It has been over 3 years since the launch of Shade Protocol’s first dApp, stkdSCRT. Since then, its contributors have built a privacy-preserving DeFi suite that features multiple interconnected leverage products, spot markets, liquid staking derivatives, and supporting tools that allow users to maximize their ability to financially express themselves. As new products were introduced to the DeFi suite, the protocol’s ability to provide unique utility and revenue streams grew, and as a result the economic policies and methodologies for maintaining and growing the suite had to adapt.
In August of 2023, Shade Protocol moved to switch SHD staking to a 100% real yield based model, ensuring that staking yield for SHD stakers was derived from fees streams and their use in SHD buybacks. With this change, this left approximately 12% of the total supply of SHD unused for its original intentions. This SHD still remains unused.
Outside of using fee streams to buyback SHD to emit to SHD stakes, the primary use case for fees accumulated by the protocol has been to provide liquidity on ShadeSwap as Protocol Owned Liquidity (POL) in order to build liquidity for trading to increase future fee streams as well as reduce the need for external incentives to build liquidity. This use of fees has allowed the protocol to acquire and deploy over $300k USD of assets on ShadeSwap(need to fact check) that directly support high traffic routes and increased leverage opportunities on ShadeX and ShadeLend. These POL assets include but are not limited to the following:
- SILK / SHD LP: $163,108
- SHD / stATOM LP: $102,030
- USDC.nbl / wBTC.osmo: $22,093
Given SHD staking is derived from real yield, this leaves 3 existing streams of subsidized emissions (SHD entering circulating supply):
- SILK Earn
- ShadeSwap
- ShadeX
With the addition of ShadeX to the Shade Protocol DeFi suite, the protocol is subsequently approaching an inflection point for its Meta-Engine. It is time for the next major steps towards sustainability for the protocol and the SHD token. These next major steps involve the previously mentioned existing streams of emissions of SHD entering the circulating supply to be switched to a real yield based model. The following details include proposed changes to improve the sustainability of the protocol:
SILK Earn:
Shade Protocol’s contributors propose to use a portion of SILK interest fees to cover the cost of SILK earn pool incentivization instead of using SHD. The SILK earn pool is critical to the protocol being able to manage debt that needs to be liquidated, and as such incentivizing deposits directly supports the functionality and security of SILK. At current prices, it would require approximately 15 SILK per day (450 SILK per month) to switch to a “Real Yield” model for SILK earn where incentives are denominated in SILK. This switch to incentivize Earn depositors with SILK aligns with the interests of depositors as this allows them to accrue more of the asset they are depositing.
ShadeSwap:
The optimization for ShadeSwap comes in 2 forms:
- Optimize local liquidity landscape to better support local leverage markets
As ShadeX increases the amount of private leverage allowed within Shade’s DeFi ecosystem, it increases the amount of non-correlated fee streams to the DAO that can be used to build further local liquidity or perform SHD buybacks. In order to optimize for these significant future fee streams, the DAO needs to optimize its local liquidity landscape to best facilitate interactions with the most demanded assets.
Shade Protocol just passed its 3 year anniversary, which comes with changes to liquidity provider emissions. Shade Protocol is set to reduce its yearly SHD emissions from approximately 331k SHD in year 2 to 222k SHD in year 3 based on the original Tokenomics distribution for LP emissions.
ShadeSwap, as a local liquidity venue, is an important functional component of ShadeX, as it services private liquidations on ShadeX (selling collateral assets for debt assets in order to repay debt). The amount of leverage allowed within ShadeX is correlated to the amount of local liquidity available on ShadeSwap to facilitate these repayments of debt via sales of liquidatable collateral. As a result, to satisfy the demand for increased supply and borrow caps for high demand assets, Shade Protocol needs to better focus its tools for incentivizing liquidity on these high demand asset pairs, or “core” pairs on ShadeSwap.
This increased focus on “high utility/demand” asset liquidity, as well as the overall decrease in emissions to liquidity providers that comes with a “thirdening” schedule, will ultimately result in decreases in emissions to liquidity providers for “non-core” pairs. Along with the goal to optimize liquidity for facilitating liquidations, Shade Protocol also seeks to continue to deploy capital (from fee streams) to highly utilized liquidity pairs in order to both increase sustainable fee streams and reduce the need to incentivize liquidity providers in these pairs.
