Title: UIP-01:Implementation of Elastic APR Model (ADE) and increasing $UNO utility
Scope: Improvements in use-cases and tokenomics
Authors: Jas Singh, Sujith Sizon, Vithuran K.
UIP-01 Summary:
The UnoRe Improvement Proposal 1 is vital for the long-term success of the protocol. Initially, the protocol operated on a model that bootstrapped liquidity. However, UnoRe must now shift its focus towards a more sustainable business model and $UNO token growth.
Initial tokenomics were designed as a mechanism of bootstrapping liquidity to make it possible to underwrite insurance contracts and earn premiums for LPs in an entirely decentralized manner. What was previously gated by traditional finance, now retail DeFi can benefit from - yielding returns from an insurance-driven business model.
Since the advent of DeFi, every protocol has been afflicted by mercenary liquidity pushing retail users to often flock to the newest protocols offering cosmetically high APRs without verifying trust source of yield. Instead, UnoRe would like to attract liquidity that is true to the community and believes in the UnoRe DAO; high APRs divert the focus and goals of UnoRe, and dilute token holders in the process. New changes in tokenomics allow for an Automated Dynamic and Elastic APR (ADE APR) model that fluctuates based on the performance of the business. This new design will establish a foundation for $UNO price growth by reducing monthly emission rates, all while providing higher APRs (capped as per old tokenomics model) when it’s needed most.
In addition to changes in tokenomics, this proposal suggests adding $UNO utility to incentivize long-term holding and increase its value. UnoRe will create additional $UNO utility by allowing policy payments to be also paid in $UNO, but priced in USD. A portion of $UNO tokens used for purchasing insurance will be burnt from the supply which will create a flywheel effect on $UNO prices as more demand in insurance will reduce our circulating supply. Additionally, USDT, DAI, and ETH will be premium payment methods on the CoverPortal. This will create more stable cashflows for UnoRe and its LPs.
Predictable cash flows will bring reliable returns for LPs, therefore increasing value to $UNO stakers. We feel the market is in need of stable and predictable returns. With stable cash flows from USDT, DAI, and ETH, UnoRe will attract additional capital into its investment pools. A healthier insurance capacity gives UnoRe more capital to work with for underwriting bigger protocols and earning more premiums for our LPs. This maximizes the benefit for the most number of people within the active UnoRe community and ecosystem, supporting UnoRe’s ambition to connect the decentralized economy and drive broader adoption of a safer Web3 in general. The implementation of $UNO utility, stable cashflows, and changes to the tokenomics distribution schedule would require changes to the DAO’s governance and decision-making processes, including proposing and passing new governance proposals and potentially updating the DAO’s whitepaper and documentation.
Goals: The primary goal of this DAO proposal is to create a sustainable business model and organic growth for the UnoRe ecosystem which will benefit both our community members and the long-term growth of our protocol. We aim to achieve this by:
- Creating a system that incentivizes token holders to hold on to the token for longer periods, which reduces sell pressure on the token.
- Creating a system that rewards token holders for contributing to the development of the ecosystem, which increases the demand for the token.
- Creating a system that ensures transparency, fairness, and equal distribution of rewards to all token holders.
- Creating a dynamic and elastic token emissions schedule that efficiently distributes tokens based on utilization metrics, and eventually making $UNO deflationary by design
Background:
ADE APR Model:
The ADE APR Model is revolutionary in how it views yield farming and DeFi yield incentive structures. All DeFi yield incentive structures are stagnant by design; they continually have fixed high inflation rates to attract liquidity at the cost of token holders. This design is not dependent on any business related KPIs and is often only changed by DAO voting – which has inherent flaws on its own.
This new ADE APR tokenomic design is the first elastic APR model which fluctuates based on TVL and insurance capacity utilization rates. We feel that it would be irrelevant to subsidize liquidity in the form of APRs if this liquidity is not being utilized efficiently.
- When utilization rates are low, APRs will be reduced to prevent over-dilution of $UNO token holders. In other words, idle capital should not exist within the system that is not being used for covering claims, as it should. It does not make sense to spend $UNO tokens on APRs for idle capital.
