: Automated Bond Redemptions - #10 by enamakel Where bond redemption should happen in a pool

This is a great idea however we want to encourage the system to actually get rid of it’s debt rather than increase it. So an addition would be to only enable the rewards in this pool only if we are in the contraction phase.

Yes correct, we need to not only make bond purchasing gradual and linear, but should also figure out ways to punish whales that are looking to dump on bond purchasers.

This is a great idea and needs more discussion definitely.

Blockquote This has been addressed in AIP3: AIP3: Automated Bond Redemptions - #10 by enamakel Where bond redemption should happen in a pool

What I proposed is not just an automated bond redemption, but one that involves an auction where the ARTHB holder line up based on how much of their bond discount they want to forgo so they can get their redemption first. This will also allow the more efficient servicing of debt since people are willing to accept less. Those who are patient will receive the full bonus for their bond purchase.

Blockquote This is a great idea however we want to encourage the system to actually get rid of it’s debt rather than increase it. So an addition would be to only enable the rewards in this pool only if we are in the contraction phase.

Staking ARTHB will only be allowed as you wait for your turn in the queue for redemption. It doesn’t change the amount of debt that exists at all. It just rewards bond holders and encourages the purchase of bonds. We want to make buying bonds more attractive without increasing the discount, which will increase the cost of debt servicing.

Blockquote Yes correct, we need to not only make bond purchasing gradual and linear, but should also figure out ways to punish whales that are looking to dump on bond purchasers.

All ecosystems will have whales, and as your project grows, you’ll attract bigger whales. Whales shouldn’t be seen as the problem. They just reveal the flaws in the way incentives and the system were designed. Adjusting how the funds from bond purchases go to buy back ARTH to smooth out the price spikes will remove the opportunity to buy and dump.

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I absolutely agree with this. I’ll correct myself there. I too believe whales are good especially for volume and providing liquidity; thankfully they’ve revealed flaws that are fixable at this early stage.

So the concept of having bond auctions has been pitched in the ESD community a lot wrt their coupons; I believe many people liked the idea however somehow they’ve not got to implementing it yet.

In our case though, yes we can hold an auction and award the bid to those who’d like to forgo their discount. However, this does seem hard to implement as it’ll conflict with the recently AIP3 that was voted in by the community which allows redemption to be automated through a pool.

I believe we should explore this further if the upcoming implementation fails to keep us out of debt or if we see the new automated redemption pools (AIP3) not working. Without enough data in hand, it’ll be hard to predict how people will behave with the protocol.

Thankfully the protocol is an early stage where there is flexibility for experimentation