CIP-0001: Change CLAIM purchase process and LP incentives

Summary

  • Do away with CLAIM/DAI LP, and only focus on NOCLAIM/DAI LP.
  • Users buy CLAIM buy minting CLAIM/NOCLAIM, and selling NOCLAIM.
  • MMs mints CLAIM/NOCLAIM, provides NOCLAIM/DAI liquidity, and actively manages the NOCLAIM price.
  • When price of NOCLAIM is too high, there is no demand for CLAIM, so MM will be stuck with CLAIM inventory - ensures MMs need to know when the price/risk is right when pricing in farming risk.
  • When price of NOCLAIM is too low - too many people minting to dump so they can get claim - farmers can choose to use their existing CLAIM to arb NOCLAIM back to their entry price - this increases fee to protocol.

Background

  • Previous incentivisation for CLAIM/DAI LP distorted the price of CLAIM.
  • Currently the incentives for the Balancer Pool are lowered to 5/75, which reduces the incentives to provide CLAIM liquidity.
  • This is the logical extension of the change in weightage, and concentrates all rewards into the single pool.
  • Currently, due to reducing rewards and high potential losses (CLAIM trends to 0 after all), most farmers prefer to only farm the NOCLAIM/DAI side due to a) high rewards and b) low IL (98/2)

Motivation

  • Reduce market making complexity - only one pool to manage
  • Increase in-protocol fees by capturing CLAIM/NOCLAIM arbitrage value
  • Users benefit from improved CLAIM purchase liquidity and reduced slippage

Specification

  1. Remove CLAIM/LP pool incentives
  2. Develop smart contract that uses a flash loan from dy/dx (free) to a) Mint CLAIM/NO-CLAIM, b) Sell NO-CLAIM, c) Payoff dy/dx loan
  3. Increase NO-CLAIM ratio (currently 98/2) to 80/20 to reduce slippage. MMs are already protected since they hold excess CLAIM, and slippage in a NOCLAIM situation is minimal (e.g. 90c -> 99.9c).

For

  • Remove CLAIM/LP pool incentives completely.
  • Restructure CLAIM purchase as a smart contract function to a) Flash loan b) Mint Claim/No-Claim c) Sell No-CLAIM d) Pay off flash loan.

Against

  • Maintain CLAIM/LP and NOCLAIM/LP pools and incentives.

Vote

Change CLAIM purchase process and LP incentives
  • For
  • Against

0 voters

For additional info, I’ve also done a study of actual insurance buyers for governance vote #1.

I define an actual insurance buyer if they have at least 2xCLAIM in account and staked, than NOCLAIM and staked.

Too little CLAIM is bought; most are hoarded. I estimate actual protocol usage at around 5%, with the rest used for farming. We need a way to increase effective use of the protocol.

Please refer to study for more details: Actual Usage of Cover Protocol for Gov Vote #1