Q2 Targeted Liquidity Mining Program for C.R.E.A.M. Finance

Submitted by Mechanism Capital

Summary

We propose to distribute 90,000 CREAM tokens in the protocol treasury to users that provide liquidity to CREAM’s capital markets across Ethereum (60,000 CREAM) and Binance Smart Chain (30,000 CREAM). The rewards will be vesting with a cliff, such that new CREAM would only begin to enter the market months after the start of the Liquidity Mining Program and will be released to LPs in a linear fashion.

For: Allocate 90k CREAM tokens from the treasury for a targeted liquidity mining program with a duration of 90 days
Against: Nothing changed

Impetus

CREAM has a warchest of tokens, and much of these have already been earmarked by governance for Liquidity Mining purposes. Other competing platforms (like Aave) are beginning to consider offering LM incentives in order to attract TVL, meaning that the battle for liquidity in lending/borrowing markets is heating up. Additionally, CREAM lost a good amount of TVL after the Alpha Hack, which many mistakenly believe to have affected CREAM lenders.

A targeted Liquidity Mining program can boost utilized liquidity and efficient use of the protocol, while also helping to bootstrap the BSC arm of the protocol.

Specifics

From the above, we see that the CREAM has over 773k unallocated tokens, some of which can be put to use as part of liquidity mining programs. For this specific program, we propose using 90k CREAM tokens to be distributed over a period of 90 days. Here is a table of how this proposed program stacks up against Aave’s and Compound’s respective LM programs (note that “annualized rate” for CREAM assumes zero LM inflation apart from this 90-day proposed program).

Although the dollar amount of CREAM distributed daily is lower than the dollar amount of AAVE and COMP distributed, the CREAM platform currently has significantly less liquidity than Aave and Compound, so the rewards are actually proportionally higher (on a TVL basis) than these other LM programs.

In addition to restricting rewards to a brief (i.e. three month) incentive period, the CREAM LM program will also target specific assets. Instead of attempting to grow liquidity on the platform by distributing rewards evenly across assets and chains, we believe that LM should optimize to grow liquidity in the most effective and productive ways possible.

Targeting stablecoin lending

In general, stablecoin lending is less common and less attractive to crypto native lenders, who would rather deposit non-stablecoin assets and borrow stablecoins against them as a form of leverage. In part for this reason, borrow APYs tend to be quite high (upwards of 20% on CREAM) and utilization rates for stablecoin deposits are much higher than they are for other assets like ETH, wBTC, and DeFi governance tokens.

CREAM can help defray the opportunity cost of lending stablecoins by offering CREAM token rewards specifically to stablecoin (i.e. USDT and USDC) depositors. This will create a virtuous fly wheel effect, as more stablecoin deposits will free up more stablecoin borrow liquidity, initially driving down borrow APYs until the additional stablecoin loans are met with borrowers flowing in from other platforms. Moreover, users that prefer to gain extra leverage on their crypto assets will provide more liquidity to non-stablecoin pairs in order to take advantage of additional stablecoin borrow liquidity. In short, incentivizing stablecoin deposits over all other asset deposits (or borrows) will give the CREAM platform the most “bang for the buck.”

Why asset utilization matters

Non-productive deposits—i.e. deposits that sit idle on the platform and are not actually loaned out to willing borrowers—do not produce as much revenue to CREAM holders (in fees). Although revenue declined sharply after the Alpha attack, as a large supplier of FTT removed their collateral, CREAM revenues have since recovered to what they were before the hack, even though TVL remains lower.

As Luciano has pointed out, this is due to the fact that the collateral that was removed was mostly idle collateral that was not being met with equivalent borrow demand, and thus not creating meaningful revenue for the protocol. In fact, although CREAM has less than $200 million (in v1), it is generating over one quarter of what Aave generates in revenue despite Aave having over 20x the TVL. The goal of any liquidity mining program should not be simply to increase TVL, but to increase productive TVL—and targeting stablecoin lending should accomplish just that.

Token distribution

As mentioned above, CREAM tokens will be distributed to liquidity providers in a delayed fashion. The liquidity bootstrapping program will last 90 days, during which no rewards will be distributed. Afterward, there will be an additional 30 day cliff, after which rewards will begin vesting on a weekly basis to be claimed by liquidity providers. Although the tokens will be earmarked for distribution within 90 days, they will be distributed (after the cliff) over a period of 180 days.

The purpose of this distribution schedule is to ensure that the market will be able to absorb any additional sell pressure that results from this bootstrapping program. Liquidity is fickle and mercenary, so we should not delude ourselves about the farm-and-dump potential that programs like these hold. To mitigate some of the worst of the selling effects, this program inflates circulating supply very slowly and over an extended period of time, much like the way Synthetix allows stakers to claim new rewards 52 weeks after their initial deposit.

Why 90k tokens?

Our recommendation of 90k CREAM tokens (or 1k distributed per day for 90 days) is an intentional one. If there are 2.925m CREAM tokens in total, the CREAM from this program represents only 3% of total supply, but of circulating supply it constitutes 14%. Rather than distributing a larger number over a longer period of time, we believe that this aggressive, short-term plan will not set in motion a permanent mechanism that contributes to sell-side pressure (e.g. such as Curve’s token distribution through near-perpetual liquidity mining), but it also provides a substantial amount of new issuance to be claimed by liquidity providers.

On a more granular level, we can map out—using a method we have called liquidity targeting—why this amount of new CREAM is squarely within the optimal range for a liquidity mining distribution like this one. Above, we explored why TVL is a flawed indicator of the health of a lending/borrowing platform (given the large discrepancy between proportional revenue for CREAM and Aave). Instead of starting with TVL as a target metric, it makes sense to target a certain revenue number that would make CREAM even more robust relative to its competitors. Here, we believe that CREAM should aim to close the gap between its and Aave’s daily revenues. CREAM is already undervalued on a revenue basis relative to its competitors, but achieving something closer to revenue parity with Aave would not only increase liquidity on the network but would help to cement CREAM as one of the tier-1 lending/borrowing protocols and would, ceteris paribus, drive substantial value to the CREAM token—potentially even offsetting sell-side pressure that results from liquidity mining inflation.

To achieve revenue parity with Aave, CREAM would need an increase in productive deposits, as mentioned above. An additional $200 million of stablecoin deposits—assuming maximum utilization—would generate an additional 8k in revenue per day. Will 90k CREAM over 90 days bring in this additional $200 million?

A distribution of 1k CREAM per day at a price of $125 per cream means $125k in daily token rewards, or $45 million annualized. If the total assets earning yield were $200 million, that would be 22.5% APR purely on the CREAM inflation alone (i.e. not even factoring in the organic interest); if there were $500 million, that would be 10% APR, etc. Our estimate, given alternatives that are available elsewhere on the market, is that yield has to be above 20% during this period (at static CREAM prices) to be attractive to LPs, meaning that we can expect total yield-earning assets to be around $200 - $400 million. Excluding the Iron Bank, there is less than $50 million in stablecoin liquidity on CREAM across v1 and BSC, so if these rewards were to target only stablecoin deposits on these parts of the platform, we can anticipate additional stablecoin inflows of at least $100-200 million, perhaps even closer to $300 million.

Stablecoin deposits across CREAM v1 and BSC have approximately a 75% utilization rate, which is paralleled on other lending/borrowing platforms like Aave and Compound, so we can further anticipate that whatever additional stablecoin lending liquidity enters CREAM will be utilized at a similar rate (75% is the maximum utilization rate for stablecoin lending on CREAM). If we assume an 75% utilization rate on inflows of $200 million, and we assume that borrowers are paying 20% APR in interest, then that would be an additional $30 million in annualized interest, or $82,000 per day. With a reserve factor of 10% for stablecoins,* that comes out to an additional $8.2k per day in revenue (over $2 million annualized) to the CREAM reserve (and by extension to CREAM holders).

The split between CREAM v1 and Binance Smart Chain

The purpose of this liquidity mining program is to bootstrap protocol liquidity across v1 and BSC, so the question becomes: how much CREAM should be allocated to each?

We believe that bringing more liquidity to CREAM’s BSC arm should be a priority for the protocol. With Ethereum gas fees reaching record levels, BSC recently penetrated through to the crypto mainstream, with leading projects accruing billions of dollars of volume and value locked. Although the migration over to BSC has slowed of late, there remains a great deal of liquidity on this chain, and CREAM should make an effort to establish itself as the leading lending/borrowing protocol on BSC. To that end, we propose allocating one third of LM tokens (30k) to BSC stablecoin lending (with 60k allocated to v1).

This distribution of LM tokens to v1 (Ethereum) vs. BSC is proportional to the current distribution of liquidity across the platforms, since incentivizing liquidity on Ethereum and BSC is the core goal of this program.

*Note that the current reserve factor for stablecoins is 5%. However, this is below the market average (Aave’s reserve factor for stablecoins, for example, is 10%). There is already work being done to revise the reserve factors for the Iron Bank, and we propose that a similar revision in the reserve factors (at least for stablecoins) for v1 and BSC is also in order. However, a revision of the reserve factor may require a separate governance proposal.

9 Likes

I have been thinking about LM for CREAM lately too since we have such a massive warchest. I would support this proposal as is but i do have some questions.

Why not provide LP rewards on Iron Bank? - IB is probably the biggest advantage CREAM has in the lending market. With Yearn v2 ramping up, they represent a large (and secure!) customer for IB loans. Proto2proto lending is much more sustainable and will drive further integrations both directly with IB and through Yv2. I’ve even suggested to other DAOs that they use IB for liquidity minting instead of dealing with all the hassle of liquidity mining which is a billion dollar market we can conquer.

Why on BSC? - All the biggest tokens on BSC are also available on mainnet with more liquidity inside and outside of Cream so it has a smaller addressable market and there is less opportunity for integrations which is long term, low effort growth. Binance has the most $ value of liquidations on futures, which applied to lending market makes it a risky bet although we do make more $ from liquidations so maybe thats your plan.

Did you consider providing rewards in CREAM Sushi LP tokens? - From personal experience and what I’ve seen in other projects, if you give people the rewards in LP tokens or get them to deposit their rewards into LP tokens soon after receiving them, that capital tends to be very sticky. Since you are proposing a 1 month cliff and didn’t provide and distribution mechanism I will throw this idea out there: After 90 day program, we calculate all LP rewards based on onchain data and an algorithm we publish before the program starts.Then during 1 month cliff period, we take 90k CREAM, add them to CREAM/ETH or CREAM/YFI pool on SushiSwap on each chain and do a merkle drop to LPs.

Why would I want to LM? - If we hit your target of $200M additional stable coins thats 20% APR in CREAM + 10% APY on real interest (hypothetical). I can already earn 10-20% APY on major stables in AAVE without taking any of the perceived risks of CREAM platform. Do you think that extra 10% is enough to bring LPs to our platform? And especially if they have to wait almost a full year to receive their rewards?

On the topic of growth

I’ve talked to @penguin about this a bit and there are some much cheaper and boring ways we can improve CREAM’s standing in the market. Public perception is the biggest blocker to us leading the market, not financial liquidity although thats important as well. Paying for top notch designer or design agency to update branding (one of the biggest detractors to CREAM), create an actual marketing website at cream.finance, and completely redesign UI/UX of app.cream.finance would have a huge impact on revenue and integrations. For example we lost FTT our biggest client because of ALPHA’s hack and they have not returned despite it being clear there was nothing wrong with CREAM’s contracts.

I’d estimate this would cost $100-200k to get the best possible designers out there and another $100k for RaidGuild or someone to implement. So about 2% of the total cost of this LM program for top tier makeover. This is evergreen content that affects every interaction people have with CREAM which is a much bigger factor than liquidity.

I personally withdrew all my capital from CREAM because of FTT and SWAG and have not put back in because those issues were never resolved to my satisfaction. At one point in DeFi summer I was something like 0.1% of all TVL in CREAM and I’ve heard similar things from other heavy DeFi users. The 3 separate hacks (alpha, furucombo, DNS) in the last month or two isn’t helping with this perception at all. A visual transformation is needed to show that CREAM isn’t the shitcoin farm it was last year and is a serious tier 1 platform like we want it to be.

6 Likes

Thanks Ben, this is an excellent idea.

I agree USD depositors should get the most rewards, but also think other depositors ought to get at least something, and perhaps Uni LP/SLP suppliers ought to get a decent cut of rewards too as those deposits are quite productive.

I have also wondered about whether locked rewards-earning CREAM should be able to become collateralized, which I believe would help to grow the protocol as well.

2 Likes

Nah stablecoins are definitely the right target. Right now your only low interest options on CREAM are either DeFi tokens or LP tokens. Those are both risky assets to borrow especially in a bull market. There is billions in stable coins in AAVE and COMP that we can pull from and easily hit the $200M target bringing lenders and borrowers to the platform.

1 Like

Thanks Kiba, I fully understand your concern. Although there had been some incidents lately, we never stop building. Flashloan/Collateral Cap/New UI are the things that will release soon. On the other hand, we are also working on solving the centralized and illiquid assets. Either adding a collateral cap or shut it down.

Glad we have you here!

3 Likes

Yes I know you guys are working hard because I follow the project. My point is it’s about public perception across entire crypto community, not just cream users. My perception is that cream can achieve more with qualitative fixes (better branding/ui, crypto-twitter relations) than quantitative fixes (stablecoin liquidity, asset caps). If you guys dont feel that way, im sure you’ve done more user research than i have on how to improve the platform and are targeting the most effective things.

2 Likes

Another thought I had. Can’t we leverage our partnership with Yearn to create a strategy that specifically only deposits in CREAM on top of the general lending strategy? We consistently have the highest APY on stables + our revenue is Yearn’s revenue so makes sense to target our platform for yield options which also increases Yearn ecosystem’s moat

Separate thought: When calculating CREAM rewards for LPs, we should take their net total amount borrowed instead of absolute total. Meaning if I deposit $100k USDC, borrow $80k USDC, then deposit $80k USDC, my rewards would only be for $100k USDC not $180k USDC. As an expert farmer I guarantee people will do this and it provides little value to the platform.

This is a well thought out proposal and definitely needed to keep CREAM competitive for LP’s

I also think that this has to be tied with some of the marketing changes that @Kiba laid out - otherwise this capital will leave the platform as fast as it joins

2 Likes

To be dead honest, until recently, with my deeper looking, I always considered CREAM, a second choice. On etherum, why not use aave or comp. On bsc, Venus incentives are the best anywhere.

I used cream for it’s niche uses, crETH2 lending, Yfi lending on BSC . Thing like this. But it is very true that I hesitated to borrow USD because of the higher apy costs.

So I support the idea of incentivings stable coins, bit not them all.

On BSC BUSD is priority, on ETH perhaps someone else can speak, there is a lot of options for the 3pool 3

If cream emits cream tokens, you can be sure that vaults are going to leverage up deposits and farm. Is there some way to avoid this? Does this even matter?

I’d love to select a few of my hodl tokens and say incentivise borrowing these, but people borrow not for rewards, but for opportunities for that coin elsewhere. Vaults are the only ones that tend to borrow anything with yield.

I like the idea of a cliff, it’s simple and to the point…it’s not a sweep in and grab your cream and skip town plan.

Great.

Oh dope this is what i was talking about

1 Like

@Kiba - really like the idea of leveraging Yearn vaults to grow stables in Iron Bank.

Would people be onboard if I proposed a liquidity mining program for ycrvIB vault?

liquidity mine where? We shouldn’t do it in CREAM platform because that’s double lending assets so it’d have to be an external contract like what we have in app.cream.finance/rewards I think. I’m definitely down for that - thats 3 layers of yield, I think that capital would be pretty sticky even once LM ends.

On second thought … liquidity mining might not be necessary for the vault. Check out next weeks CRV rewards :eyes:

1 Like

Ben, go ahead and submit a proposal on snapshot please? I want rewards and lower borrowing rates and a higher CREAM price too. Danke ser.