2. Switch to “real yield” based model
In its current form, approximately 608 SHD per day, or 222k SHD per year, would enter circulation to be used to incentivize liquidity providers. Shade Protocol contributors are suggesting ~50% cuts to these planned incentives resulting in approximately 304 SHD per day (annualized at 111k per year) to be emitted as LP rewards. These rewards will be supporting the most critical pairs to ShadeSwap, ShadeLend, and ShadeX functionality.
Additionally, Shade Protocol contributors propose that half of SHD emitted for liquidity providers be bought off the open market with fees, in a similar fashion as the SHD emitted for stakers.
ShadeX:
Shade Protocol retains the ability to incentivize both the supply and borrow sides of ShadeX, and has been carefully observing participation trends and activity for borrowing/lending. After further discussion with market participants and internal deliberation, Shade Protocol contributors propose that 95-100% of planned incentives for ShadeX be directed to borrowers. Borrowers are the users who bear the realized cost of taking on leverage on the Money market (which drives fees for the protocol) and ultimately drive up supply side APY.
Additionally, Shade Protocol contributors propose that all SHD emitted for lenders and borrowers be bought off the open market with fees, in a similar fashion as the SHD emitted for stakers. Currently, ShadeX is receiving ~150 SHD per day in emissions.
In summary, the proposed economic policy changes to Shade Protocol are as follows:
- Switch SILK earn to SILK based emissions
- Switch source of the majority of SHD for LP emissions to open market buybacks with fees
- Switch source of SHD for ShadeX emissions to open market buybacks with fees
- Reduce incentives to “non-core” pairs on ShadeSwap
- Reduce incentives to supply side of ShadeX
If implemented in full, the approximate monthly buybacks required to incentivize all aspects of the DeFi suite would be:
- ShadeSwap: 152 SHD per day (4560 SHD per month)
- ShadeX: 125 SHD per day (3750 SHD per month)
- Shade Staking: 200 SHD per day (6000 per month)
- SILK staking: 8 SILK per day (250 SILK per month)
- SILK earn: 15 SILK per day (450 SILK per month)
Nominal Token Totals per Week: 3,339 SHD + 163 SILK ($3,229)
Nominal Token Totals per Month: 14,310 SHD + 700 SILK ($13,810)
*Keep in mind, all monthly incentive values are subject to change.
Considerations:
Given the drastic change in source of tokens being emitted to the aforementioned yield opportunities (switching to real yield based emissions), we suggest a gradual change over the course of 3 months. Below are the suggested gradual changes over the course of 3 months:
Cumulative % of emissions based on real yield before policy changes: 22.4%
Month 1:
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Implement shift to SILK emissions for SILK earn
-
Implement optimizations for local liquidity landscape to better support local leverage markets
-
SILK earn emissions: 15 SILK per day
-
SHD emission reductions by ~50% relative to the original tokenomics distribution curve for LP emissions (~310 SHD per day)
-
Cumulative % of emissions based on real yield post Month 1 change: 31.9%
Month 2:
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Implement shift to “real yield” based emissions model, where SHD emissions to either lenders or borrowers on ShadeX comes from SHD buybacks from the open market using protocol revenue streams.
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ShadeX lenders and borrowers: 100-125 SHD per day (3000 - 3750 SHD per month)
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Cumulative % of emissions based on real yield post Month 2 change: 49.6%
Month 3:
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Implement shift to “real yield” based emissions model, where half of SHD emissions to liquidity providers on ShadeSwap comes from SHD buybacks from the open market using protocol revenue streams.
-
Cumulative % of emissions based on real yield post Month 3 change: 76.2%
Along with the fee allocations proposed above, we recommend that all fees in excess of those needed to incentivize SHD and SILK staking, SILK earn, ShadeSwap LPs, and ShadeX borrowers and lenders at the proposed amounts above are used to build protocol owned liquidity on ShadeSwap in the form of uncorrelated assets that are “high utility/demand”.
We want to reiterate our continued appreciation and support from our community and user base, and we are steadfast in our determination to improve and drive sustainable economics within Shade’s private DeFi ecosystem. Any and all feedback on the above proposed changes to economic policy and fee allocations for Shade Protocol is encouraged and appreciated..
-Shade Protocol Contributors