Shifting incentives towards tBTC v2 and Coverage Pool (Version 2)

This proposal is intended to keep most of the elements of the proposal “Shifting incentives towards TBTC v2 and Coverage Pools” written by BenLongstaff, with the sole intention of undoing the change proposed by Ben’s proposal regarding the allocation of liquidity to the pool of TBTC/ETH.

Taking into account the current stage of development of the Coverage Pool, and the tBTC v2 bridge on Threshold Network , there is a need to adapt the current incentives, migrating them so that it is possible to provide greater adoption to tBTC 2 through the bridge transition between tBTC v1 and tBTC v2 when released.

It is necessary to push this proposal at this time so that it has its approval prior to the launch of the Coverage Pool and the tBTC v1 <-> tBTC v2 bridge, This will ensure that the incentives are aligned with the launches, thus providing its effective incentivization needed in the protocol.

Positive outcomes that are being aimed

As mentioned previously in the first proposal, this proposal attempts to solve for multiple positive outcomes:

  • Launches a v2 TBTC token early so so we can start working on integrations with major networks
  • Allows for a graceful unwinding of the tBTC v1 bridge when the tBTC v2 bridge is launched
  • Changes liquidity incentives so we can reward behavior that we need for the new network and bridge
  • Transitions the v1 tBTC bridge to be secured by our KEEP-only Coverage Pool.

How incentives are currently being distributed:

Weekly the Keep Network team allocates:

  • 25k KEEPs as an incentive for those who provide liquidity to the tBTC/ETH pool in Uniswap
  • 170k KEEPs as an incentive for those who provide liquidity to the KEEP/ETH pool in Uniswap
  • 250k KEEPs as an incentive for the Saddle stableswap pool

Totaling 445k KEEPs allocated weekly as incentives of liquidity rewards.

Additionally, per month the Keep Network team currently allocates:

  • 200k KEEPs as an incentive for KEEP-only staking pool

What was kept from the first proposal:

  • Move rewards from v1 TBTC stableswap pools to a new v2 TBTC stableswap pool on Saddle (250K KEEP)
  • Move KEEP-only pool rewards to our Coverage Pool when it’s deployed (200K KEEP)

What has changed from the first proposal:

  • Maintain the current incentives of 25k KEEPs weekly in TBTC/ETH pool unchanged. (Instead of cutting it off completely)

Reasons to maintain the current incentives for the TBTC/ETH pool

The fees related to the TBTC v1 minting process are high due to the v1 protocol design (Addressed in multiple different aspects in tBTC v2) and for this reason, it becomes notoriously unfeasible for users to mint smaller lotsizes on tBTC v1, thus, remaining for small users, the only way of acquiring TBTC through swap exchanges.

In addition to this problem, the network is currently in a state of ETH shortage currently, so this compresses the possibility of minting large lotsizes due to lack offer of ETH in the system, making the process of mint new TBTCs v1 even more difficult.

Having that said, the mint process becomes compressed from both ends, on the one hand it is difficult to mint larger TBTC lot sizes due to the ETH shortage in the network, on the other hand, it is not economically viable to mint smaller lot sizes due to high protocol fees from signers.

For this reason the incentives for the TBTC/ETH v1 liquidity cannot be removed until at least the tBTC v2 minting process be fully launched. Otherwise, there will be less availability of liquidity for the TBTC v1 market, thus being difficult for users to access the TBTC v1, even making the transition harder between tBTC v1 <-> tBTC v2.

Below is an excerpt of the first proposal “Shifting incentives towards TBTC v2 and Coverage Pools” about how the bridge will work and what the next steps of the transition will be:

How the v1 <-> v2 TBTC vending machine works

In v1 a user can deposit BTC to receive a non fungible TDT token specific to the Keep that holds the users deposit. The user can then exchange the TDT token for a fungible TBTC v1 token through a vending machine contract.

TBTC v1 is always backed by BTC.

A new vending machine contract to exchange TBTC v1 for TBTC v2 and unminting TBTC v2 for TBTC v1 will be deployed. This means that TBTC v2 tokens that are minted by the vending machine contract are backed by TBTC v1 tokens held in the vending machine contract, which are backed by BTC held by the Keep created for the deposit.

Once the tBTC v2 bridge is released users will be able to mint TBTC v2 directly with BTC.

TBTC v2 will always be backed by either BTC or TBTC v1 that is in turn backed by BTC.

Overview of the minting mechanism

  • Everyone can mint TBTC v1-> TBTC v2 and unmint TBTC v2-> TBTC v1 WITH or WITHOUT a fee
  • The DAO can raise or lower the redemption fee – this is important in case we want to pause unmints
  • This strategy should be active all the time until the tBTC v2 bridge is ready.
  • Holders will migrate to TBTC v2 because there will be incentives there.
  • Holders will migrate to TBTC v1 in case of a collateralization ratio drop.

Proposed High Level Timeline for Rewards Transition

  • Launch the TBTC v2 token, transfer ownership of the minting fee to the DAO
  • Move rewards from where they’re unnecessary to where they’re needed the most. Almost all v1 TBTC pools are no longer useful, and we need to incentivize v2 TBTC pools in order to get people to lock up their v1.
  • Launch the KEEP-only Coverage Pool
  • Move rewards from KEEP-only pool to the KEEP-only Coverage Pool
  • Maintain rewards for KEEP/ETH pool because liquidity is essential for proper functioning of KEEP-only Coverage Pool

Terminology

  • Vending Machine - the new set of contracts which, when deployed, will enable a mechanism to mint and unmint TBTC v2 tokens by depositing TBTC v1 tokens
  • TBTC v2 - the token minted from the new vending machine, and eventually from the tBTC v2 bridge
  • TBTC v1 - the token minted from using the tBTC v1 Bridge currently operating on Ethereum and the Keep Network
  • tBTC v2 Bridge - the new set of contracts which, when deployed, will enable minting of TBTC v2 on Ethereum with BTC
  • Threshold Network - the network formed from the merger of Keep and NuCypher, and on which tBTC v2 Bridge will be deployed
  • KEEP-only Coverage Pool - the new set of contracts, which, when deployed, will enable a buyer of last resort for TBTC v1 tokens on the Keep Network
7 Likes

To help with adoption of v2 tBTC, I’d love to see some kind of incentive to migrate v1 tBTC to v2 tBTC.

Maybe a retrospective airdrop which at least covers the gas fee for every users migration?

This will be huge for those who don’t own a substantial amount of tBTC who are going to have to pay the gas fee for the migration which might eat up all their rewards they got from providing liquidity (if they were providing liquidity in the first place) and they wont earn much rewards in the new pools either if they choose to provide liquidity with them owning so little tBTC.

2 Likes

I’m not sure any explicit incentive will really be required. V1 tbtc currently trades at a premium, and I expect this to continue. I would expect this premium to offer plenty of incentive to convert to v2, which will likely trade at a much smaller premium due to its gas and collateral improvements.

Also as per this proposal one incentive to transition from v1 to v2 is via KEEP rewards the community allocates to new v2 pools. Worth noting too that while there are gas fees there is no initial minting fee to transition.

2 Likes

I support this modification to @benlongstaff’s proposal, as it’s important for people to have a pool to get TBTC without the cost of minting or the availability issues we’ve seen at times.

And in the spirit of experimentation and data-based decision making I mention in my proposal reply here, I think we should monitor this pool and increase incentives if needed.

1 Like

I value there being a pool to get TBTC, but I believe saddle/curve cover this need much more efficiently than a eth/tbtc pool.