- If utilization rates increase and are more efficient, however, APRs will increase to incentivize more deposits so that capacity is always available to maintain a healthy balance between liquidity incentives and utilization rates. The goal for this model would be to maintain between 60-90% utilization rates on a rolling month-by-month basis across all pools.
- Furthermore, if TVL decreases while the utilization rate stays constant, APRs will increase to incentivize deposits into investment pools to ensure that capacity is always available for underwriting insurance.
- Similarly, if TVL increases, while utilization rates stay constant, APRs will naturally decrease but will still be far more desirable than most risk-free rates in DeFi today
After careful analysis of all DeFi yields today, we have found that the average yield in the safest DeFi protocols offer roughly 1.9% APR. If TVL is a factor, the APR is closer to 0.78%. (This would be considered the risk-free rate in DeFi given current market conditions.)
The ADE APR model is designed to offer a minimum of 5 times the risk-free rate in DeFi, 9.5%, to a maximum of 50% APR or the max emission rate defined by the token release schedule - whichever is highest. Realistically, however, we are more likely to see APRs range between 15% to 30% given current metrics.
Utilization Rate and Conservative Insurance Capacity:
The utilization rate can be defined as how much of the staked assets are backing possible insurance claims while also taking into account the stability of assets in the investment pools via the Conservative Insurance Capacity. This relationship can be expressed as:
Utilization Rate = Insurance coverage sold + insurance coverage pending to be active / Conservative Insurance Capacity
In other words, we could relate the idea of the utilization rate to capital efficiency. If the utilization rate is 70-100%, the capital is being utilized effectively. If the utilization rate is low (20-40%), the capital is not being utilized effectively.
Since there are investment pools that require staking $UNO and some that require staking stablecoins, there are some correlated and uncorrelated risks when a claim is due. When a claim is due, market forces can cause the price of $UNO to fall, therefore reducing the value of capacity available to pay out the claim. To assess correlated risks, the Conservative Insurance Capacity framework was created. This would provide a means of stabilizing insurance capacity based on correlated risk.
This relationship can be expressed as:
Conservative Insurance Capacity = (Insurance capacity in non $UNO denominated assets X 2) + (insurance capacity in $UNO denominated assets * 1/3)
Utilization rates and conservative insurance capacity play a crucial role in calculating ADE APRs.
$UNO Utility:
$UNO tokens are digital assets that represent ownership and decision-making power within the UNO decentralized autonomous organization (DAO). These tokens will provide holders with voting rights, allowing them to participate in decision-making processes related to the DAO’s operations and governance.
However, the value of DAO tokens is often subject to market fluctuations and can be influenced by external factors beyond the control of the DAO’s community. To address this issue, many DAOs have started to explore use-cases for DAO tokens other than voting rights to increase the value in DAO tokens over time.
DAO token use-cases and tokenomics are a set of rules and mechanisms that incentivize long-term holding and participation in the DAO’s activities. By doing so, the DAO can increase the value of its token over time, benefiting both the DAO’s community and its long-term sustainability.
The current tokenomics point towards an inflationary token release schedule. A token release schedule is a month-by-month schedule showing the distributions of new $UNO tokens entering the circulating supply. The aim would be making $UNO deflationary by using it to pay premiums for purchasing Insurance Policies.
Proposal:
- Accepting $UNO as payment for insurance at a 15% discount: Allowing users to purchase insurance premiums using $UNO tokens will increase the demand of $UNO tokens by taking away $UNO supply from the open market. A ‘Zap’ feature would allow users to seamlessly zap into $UNO via an Oracle for pricing and pay meta transactions therefore, increasing DEX volumes and fee revenue for DEX LPs. However, the ‘Zap’ feature will only be available if sales volume is high enough to counteract the gas charged by DEXs. This also allows users to purchase insurance subsidized by $UNO rewards accrued from staking and other incentives. Although premiums will continue to be quoted in USD for most products, products such as ETH2 Slashing coverage will continue to be quoted in ETH.
