Great news for LP's on Thorchain today, with the latest Thorchain Weekly Dev Update indicating a change of direction for Thorchain with regard to the Incentive Pendulum.
If you are not aware, the Incentive Pendulum is a device that allocates system income (trading fees and block rewards) between Node operators and LP's. When the network is in balance, 67% goes to the nodes, 33% to LP's. The reasoning for this split was that Nodes encounter significant operating expenses compared to LP's, and they should be paid more in comparison. More information about the Incentive Pendulum can be found in documents on the Thorchain website.
System is overbonded.
Now with a few months of live data from chaosnet, a change has been foreshadowed to this setting. The team has deduced that the system is almost always overbonded, with funds in LP's failing to keep up with the amounts being bonded by nodes. The team have pinpointed Impermanent Loss as being a factor they had not sufficiently considered in the equation, and have decided the best way to boost compensation to LP's is by making the Incentive Pendulum "tunable".
Gauntlet was first to identify several months ago that nodes are paid significantly more than LPs in “Steady State”, despite nodes contributing the same amount of capital as LPs. As an example, for 100m RUNE, nodes will bond 67m RUNE, and LPs will supply 33m RUNE to the pools, AND, 33m RUNE worth of assets. So in fact, LPs supply the same amount of “capital” as nodes (67 vs 33 + 33).
Thus the Incentive Pendulum is paying too much to Nodes. To address this, the team have now added a Tunable Incentive Pendulum, that can be tuned to pay anything from a 50:50 to 67:33 split in steady state, with a single parameter. The next net will launch at 50:50 and will only be adjusted if the network flips to become underbonded most of the time. This will now see more payments to LPs
Quotes above are sourced from the Weekly Dev Update.
Taking in to account the IL, that liquidity providers experience - particularly in times when RUNE outperforms the other assets being provided, is a great move from the team. Many people have been on the fence about adding liquidity, as they remain bullish on the price of RUNE and don't want to risk the Impermanent Loss when/if it moves significantly higher. With many in the community expecting RUNE to move towards $6 and beyond, this could mean bagholders lose significantly in favour of arbitragers profiting from these moves.
First-class citizens
I believe that this move, with the point being made that a 50-50 split will be the default on the next net (which by the way will be multi-chain chaosnet - live funds with native BTC) will improve the rate at which LP's are comfortable adding to the pools. The system is designed with an economic goal of 80% of RUNE as a minimum being in the system, either bonded by nodes or in pools by LP's. Obviously, the 2 thirds/1 third split has had the desired effect of encouraging node operators to bond and compete for their place in the system, but RUNE in pools has lagged for most of the chaosnet period.
The team have been trying to compensate LP's for the past few weeks, with a series of targeted payments being added to specific pools. Firstly, RUNE was added to the BTCB pool, followed by the BUSD pool. This week it is the trun of the RUNE/ETHbep2 pool, with 75K RUNE being added in over the course of the week. This is obviously a temporary measure, but I guess much of the benefits need to be built in to the system to be sustainable. Shifting the pendulum's default settings has the effect of improving the income for all the pools containing significant liquidity and volume.
Many times, Thorchain have stated that Liquidity Providers are the "first-class citizens" in the Thorchain eco-system. This change being made proves that point once again.
For more info on Thorchain and the RUNE cryptocurrency, see these related posts:
What is Thorchain and the RUNE cryptocurrency by @khaleelkazi
Why RUNE is one of the Best Cryptocurrencies to buy in 2020 by @khaleelkazi
Big picture suggestion – building a Thorchain interface into LeoFinance
Learn more about the determanistic value of RUNE](@khaleelkazi/rune-deterministic-value-and-how-we-can-use-it-to-predict-price-action-in-the-future) by @khaleelkazi
You can find all Leofinance content related to Thorchain by visiting the Thorchain trending page. If you do create a post on Leo about RUNE or Thorchain, make sure to add the "thorchain tag to the post so we can find it easily.
Thanks for reading,
JK.
