Ensuring timely rollovers is critical for the stability of the SPOT system, as it insulates SPOT from supply fluctuations. To encourage this, the system offers a yearly percentage-based reward to rollover vault LPs who dedicate their AMPL for this network task. The system funds these rollovers primarily through reserve fees collected during SPOT minting or redeeming. If reserve fees are exhausted, a k% constant rate debasement is applied.
Before determining the appropriate fee, we need to understand the SPOT system’s users and how fees might impact SPOT and user behavior. Market actors who conduct arbitrage to align AMPL and SPOT prices are the predominant users minting/redeeming SPOT.
When SPOT is backed by new and senior AMPL tranches, its value should approximate 1 future AMPL (i.e., AMPL at the price target), subject to a time discount to hold the tranches till maturity. Arbitrageurs might do the following:
1. If SPOT price >> AMPL price, they purchase AMPL,
mint SPOT, and sell it to profit from the value difference.
2. If SPOT price << AMPL price, they purchase SPOT,
redeem for AMPL tranches, and profit from the value difference.
Imposing a tax on this arbitrage activity (via mint/redeem fees) can support the public good of sustaining rollovers. A high tax might decrease arbitrage activity and lead to higher SPOT/AMPL price deviations. For instance, with a 5% mint and redeem fee, SPOT and AMPL prices must deviate by at least 5% to trigger arbitrage. Any deviations below 5% would be absorbed by AMMs and market participants. In general this should play out as lower correlation between SPOT and AMPL, as SPOT should in theory spend more time in steady state (within 5% deviation).
And say we set the fees to 0%, any deviation in SPOT/AMPL market prices will trigger arbitrage, this will result in higher correlation between SPOT and AMPL, and maybe introduce more volatility into both assets. Alternatively a fee percentage which is very high (say 25%), might just break the assumptions around how SPOT should be valued and also make the system unusable.
Comparably, the Ampleforth protocol views a 5% AMPL price deviation from the target as significant enough to initiate a supply correction. Given SPOT’s lower price volatility compared to AMPL, a fee lower than 5% seems reasonable. Though lending isn’t the primary driver of SPOT demand, if we look at comparable lending protocols like Liquity they charge an up font fee up to 2.5% for borrowing against ETH.
In any case, there is no free lunch. We either charge higher fees up front or SPOT holders eventually pay through debasement. I personally lean toward the former.
I propose a 2.5% mint and redeem fee for SPOT.
Regarding rollover reward rates or SPOT debasement, if SPOT aims to be a competitive inflation-resistant store of value (SOV), its debasement should ideally be lower than current fiat alternatives. The Federal Reserve targets a 2% annual inflation rate. Therefore, to stay competitive, SPOT’s debasement should match or undercut this rate. Rollover vault LPs need to be compensated for providing rollover capital for a long period of time. For most long-term AMPL holders, being an LP is strictly better as they earn a yield on their AMPL. The yield should be high enough to make it worth their while.
I propose a 1% annual reward rate.
One important consideration here and going forward, is to come up with parameters we are comfortable being immutable. Being “smart” and making these parameters reflexive (ie dependent on the current state of the market) might be tempting. However any reflexive system can leak value to traders with more information. I strongly feel we should reject those temptations in favor of a “dumb” system with immutable rules.
