Proposal: Amendment to the Protocol Income Distribution - Increase veMUX’s Share & Reduce POL’s Share

Proposal
1

Background

Upon genesis, the Protocol-Owned-Liquidity (POL) setup was designed to ensure MUX won’t fully rely on external LPs and that the native pool can gradually become self-sufficient. Also, to ensure veMUX, the governance token holders, are bound with the protocol growth, veMUX’s income share is calculated based on POR using the following formula:

  • Total Protocol Income × 70% × POR: Allocate for veMUX holders (in ETH)

During the first year of MUX’s runtime, the POL has grown from $6.57M to $9.9M (after deducting $400K first year marketing budget, $1.9M second year development & market budget and bearing $120K Multichain & Fantom black swan incidents losses for all LPs); however, the total MUXLP pool size also increased from $6.57M to $49.3M. Although the total protocol income has been over $10M, veMUX holders’ share has been decreasing due to increased external LPs.

To ensure veMUX holders’ interests are aligned with MUX for the long term, after learning community feedback, MUX contributors looked into directions to increase veMUX holders’ income share while still allowing POL to grow and serve its crucial functions:

  • Serves as the foundation of the MUXLP pool to support trading demands.
  • Funds annual development and marketing activities
  • Binds with the governance token, veMUX’s share of income.
  • Serves as the safety fund to protect all LPs during black swan incidents.

Proposal

Based on community discussions and careful evaluations, MUX contributors propose to update the protocol income distribution as follows:

From

  • The protocol income collected from trading fees will be allocated as follows:
  • Total Protocol Income × 70% × POR: Allocate for veMUX holders (in ETH)
    • POR is the rate of Protocol Owned Liquidity
  • Total Protocol Income × 70% × (1 - POR): Allocate for MUXLP stakers (in ETH)
  • Total Protocol Income × 30%: Purchase MUXLP and add it as protocol-owned liquidity

To

  • The protocol income collected from trading fees will be allocated as follows:
  • Total Protocol Income × (70% × POR + 15%): Allocate for veMUX holders (in ETH)
    • POR is the rate of Protocol Owned Liquidity
  • Total Protocol Income × 70% × (1 - POR): Allocate for MUXLP stakers (in ETH)
  • Total Protocol Income × 15%: Purchase MUXLP and add it as protocol-owned liquidity

Using the existing formula, veMUX holders’ share is around 15% and is entirely dependent on POR. After the change, the veMUX holders’ share will be increased to approximately 30% and will be less reliant on POR. This change aims to allow veMUX holders to earn a higher share of income while still enabling the POL to grow and serve its crucial functionalities.

Next Steps

  • Community discussion surrounding this proposal
  • Community members vote to approve/disapprove of this proposal
1 Like
2

Excellent proposal that allows token holders to capture Mux growth.

Looking forward to passing this :handshake:

3

Appreciate the devs taking a first crack at this. But I don’t think this incorporates community feedback much. Seems like barely a change from current setting

imposing a variable rate based on POR is inefficient - POR will definitely decrease over time as there’s more liquidity onchain owned by other people than owned by MUX.- just basic theoretic principle. As evidence, POR has decreased by over 85% since launch.

this proposal also significantly diluted mux LP payments. And it’s not clear why users would deposit into MUX LP and take more smart contract risk (connext) for less yields than GMX V1 or G2 vaults custom strategies which have less smart contract risk and more yield

Would prefer this proposal to be for a fixed fee change that allocates to stakers, LP and POL (to serve as dev fund. this keeps it simple, yeilds reliable for everyone, and hopefully doesn’t dilute mux LP this much.

for example

70% to MUX LP
20% to stakers
10% to POL

This way token value to stakers doesn’t get diluted as POR inevitably declines, MUX LP remains intact (which is what generates revenue in the first place), and POL can be supported for dev budget and floor fund.

1 Like
4

Thanks for the feedback, but I think there have been some misunderstanding surrounding the new formula.

POR is currently around 20%

Screenshot 2023-09-12 at 3.26.28 PM
Screenshot 2023-09-12 at 3.26.28 PM770×66 7.95 KB

So using the new formula, the protocol income collected from trading fees will be allocated as follows:

  • veMUX’s share:
    • 70% × 20%+ 15%= 29%
  • MUXLP’s share:
    • 70% × (1 - 20%) = 56%
  • POL’s share = 15%

So MUXLP’s share stay unchanged, POL’s share will reduce by 15%, and veMUX’s share will increase by 15%

1 Like
5

Thanks for clarifying @dumbird_MUX.

But what’s the advantage of this variable model based on POR instead of simple fixed split model. MUXLP’s share of fees still less GMX V1 and others in market…

7

MUXLP’s share of fees might be a bit less, but since the utilization rate is usually higher, MUXLP’s actual APR has usually been higher in the past. The scenario will likely be similar if the volatility is back and trading demand increases again.

The variable part primarily aims to bind the POL growth with the governance holder’s share in the long term as the protocol becomes self-sufficient.

