Distrbution of UMA rewards for uGas and Yam Treasury Liquidity Mining Proposal and Liquidation Bot

Distrbution of UMA rewards for uGas and Yam Treasury Liquidity Mining Proposal

Upcoming Changes to UMA rewards - on Jan 14th 00:00 UTC all uGas UMA rewards will be snapshotted and it will be changed to an allocated rewards structure of 75% to uGasFeb / 25% uGasMarch. If governance approves a different allocation, it will start on Feb 7th.

Basic Summary

This is a proposal for multiple items that are related but will be snapshotted separately. The community has already approved using the treasury to provide liquidity to uGas: Snapshot

There are four additional items that need to be discussed/voted on:

  1. UMA rewards availability for minting uGas and LPing vs only LPing
  2. Beginning, ending and weighting of UMA rewards for specific monthly contracts.
  3. How much of the treasury should we invest into each uGas contract to provide liquidity?
  4. Yam Treasury supported uGas liquidation bot.

Abstract

uGas is the first synthetic Degenerative.Finance is launching with and creating the right balance of incentives and liquidity is important to build out the synthetic ecosystem because uGas is only the first of many synthetics.

The UMA rewards are based on the total value of minted synthetics vs total value of minted uGas. UMA distributes 50,000 UMA per week across all synthetics. Yam will receive it’s portion based on that ratio. Yam will distribute the rewards as per our medium article 10% Yam Treasury 40% dApp mining (degenerative.finance which is also Yam) and 50% to end users. After discussing with the UMA team there are a few things that need to be discussed and determined. A few key points that UMA explained:

uGas’s primary use case is hedging / speculation. Need to add liquidity to at minimum a month in advance contract. Ie. Jan 1st, we should add liquidity to Feb’s contract. Jan’s gas usage is already starting to be known, so it’s ability to hedge or speculate is reduced. The more uGas that is minted, the more UMA rewards Yam receives to distribute.

Motivation
Yam’s goal is to create as large as possible uGas market by increasing minting and LP. We can do this by controlling the distribution of UMA rewards across uGas contracts. There are two variables that Yam should determine:

  1. Do we reward mint + LP or just LP
  • Yam team recommends we mint + LP for now then we re-evaluate.
  • Cons - Rewards based on total invested are approximately half due to the increased collateral requirement.
  • Pros - Mint + LP creates a neutral position in uGas, so there’s no uGas price risk but there is impermanent loss risk and liquidation risk. Encourages more minted uGas thus creating a healthier market.
  1. Beginning, ending and weighting of UMA rewards for specific monthly contracts.
  • Yam team recommends we weigh rewards 75%/25% for the next two months uGas contracts and roll those rewards forward on the 7th of every month.
    • ie. Today is Jan 7th, rewards are moved to 75% Feb and 25% March until Feb 7th.
    • Based on recommendations from UMA it is better to add liquidity to next month’s contract.
  1. How much of the treasury should we invest into each uGas contract to provide liquidity? Previously, we approved providing 50/50 liquidity to the future two months but because of liquidation concerns we need to re-evaluate.
  • Yam team recommends that the treasury deploys 100% of liquidity on Feb contract and rolls the liquidity March contract on Feb 7th + 2.5 days governance.
  • There is a risk of liquidation if uGas prices rise and or ETH prices fall. Since it requires 2.5 days to pass an emergency provision, risk of liquidation is possible. UMA noted that anyone can deposit additional collateral to our position at any time to reduce the risk of liquidation. If added, it can only be removed by owner of contract (Yam), so there needs to be a defined reimbursement process and or incentive program.
  1. Liquidation bots are necessary for security of the contract. Brock is currently funding and running a bot. This function should be transferred to the Yam and its treasury.

Risks

There is a chance of liquidation which we will mitigate by monitoring the position and creating a discord bot to alert everyone if there is a position that is close to liquidation.

A primer on how liquidations, collateral ratios and pricing of uGas token.

There are two collateralization ratios (CR):

  1. Global CR - This is the average collateralization ratio across all token sponsors of a synthetic token. When minting uGas, you must stay above this CR.
  2. Minimum CR – This is the ratio that if you drop below, your collateral could be liquidated to cover your minted assets. For uGas tokens this ratio is set at 1.25.

To mint uGas tokens, you deposit ETH as collateral and it allows you to mint tokens up to the Global CR. For example if you deposit $10,000 worth of ETH and the GCR is 4, that means you can mint up to $10,000/4 = $2,500 worth of uGas tokens. In this example, if you minted 10 uGas tokens, if you return 10 uGas tokens, it will unlock all of your collateral no matter the price of the token at the time of return.

Pricing of uGas tokens is derived from the 2hr Time Weighted Average Price (TWAP) of the highest liquidity AMM pool. TWAP makes it resistant against flash attacks as they only effect a single or a few blocks, then natural arbitrage should return the price back to normal.

What’s the risk of liquidation? If we mint with a ratio of 3.5 and the minimum CR is 1.25. uGas 2-hour TWAP would have to increase by 156% or ETH decrease by 64% to be close to minimum CR, both of which are unlikely.

Specifications

Current uGAS rewards ends on Jan 14th 00:00 UTC

Feb 7th, on-chain vote to:

  1. Move rewards to: 75% MAR / 25% APR
  2. Payout rewards for uGAS-FEB21
  3. Move liquidity 100% to March
  4. Or change any parameters based on this proposal

Poll to Measure Sentiment

UMA rewards for minting uGas + LP or just LP
  • Minting uGas + Liquidity Provider
  • Only Liquidity Provider

0 voters

Weighing UMA rewards for the forward 2 months
  • 75% Next Month / 25% 2 Months
  • Let’s continue discussion

0 voters

Which day to roll rewards to next month’s contract
  • 7th of the Month
  • Let’s continue discussion

0 voters

Approve development of liquidation bot for Yam Treasury
  • Approve
  • Deny

0 voters

2 Likes

Hey Yam Fam,

Since we’ve removed the rewards on Jan and move those rewards to Feb/March there has been a few issues that has popped up due to all the liquidity moving off of Jan’s contract. A few people were trapped in Jan and unable to sell on uniswap, their only option is to wait till the end of the month to settle. Another user was liquidated due to a price spike in the uGas price due to low liquidity.

The original proposal to have rewards move monthly to the next 2 months is no longer the best course of action. The team proposes to not specifically allocate rewards to a specific month and instead keep it open to all months so all rewards are equal across any month. Yam will still be moving it’s liquidity on the 7th + 2.5 days of each month to the next month. It is best for any UMA miner to make sure that they are where the liquidity is highest for the protection of its own position.

1 Like

In addition, the proposals have been submitted to snapshot but not pass snapshot quorum.
Since there is majority support for what the team has put forth as recommendations. I’ll be combining the snapshots into one so that we can get enough votes to pass quorum.

Any concerns feel free to let us know. Thanks.

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