SeFi Value Capture Methods

We’ve been having several promising discussions on Telegram, but I’d like to formally write out some of our ideas as RangerRanger did to open further discussions on the goal in adding governance as well as to discuss the game theory and technical capabilities of different potential incentive structures.

Obviously the market hasn’t been kind to either SCRT or SEFI from a short-term perspective, and all of us want to make money. As somebody who is ONLY invested in these two protocols, I plan on addressing the game theory from both perspectives, hoping obviously to derive a plan that benefits our entire Decosystem.

Current frustrations from the SEFI holders perspective: The selling pressure on SEFI is high, and there is currently no incentivized buying pressure. Staking does not have the highest yield. The majority of rewards go to people who have no necessary interest in its short or long term success. It feels like it was a temporary tool used to boost SCRT’s exposure and eventual marketcap, which if true (and I don’t believe it is) makes us fools for being involved and buying into the idea.

What we want:

  1. Incentivized buying pressure
  2. an Incentive structure that ONLY rewards people who are invested in SEFI’s short and long term success
  3. the Secret Swap DApp to have the purpose and focus on raising the price of its “native token”.

Thoughts on changes to current structures to complete these goals:

  1. 5bps (out of the 30bps fee) goes towards purchasing and burning SEFI, adding buying pressure and making it eventually deflationary
  2. Having SEFI be the base pairing for all (or most) Liquidity Pools
    a. With routing, people should be able to then onboard scrt and through the scrt-sefi pool easily route into any asset, and either with bridges or scrt, an off-ramp for SEFI specifically will be less important.
    b. People who want to LP will have to buy and care about SEFI, which would then be easier to do
  3. Incentivized pools that AREN’T based in SEFI would have to have a different method of proving investment in SEFI such as:
    a. Having to pay a certain amount of SEFI to be split amongst the SEFI stakers for access to an incentivized pool
    b. Having to temporarily lockup a certain percentage of value in SEFI for as long as one is LPing in such a pool
    c. Having rewards be cut for people who don’t meet a certain SEFI ownership requirement. ie. if somebody owns less than 1000 SEFI they only get 50% of their SEFI rewards, and the rest is split amongst stakers, if they have 1k-10k they get 80% of their rewards, and if they have 10k+ they keep 100% of their rewards.

Potential Backlash from SCRT holders:

  1. Some of these focuses are too short-sighted, and the current system will eventually bring more longterm value to the Secret Network, and therefore also to the SEFI token
  2. SCRT should be the base-pairing because that is the L1 governance token, and the model we’ve seen primarily through Uniswap and Pancake, and relying on SEFI is likely to drive away TVL and Liquidity, which in doing so, would make the Swap less successful and take value away from SEFI anyways.

Resolution:
There obviously needs to be a balance, but relying on SCRT investors to eventually some day possibly have good intentions for SEFI holders is based on trust, not game theory. If we relied on trust we wouldn’t be here. SCRT should continue deploying apps, as it is, and have its inherent value derive from necessary gas fees as is customary and if that value can’t defeat the high inflation then that shouldn’t be the SEFI investors problem.

Governance will obviously play out as it is designed to, but the further SEFI drops, the easier to take over this will be, and those who own it will always be looking out for their own interests, which are the interests I’m primarily representing here. If therefore, the team has largely sold their SEFI positions, it would look terrible to not follow through with governance decisions, which could potentially differentiate from the best interests of the SCRT token. If whales have held and use their dominant governance capabilities to solely attempt to raise the value of the SCRT token, then SEFI will drop further as we all dip, and so will rewards, and yield farmers will look elsewhere.

Just as CEO’s are focused only on their ability to influence their own stock price, so should SEFI be looking out for itself, and with its hopeful success, bring handsome yield rewards and more users to the Secret Network Ecosystem, which as shown by its rapid growth and decision to issue a separate native token for this DApp, is bigger than Secret Swap.

