[Request for comment] AMM and Bonder Liquidity Incentives

🐰Hop Ecosystem
22

@fredcoen, The numbers @maaria laid out are correct and the returns are similar for the other bonders except for USDC, which has been slightly higher.

@pulpmachina I don’t think retroactive LP rewards are justified because that’s a completely liquid market. LPs can come and go as they please. The relationship with bonders requires a lot more cooperation on both sides. We want bonders to keep the bonder fee rate low, not pull funds until a replacement bonder is found, and raise capital on short notice if Hop needs to scale up. In general, bonders need to be highly aligned with Hop and responsive to its needs.

Bonders deserve a higher return than standard DeFi yields and Hop LPs for several reasons:

  • Running a bonder carries a lot more risk than LPing. LPs are only exposed to Hop smart contract risk and the risk of the network they’re on. Bonder’s are exposed to Hop smart contract risk, the risk of every supported network, and custody risk related to running and securing the bonder server.
  • Running a bonder is a lot more work. Bonders spend significant amounts of time setting up infrastructure, running updates, debugging issues as well as raising funds and forming legal entities to pool funds.
  • Running a bonder is fairly illiquid. If a bonder wants to pull their funds, a replacement must be found, or the bridge will lose fast-transfer capabilities until a replacement is found. If a current bonder pulls out because 1) they’re only making 4.5% while taking on a lot of bridge risk and 2) they’re spending time/money running infrastructure, it will be really hard to convince a different party to take their spot.

All of the bonders have kept fees low the past 3 months despite subpar returns. They have also raised/contributed significant liquidity on short notice to keep Hop operational during surges in demand.

I think demonstrating that Hop will seek a positive-sum outcome will significantly lower Hop’s cost of bonder capital moving forward. It will also make it easier for Hop to attract new bonder liquidity as it scales up. Since demand is hard to predict, liquidity often needs to be raised on short notice. In my opinion, the rewards are deserved but will also benefit Hop and help it scale until the bonder role is decentralized.

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23

Perhaps rather than providing a flat incentive, there could be either a floor/minimum guarantee or a floating rate that takes into account opportunity cost for the bonders to lock up capital vs an alternative benchmark?

A floor on yield may not require actual outlay of subsidy in all months, depending upon market condition. Likewise, a floating rate of subsidization might limit spend while ensuring bonders are economically secure.

Of course, this is easy to say without having to propose specific numbers for those frameworks!

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24

conceptually I love the idea of a benchmark total return for bonders, where HOP incentives are used for any shortfall.

But agree its hard to decide what that is, and what bonders agree to today may not work down the road.

A guaranteed total return could also warrant a bonder’s capital to be formally locked up for a fixed period (6 months?), with a slashing mechanism if the bonder doesn’t fulfill their duties (primarily uptime).

Think this is off topic for this proposal but worth exploring further once this initial program is live.

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