Quoting from the docs: “Sufficient liquidity is crucial for trading protocols, as deeper pools can support higher open interest. However, acquiring and maintaining liquidity can be costly and unstable if solely reliant on liquidity providers (LP). Therefore, instead of “renting” all liquidity from external sources, the MUX protocol implements the POL mechanism to become gradually self-sufficient.”

1 Like
8

Great proposal. Whilst the additional 15% would certainly be welcome by veMUX stakers, we are still looking at marginal utility targeted at a specific segment of existing users which will likely translate to some retention conversion to upcoming unlocks, global average lock duration and to a lesser degree % of total supply locked in veMUX.

I’d like to propose a slight amendment that still encapsulates the core spirit of the proposal whilst addressing the big elephant in the room that is liquidity around MCB. It is an essential parameter whenever someone speculates staking it for X years and a recurring thought for existing stakers. “Will liquidity conditions around MCB be similar around my unlock?”

The protocol recently added ARB-MCB liquidity in a relatively large v3 liquidity range as a backstop, which is a positive step in the direction but not enough. So, my ammendment would be to temporarily use the additional 15% in question to build protocol-owned MCB/ETH liquidity and reduce reliance on individual third-party v3 LPs - once the liquidity milestone is reached stream that 15% to veMUX.

Please discuss.

1 Like
9

Hey guys!
First of all, thank you for your constant work on improving the protocol. I highly appreciate that during this bear market you are building the base for the next bull.

As for the proposal, I strongly disagree. It’s just not the right time for this change.

MUX’s earnings for the last couple months are roughly $1,8m.
If this boring market continues for another year, it’s $10,8 million per year. You are proposing to cut POL’s share from $3,2m to $1,6m.

$1,6 million is less than the development & marketing budget for the upcoming year.
This means POL, following the current trend, will decline over time if this proposal is accepted.

You may argue that current volatility is extremely low and will, most likely, go up.
But what if it gets even worse?
If the crypto market continues its slow bleeding, MUXLP loses value because of:
— declining price of crypto
— LPs leaving because of the low APR.

These two factors forced MUXLP to shrink from $57 million to $48,5 million, and that took only two months.
Therefore, if this ugly bear continues, MUX’s earnings for the next year could be way less than $10 million.

POL is not only the source of funding for the protocol.
POL is the basis of protocol stability, both in harsh and flourishing markets.
I can easily imagine all kinds of vampire attacks during the next bull market.
New protocols will offer crazy farm APRs and zero trading fees.

Mercenary capital comes and goes for better opportunities.
POL stays with the protocol.

This is the proposal for better times.
Let’s survive this market first.

1 Like
10

Thanks for the feedback, and agreed that the MCB liquidity situation should be optimized for the long term.

Based on the roadmap, veMUX and MCB holders are the long-term governors of the protocol and will also be core income receivers in the long run. To reach this goal, there needs to be sufficient POL. MCB liquidity optimization will likely happen in the long run, but it is better to be prioritized at a later stage when the volume TVL shares are dominant in the overall perps sector.

The path can be like product improvements → onboard more traders & LPs → repeat the previous loop until MUX is widely adopted → further strengthen governance token holders’ benefits & improve MCB liquidity.

Since this proposal focuses more on veMUX’s share of income, would you mind if the amendment is proposed in a separate proposal down the road?

1 Like
11

Thanks a lot for the feedback and really appreciate for aligning with the long term goals that MUX tries to achieve with the POL.

The latest volume drop is concerning. And exactly like what you mentioned, the major factor behind it was low volatility; when the volatility was briefly back on Aug 17th, MUX volume was still notable hahah. But aside from volatility, trading cost and market diversity can also be related factors. To make up for those shortcomings, MUX contributors are actively working on campaigns and feature updates, and the goal is to meet more diverse trading demands in diverse market conditions.

In terms of the liquidity loss, I would say it’s part a natural loop: when the APR is high, LPs would come; when low, LPs might leave. We are witnessing the latest drop, but it’s not MUX-specific atm, cuz it’s happening across the sector. I think the potential good part is LPs are aware of MUX as a farming destination now, so when protocol income goes higher, they will likely come back. So the loss won’t be permanent as long as we keep building and increase the influence. In addition, the new liquidity setup will be live in the future and can potentially help to onboard more LPs with diverse risk exposure preferences.

Surrounding the timing, I think one of the main factors that lead to this proposal is that veMUX holder’s share of income was completely bound with POR. Since POL doesn’t grow as fast as external liquidity, veMUX’s share actually got diluted as the protocol grow. veMUX is an important part of MUX, not only because it’s the governance token, but also because veMUX holders are the backbone of this protocol. Many veMUX holders have made great contributions to help the protocol gaining exposure and onboard traders. Also, since acquiring veMUX requires hardcore locking, the holders can barely be mercenaries and is instantly bound with protocol growth. From this standpoint, it might make sense to balance the share a bit and make veMUX’s share not so volatile and not completely bound with POR. As POL still earns 15% of the income, it can still grow and the long-term goal is still to be achieved.

Again, totally understand the concerns, but I would say with the upcoming campaigns, major feature updates, and stronger holder confidence and influence caused by the potential share increase, the road forward might not be that hectic.

1 Like
12

Don’t mind - will vote yes for the immediate benefits mentioned above.

1 Like