LEAP-49: Trading Rewards 2.0

Simple Summary

New reward programs for trading and referrals.

Abstract

This LEAP proposes two new reward programs for trading and referrers:

1. Trading Pools: Traders earn from a pool of rewards each epoch proportional to their fees generated.
2. Referrals: Integrations and affiliates earn a share of fees generated as rewards. Verified partners who stake LYRA earn more rewards.

This LEAP also proposes discontinuing existing trading reward programs:

1. LEAP 34: The tiered fee rebate program will be replaced with trading pools.
2. LEAP 30: The short collateral rewards program will be discontinued.

Motivation

1. Existing trading programs don't incentivize protocol growth:
   • Fee rebates are rewarded in volatile tokens (LYRA and OP) instead of the quote asset (USDC and sUSD). This means traders cannot lock in a rebate's value until the end of an epoch up to 2 weeks after a trade. Additionally, stkLYRA tiers reward incumbent traders but introduce a high barrier to entry for new traders.
   • The short collateral program is difficult to understand and communicate due to its unpredictable rates impacted by option deltas.
2. The new trading pools program generates more trading activity:
   • Increases total available rewards, solving the fee rebate program's cold start problem.
   • Sybil resistant with a unique rewards formula based on open interest.
3. The new referral program onboards new traders and steady sources of volume from integrators:
   • Referrers earn a steady stream of rewards for generating protocol fees, separate to the trading pools competition between individual traders.
   • Verified partners who stake LYRA and establish long-term alignment with the DAO unlock higher reward tiers.

Specification

Trading Pools

Traders earn points for each open position they hold. Traders earn more points when they:

• Pay more fees relative to premiums.
• Open shorter dated positions. This frees up more liquidity to keep pool utilization low.
• Hold a position until expiry. This punishes malicious users who repeatedly open and close positions to generate fees.

Trading Score

Let:

• F be the amount of fees in a trade
• P be the premium of the trade
• T be the time to expiry of the trade
• L be the epoch length

Define the fee score Fs as

Fs = 1 + sqrt(F/P)

Define the time score Ts as

Ts = max(1 - T/L, 0.2)

Define a position score Ps if they hold the position until expiry as

Ps = F * Fs * Ts

When a position's size is adjusted or closed, the position score is the time weighted average of the rate before and after based on contract size.

For example, if a position with 10 contracts expiring in 2 weeks has score Ps1. The position size is reduced to 5 contracts after 1 week and held until expiry. The new score Ps2 is

Ps2 = 10/10 * 1/2 * Ps1 + 5/10 * 1/2 * Ps1

A trader's total score is the sum of the square root of their daily scores for each position held over an epoch. This creates a flatter distribution and balances daily multipliers (see next section).

If a position is held across multiple epochs, the score carries across epochs.

Multipliers

A trader's score can be multiplied when they:

• Stake LYRA
• Hold a top trader score over a 24 hour period
• Get referred by another trader

The stkLYRA condition requires a user to have a stkLYRA balance at the end of each 24 hour window. Only a trader's points over that 24 hour period are multiplied.

The top trader condition applies over a 24 hour window starting 00:00 UTC every day. Only a trader's points over that 24 hour period are multiplied.

The referred condition is applied on a per trade basis based on a referrer address being populated in the OptionMarket.Trade event's referrer field.

Tier	Conditions	Multiplier
I	1k stkLYRA or top 100 or referred	1.2x
II	10k stkLYRA or top 50	1.5x
III	50k stkLYRA or top 25	2x
IV	250k stkLYRA or top 10	2.5x

Referrals

Accounts that refer trades will earn a share of their referred trading fees as rewards. The fee rewards will be tiered by stkLYRA balance, with the same functionality and implementation of LEAP 34.

Accounts must verify themselves to access higher rebate tiers. The verification process from LEAP 39 will be adopted, allowing integrations to delegate stkLYRA and payout addresses. Post LEAP 51 the Grants Council will be responsible for approving new integrations. Additionally, the Grants Council will be able to denylist malicious addresses that are gaming the referral program.

Tier	Conditions	Fee Rewards
I	0 stkLYRA, unverified	10%
II	500k stkLYRA, verified	35%
III	1m stkLYRA, verified	50%
IV	5m stkLYRA, verified	60%

The referral allowlist and denylist will be maintained publicly in this spreadsheet and will be initialized with the existing LEAP 39 allowlist.

Implementation

• Trading scores will be calculated in an off-chain script.
• Referrals will be tracked on-chain via the OptionMarket.Trade event's referrer field. Population of a trade's referrer field is up to the integrator.
  • Referrals will only be available on Newport versions of the protocol since previous versions do not support the referrer field.
  • Interfaces may track affiliation off-chain using tools like Spindl that provide vanity links with short referral codes and measure more precise attribution windows for trader to trader referrals. They could then populate the referrer parameter on-chain as a trade is made.
  • On-chain integrations such as dHedge, Polynomial and Brahma may choose to hardcode a referrer parameter to their DAO's address, then distribute rewards to LPs periodically.
• Reward quantities, tiers and their conditions for trading pools and referrals will be set by Council pre LEAP 51 and by off-chain Snapshot vote post LEAP 51.
• Rewards for both programs will be distributed after each epoch.

Program Adjustments

For posterity, this LEAP proposes three amendments for all epoch-based reward programs, covering trading rewards, referral rewards and vault rewards programs.

1. Thresholds: Each program has a threshold for minimum distributions. For example, if a threshold of 1 LYRA is set for the trading rewards program, traders who earn less than 1 LYRA will be ignored in the distribution. This makes distributions more gas efficient by ignoring sybil accounts.
2. Distribution Buffer: Rewards can be distributed up to 1 week after an epoch ends. This gives the DAO time to identify and resolve issues in distributions.
3. Updates: Post LEAP 51 changes to reward programs must be made via Snapshot vote using the off-chain signaling process. For proposals that update or introduce a new program, the full LEAP structure should be used. For proposals that adjust a program's configuration, for example increasing a rewards cap or changing a program's reward token, only the new configuration needs to be included in the proposal.

Copyright

Copyright and related rights waived via CC0.