SIP-244: New inflation mechanism

Author	JVK & Danijel
Status	Draft
Type	Governance
Network	Ethereum & Optimism
Implementor	TBC
Release	TBD
Created	2022-05-30

Simple Summary

This SIP proposes a reduction in SNX Inflationary Staking Rewards for both L1 and L2 and a new way of setting up inflationary rewards to have a constant yearly inflation of 20%.

Abstract

Reduce inflationary SNX staking rewards on both L1 and L2 to a fixed annual rate; address division of rewards between L1 and L2; and, signal an eventual shift to L2 only staking rewards.

Motivation

Current inflation level is at about 50% of total circulating supply, inclusive of escrowed rewards.

Futures functionality has brought an increase of sUSD fees to stakers with debt stabilisation - approaching neutral thus far. Staking is expected to become relatively more passive going forward with comparably less risks/debt hedging required.

Drafters believe that a targeted 20% yearly inflation, presumably into perpetuity absent further SC action, that readjusts weekly based on total circulating supply, is an appropriate target. Compared to SIP-202, this should require less labor from the pDAO, and be thus less susceptible to implementation and maintenance errors. This outcome should therefore also be more aligned with a greater decentralised status for the operation of the protocol.

Furthermore, due to the way SC voted on how to use OP tokens to increase SNX liquidity on L2, and keeping with the overall marketing and incentive objectives soon to launch on Optimism, the drafters believe an inflation split between L1 and L2 of 50-50 (from current 60-40) is appropriate at this time.

We are supportive of having SNX staking native to Optimism alone (deprecate L1 staking), due to the technical overhead and increased error surface with staking and debt management on 2 chains. However, we understand this can not happen before V3, so are happy to keep it at 50-50 until either debt migration without burning debt is implemented, or staking is fully moved to L2.

Specification

Fixed Annual $SNX Inflationary Staking Rewards

Current total supply of SNX per coingecko (at the time of writing the SIP) is 266,473,982.

We are proposing a simple formula to calculate new weekly inflation:

(totalSupply*1.2 - totalsupply)/52

This makes for 20% yearly APR assuming all SNX is staked, or 22.09% APY, thus the actual yearly inflation at any given time is 22.09%.

We assume this would be relatively simple to implement, but while it’s being implemented and until release, we urge ProtocolDAO to set a fixed inflation rate of what the formula would currently result in as soon as this SIP is voted in (if it does get voted in):

(266,473,982 * 1.2 -266,473,982) / 52 =1,024,900 SNX per week

L1 v L2 Rewards

Total SNX Inflationary Rewards shall be divided equally, 50/50, between both L1 and L2. The goal at this time being to achieve identical APYs across both staking networks.

Signal Future Shift to Staking Rewards Exclusively on L2

Users are advised that the current SC foresees an eventual shift to staking exclusively on L2 and deprecating L1 staking. The exact timing of such a change is dependent on various factors to be discussed and determined by a future SC.

Test Cases

N/A

Configurable Values (Via SCCP)

Yearly Inflation rate multiplier = 1.2