I would like to receive more engagement/discussions here, not only on why we should or shouldn’t go forward with variations of ideas I’ve enumerated, but also on differing ethos’s, timelines for those ethos’s to bring value to SEFI, and other suggestions for value capture for either/both of the tokens on this platform that haven’t been mentioned.

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YES! We need better value capture mechanisms. However, how do we determine which of these ideas have economic potential, and which are gimmicks? Also, who develops these? We’d love to see more community members joining the good fight and helping us in building out these interesting features!

As to your points specifically:

  1. As I mentioned in RangerRanger’s post, this likely won’t have any serious buying pressure.

  2. I personally disagree with this. A mix of SCRT and SEFI might be more appropriate.

  3. Interesting (but also a lot of dev work). Need to be careful not to over-reward people based on time/holdings because that could lead to undesirable results.

Other than that, and as mentioned in the other post, we are getting excited about the idea of SEFI becoming a double-dip reward protocol. Essentially:

  1. Locked assets will earn yearn-like fees on other networks. These will be used to buy SEFI
  2. SEFI rewards will continue in addition

Other ideas should convince people to lock their SEFI, so perhaps access to these premium yields are only available if you also lock your SEFI up for a period. Needs more thinking!

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Thanks for your consideration and response Guy!

I love the idea of using alternative yields as a tool to buyback SEFI, will be very cool!

  1. While the buyback/burn won’t have significant buying pressure, the model of it encourages speculation. To this point I’ve seen the $200M total volume metric floated around, that would have proved a total of $100K going towards buying/burning SEFI. It certainly won’t burn as quickly as its generated at this time, but the idea of increased scarcity of governance strongly encourages not quickly dumping the rewards.

  2. You are the expert and I fully yield to your disagreement here, just floating some ideas that have been pitched repeatedly in Telegram. Also $SEFI listings on other CEXs and DEXs and upcoming usecases will help to dismantle the sentiment that it’s only good for dumping for SCRT.

  3. It would certainly be new! We will definitely need to have future conversations about where devwork for Secret Swap will come from. It has been wonderful having the Enigma team doing this for so long to this point, but obviously the work is great and the workers are few. I’m not against setting up a specific SEFI devpool, where a later specified percentage of the buyback SEFI goes towards a devpool instead of a burn. That would definitely take more thought and planning, and I’m in no way certain that this specific idea is worthy of the time and difficulty it would take to enact.

My intention is not to over-reward any party, but to get people to purchase SEFI before, or as a condition of, earning their rewards. Our current focus on TVL and liquidity over short-term SEFI metrics is in good intent, however those dumping their rewards are not only lowering the APY’s which disincentivizes more TVL and liquidity, but also currently offer no guarantee that their TVL and liquidity will remain here. Perhaps this “double-dip reward” system and your shared idea in incentives specifically to lockup SEFI, but perhaps other assets as well, will help here.

As always Guy I appreciate your time and consideration!

There is an existing thread on this.

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I would agree more with 1 than 2 or 3. However, I think that the total fees should be raised to 35bps so that LPs aren’t the source of the sefi revenue share. This makes sense because traders are already rewarded by cashback.

I also think that instead of burning, the bought-back sefi should be distributed to sefi stakers to incentivize governance participation.

I wouldn’t be opposed to longer lockups getting more rewards but it sounds like that could require more dev work than a simple buyback.

As to the point that buybacks won’t generate much price pressure, I agree that even the speculative value will have a substantial impact on this downward price spiral. I also agree that it’s not easy to separate gimmicks from good tokenomics decisions sometimes. The model I outlined is basically like xsushi but takes the 5bps from traders instead of LPs.

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I wanted to follow up on this and make it clear that this is top of mind.

I think we’re coming up with a really cool idea that ideally could have a lot more impact.

This will take some time though. I’m excited to share it once it’s more fleshed out.

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Appreciate the followup Guy! Been excited seeing the floating ideas amongst the Enigma team on telegram and Twitter :+1: