Real Yields, LP Incentives & Staking Rewards

The real yield narrative in DeFi is a welcome byproduct of the current market slump. Real yields are vital for the continued growth and success of DeFi, and of that there is no doubt. There is, however, an ongoing debate on the pros and cons of token incentives.

Token incentives in the DeFi lending markets are generally used to boost real yields in order to attract new users and increase adoption. As a pioneer in the DeFi real yield space, Clearpool is one such protocol that enhances real yields available through its single-borrower lending pools with token incentives.

Critics argue that token incentives emissions are unsustainable, cloud the real success/growth rate of the project and place downward pressure on the token price. Supporters maintain that token incentives are an effective method for building adoption and capturing partial or dominant market share.

In many ways, token incentives are analogous to customer acquisition costs for early-stage web2 startups. In targeting a specific set of early users and adopters, many web2 startups will embark on aggressive marketing campaigns, including paid advertising, promotions, product discounts and other tactics to expand the user base or market share. Doing so increases customer acquisition costs, which are considered value accretive if their ratio to the customers’ lifetime value (LTV) is greater than one.

As a substitute for direct marketing and promotion costs in the example above, token incentives effectively increase the customer acquisition costs for DeFi projects and, therefore, must be outweighed over the long term by the value generated through each user’s interaction with the protocol.

So, where does Clearpool stand? At Clearpool, we welcome the discussion and approach the matter with deep appreciation and understanding of the differing views. Clearpool considers token incentives a feature of DeFi, without exact parallels in CeFi, that can be used advantageously to promote and enhance growth. But we also believe that token incentives must be emitted in a manner that is at once gradual, controlled and deliberate, avoiding excessive inflation, and earned via practical interactions with the protocol that benefit the Clearpool ecosystem at large.

LP Incentives

As with many DeFi protocols, Liquidity Providers (LPs) play a crucial role in the Clearpool ecosystem. Particularly important are those LPs that are among the first to participate, given that their positive contribution to TVL is more impactful in the early growth phase. It is generally accepted that these early adopters should be incentivized for their outsized contribution to growth.

Clearpool’s emission schedule for LP incentive rewards extends gradually over a four-year period. Upon the schedule’s completion, future LP incentives may, if required, be supported through revenue and buybacks. The distribution model is dynamic but also capped in order to avoid unsustainable inflation. Monthly targets for Total Liquidity Provided are projected, and a budget for LP incentive rewards is set. Although the reward cap ensures that emissions remain within schedule, a recalibration to lower rewards may take place each month in order to optimize emissions.

Staking Rewards

Clearpool Oracles and CPOOL stakers also contribute significantly to the Clearpool ecosystem. Oracles provide inputs which are used to price Clearpool’s interest rate curves. By staking CPOOL to an Oracle pool, stakers help secure this pricing framework. The resulting pricing mechanism, unique as it is critical to the Clearpool protocol, ensures that interest rates are reflective of current market conditions whilst also giving important utility to the CPOOL governance token. Rates derived from this process will serve as benchmark rates within the DeFi unsecured lending markets and further cement Clearpool’s position.

As with LP incentive rewards, Oracle and staking reward emissions follow a capped gradual release schedule. At the beginning of each two-week epoch, targets for Total CPOOL Staked and average APR are projected, and a staking rewards budget is set. Set incentives for the individual epoch are viewable on the staking page and updated at the beginning of each new epoch. This transparent process once again ensures that emissions remain within schedule and unsustainable inflation is avoided.

Learn more about Clearpool oracles and CPOOL staking.

Tapering, Buybacks and Future Incentives

As the Clearpool ecosystem and protocol mature, LP incentives will gradually taper off. Whilst this gradual decrease is factored into the emissions model, it is neither practical nor possible to project in advance with exact certainty. With the cap in place to protect the schedule, it is feasible that, through periodic downward recalibration and tapering, the emissions schedule may extend beyond four years. If, however, a point is reached where LP incentive rewards are depleted but remain integral to the protocol economics, protocol revenue may be used to buy back CPOOL in order to extend or sustain LP incentive rewards perpetually.

Buybacks will also be used to replenish the staking reward pool. Staking rewards will eventually shift from being paid through treasury emissions to being generated and paid through revenue and buybacks. This continuous revenue-buyback-reward mechanism for staking will ultimately become a permanent feature of the CPOOL economy.

A percentage of buybacks will continue to be burned, ensuring that over the long term, the overall supply of CPOOL is deflationary, driving constant demand, utility and value for its holders. Click here to learn more about the CPOOL buybacks schedule and transaction details.

A Model for Governance

Clearpool’s approach to governance is one of cautious progression. The Clearpool protocol’s permissionless pools are driven purely by market forces of supply and demand, and its interest rate curves are derived through a decentralized network of market participants that serve as Oracles. It, therefore, might follow that the setting of important protocol-specific parameters, such as emissions, should also be subject to decentralized governance.

Whilst great consideration has been given to the design of future governance mechanisms, it is important not to rush into the implementation phase. Indeed, the Oracle mechanism was extensively tested, initially internally and then with external participants in a dry-run setting. The result is a robust mechanism that can stand on its own. In the interests of the community and ecosystem, we would want nothing less than the same independent robustness for any and all future governance mechanisms introduced.

Read more about Clearpool’s tokenomics.