Goal:
Launch staking rewards, subsidized by the Community Pool, while continuing to bootstrap TVL across a growing number of Cellars.
Context:
Currently there are no opportunities for users to earn staking yield on their SOMM tokens. Sommelier’s tokenomic design allocates a portion of all Cellar fees to stakers and validators (.225% TVL). However, SOMM staking yields have been constrained by Cellar TVL, which hasn’t yet reached the point at which it can provide competitive APYs.
Temporarily subsidizing Cellar fees from the Community Pool to provide competitive staking rewards should create more awareness for Sommelier, incentivize new user growth, and improve security. As more users generate higher commissions for validators, new validators may be incentivized to join the network, further increasing decentralization. Additionally, higher commissions for validators will help support one of Sommelier’s main 2023 goals: multi-chain strategies. Supporting multiple chains comes with an additional cost to validators and subsidized staking rewards will partially offset the cost of supporting multiple chains.
Credit to @poldsam for figuring out how to thread this needle.
These subsidies are designed to be in place only temporarily, while total value locked (TVL) grows across an increasing number of Cellars. After a period of roughly one year, the subsidies will be re-evaluated depending on the amount of bootstrapping needed to achieve competitive yields via Cellar fees alone.
These rewards would be distributed out of the Community Pool. There would be no change to token supply as a result of this proposal and these rewards are all non-inflationary.
Proposal:
This proposal would activate staking incentives funded by the community pool via the new incentives module: sommelier/x/incentives at main · PeggyJV/sommelier · GitHub
This proposal will adjust two parameters, “DistributionPerBlock” and “IncentivesCuttoffHeight". These parameters control how much SOMM is distributed to stakers every block from the community pool and at what block height these incentives will cease respectively.
If approved, the proposal will set the DistributionPerBlock parameter to ~2.0 (rather than 0) and set the IncentivesCuttoffHeight to approximately 5M blocks, or a block height approximately one year away. This will enable distribution of the specified number of SOMM per block until the chain reaches the specified block height in approximately one year.
If 100% of the circulating supply are staked, stakers could expect an APY of ~10%. However, we believe we could see APYs +50%, using more realistic staking rate assumptions.
Funding:
Up to 10M SOMM, or ~7% of the current community pool, would be used to temporarily subsidize staking rewards for the period of one year. The exact amount of SOMM to be distributed is hard to know in advance, as it depends on block height, but variance is not expected to be greater than 30,000 SOMM.
Conclusion:
In this post we outlined a proposal to subsidize staking rewards through the community pool. We believe this is a critical step in bootstrapping the growth of the Sommelier network.
We would appreciate any feedback on how to ensure the proposal best reflects the interests of the Sommelier protocol and community.
