MIP49: Staking Rewards is going through the May monthly governance cycle, and I wanted to start discussion on what the starting parameters should be. I’ve constructed a little chart to see how various rewards % amounts correspond to MKR holder’s yearly ROI.
As you can see the APR quickly increases the lower the lockup. In particular if we were to stay put in terms of MKR lockup (~20%) then we could offer 10%+ APR with only 50% of the burner redirected to the rewards contract. This may not seem like a lot compared to the farming rewards available out there, but I think we are within striking distance.
I will attempt to profile a few types of DeFi degens in increasing amounts of degeneracy:
The Sound Sleeper likes to keep MKR in her cold wallet. She trusts the Maker protocol, so she already participates in voting, but isn’t interested in touching yield farms with a 10 foot pole.
The DeFi Chad has a busy life-style. He heard about this crypto thing, but doesn’t want to spend too much time hunting around. DeFi Chad uses Yearn and a high collateralization ratio, so he only needs to check in once a day.
Rik has an insatiable appetite for maximum yields. No he will not waste money on Yearn performance fees. He does his own research and keeps his collateralization ratios on the bleeding edge.
Let’s see how they compare with various rewards setups:
As you can see it is possible to bring competitive yields to the Sound Sleeper profile vs the DeFi Chad. It’s hard to say how many fit the Chad profile, but my guess is this is the majority of farmers as it is the most benefit / least work. Being a true DeFi degen requires reading code, keeping up with new launches and re-adjusting your CR frequently to ride the line. Even then the risk / reward calculus is not the same. MKR staking rewards are much safer on many fronts including smart contract risk, price risk, etc. It may be that a number of Riks will be willing to hang up their degen hats for a safe 20% APR.
The above numbers assume a 20% rewards lockup which is larger than the current amount locked in the chief, but we can probably expect some inflows from users who are just there for the rewards. It’s hard to estimate what the actual result will be, but we can probably deduct users like the Foundation, MKR holders still inside the foundation and a good chunk of lost/forgotten MKR. My guess at a reasonable upper bound is 50% locked in rewards, but who knows. Even in that scenario we can provide 10% APR if we direct all burner MKR into the rewards contract.
In any case, this is something that can be tweaked as we go. Starting with maybe a small 10% or so to see how things go and gradually ramp it up/down as needed. I think this is a good parameter for Parameter Proposal Groups to adjust based on market analysis. IE we could have a mandate to keep the rewards as low as possible, while trying to balance with the MKR locked in third party lending protocols.