- Allowing $USDT, $DAI, $ETH as additional payment options: Since revenue is mostly comprised from cash flows of premiums, it is better to have more predictable and reliable cash flows. We believe this will help maintain an organic, healthy, and stable valuation of the UnoRe business model. For this reason, the choice of payment in $USDT, $DAI, and $ETH will bring sustainable and reliable returns to LPs and UnoRe stakers.
- Implementing the ADE APR Model (Automated Dynamic and Elastic) which will provide an efficient and sustainable means of token emissions.
ADE APR Reductions:
ADE APRs will be reduced if the following conditions are met by the end of each quarter:
a. TVL increases while utilization rate stays contant
OR
b. Utilization rate decreases while TVL stays constant
In either of these scenarios, the demand for insurance is less, therefore a reduction in ADE APRs is required. The ADE APR model will automatically reduce APRs given for liquidity providers. This will be reflected on the monthly emission rate of $UNO tokens.
ADE APR Hikes:
At the end of every month, the ADE APR model will readjust to determine any changes in the APR. Unlike ADE APR reductions being adjusted quarterly, ADE APR hikes are done monthly. This is important because liquidity must be responsive toward demand in insurance, whereas a lag to decrease ADE APRs is necessary to prevent unnecessary changes.
ADE APRs will increase if the following conditions are met by the end of each quarter:
a. Decrease in TVL while utilization rate stays constant
OR
b. utilization rate increases while TVL stays constant
The ADE APR model will automatically increase the APRs given to liquidity providers. This will be reflected in the monthly emission rate of $UNO tokens.
ADE APR Formula:
The relationship between utilization rates, TVL and APRs can be modeled using the formulas below:
ADE APR = (40 * r^4) + (9000000 / (x + 180000)) + 5R, for r = { 0 < r < 1 }
FOR r = {r>1} , ADE APR is capped at 50%
Where;
r = the utilization rate expressed as a percentage but in decimal form bound by ranges from 0 to 1.
X = TVL
R = risk-free rate in DeFi (1.9%)
For simplicity’s sake, I have broken down the above complex formula into 2 formulas, one of each defining the relationship between single variables.
I. Target APR (Relationship between TVL and APR) = (9000000 / (x + 180000)) + 5R
Where;
x = TVL
R= risk-free rate in DeFi
Below is a graph of the relationship between Target APR and TVL
As you can see, the sloping curve illustrates the Target APR decreasing as TVL increases. The Target APR is not the ADE APR; however, is used in formula II to calculate the ADE APR.
Finally, to calculate the ADE APR from the Target APR in formula I, we use the below calculation:
II. ADE APR = (40 * r^4) + Z
where;
r = utilization rate expressed as a percentage in decimal form (10% = 0.1)
Z = Target APR
**Below is a graph illustrating the relationship between the utilization rate and the ADE APRs. **
Given the current TVL across all investment pools of $2.4m;
- a 30% utilization rate will deliver 13.31%
- a 60% utilization rate will deliver 18.17%
- a 90% utilization rate will deliver 39.23%
Conclusion and next steps: Our proposed use-case and newly enhanced tokenomics model aims to create a sustainable ecosystem that benefits all token holders. By incentivizing holding, reducing selling pressure, and implementing mechanisms that can make $UNO deflationary, we believe that our token will have a more conducive and sustainable long-term growth trajectory. We look forward to feedback and support from our community members as we hope to implement this proposal.
Note: The following APR calculations apply to Uno Re’s SSIPs - upon passing of this proposal, further UIPs will be proposed with distinct formulas for veUNO and Uno Re’s SSRPs.
(For full transparency, if passed, this proposal will also hold the protocol liable for commissioning a Dune Dashboard that dynamically displays current circulating supply, staked amounts, emissions, and other important protocol information; the development of this dashboard will be outsourced as a community consignment, and an appropriate budget will be allocated for its completion. More details will follow post-passing of UIP-1).