Dual Finance - Hubble Staking Option Proposal

Hi Hubble Community, Dual Finance would like to share the following proposal to kick off a healthy discussion around token incentive structures for liquidity mining. We preface this proposal by highlighting that any of the below parameters in bold are configurable and understand the community may want to pilot the changes before finding its end state. A highly recommended walkthrough of the benefits of Staking Options can be found here: Sustainable Token Incentives. Token incentives are the central force… | by Dual Finance | Jun, 2022 | Medium

About us: Dual Finance is designing the next generation of sustainable yield products to be the Base-Layer Incentivization Protocol for Web3. Our breakthrough token incentive mechanism, called Staking Options (SOs) aligns incentives of participants by granting those who provide liquidity or participate in governance, the right, but not the obligation to purchase tokens for a future price. No more token rewards, instead token option rewards.

Dual Finance proposes the Hubble community allocate part of the Liquidity token allocation to be issued in option form using our Staking Options Studio (SOS). The goal of this overhaul of incentives is to revitalize the Hubble token economy and disrupt the negative cycle of inflationary incentives. The initial Liquidity token allocation will be split into SOs for incentivizing Mercurial USDH-3pool LPs and Orca HBB/USDH LPs.

Currently Mercurial USDH-3pool LPs earn ~770 HBB/day which with HBB trading at $0.25 is worth ~$195/day. Additionally, Orca HBB/USDH LPs earn ~357 HBB/per day which is worth ~$90/day. The proposed implementation of both SOs will keep the same effective APY and present value per day to LPs, but grant them additional upside leverage. The SOs will be 150 day expirations of 20% OTM (out-of-the-money) strikes, rolling every 5 days. Users will accrue SOs in 2.4x the proportion to the time and quantity they staked, compared to the fixed emissions scheme.

Effectively LPs will earn per day for Mercurial USDH-3pool 1,848x and for Orca HBB/USDH 857x, a 150 day call option to buy HBB 20% above the current spot price. When pricing the equivalent value of those options using recent realized volatility of 185%, the rewards have the same present value of $195 & $90 per pool and therefore the same effective APY.

Given the reward is equivalent in present value terms at the start, let’s compare the payoff of LPs with Staking Options vs. Fixed Token Emissions at expiration.

LPs with Staking Options gain significantly more upside leverage, in fact at $1.25 its an 82% increase in the profit LP would experience. Critically important here is that Staking Options do not release any HBB supply into the market if the price is below $0.30, whereas Fixed Emissions will release the same supply as price goes to zero.

Users can view and exercise these SOs at anytime by going to DUAL and paying the exercise amount (strike price * quantity) in USDH. All SO exercise proceeds, less a 3.5% fee, go to the Hubble treasury for the community to grow the Hubble ecosystem. For being an early partner and user of Staking Options, Dual Finance will issue a grant to the Hubble treasury of 5M DUAL 1 year SOs with a strike of the greater of $0.25 & 100% OTM.

The benefits of Staking Options are clear to us but the difficulty ahead will be to educate communities and provide the tools and liquidity so any skeptics can liquidate their SOs immediately for cash. Please comment with any questions or concerns. We look forward to addressing your most critical feedback and hope this is the beginning of a long and fruitful partnership.

To learn more about Dual Finance’s mission to re-incentivize crypto and bootstrap token options markets, follow us on Twitter (https://twitter.com/DualFinance), join the Discord (discord.gg/P3uH9AvEp5), and review our medium articles (Dual Finance – Medium). Our Dual Investment Pools (DIPs) to earn sustainable, customized yield are also live for testing at https://beta.dual.finance/ !This text will be hidden

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Thanks for sharing, this is a pretty cool idea for incentivizing liquidity mining for HBB. Didnt realize this was possible myself, actually so thanks for introducing Dual Finance and their SOs. ’

The idea that you’d be keeping the APY from the Mercurial and Orca pools in addition to upside leverage with SOs is very intriguing, would love to understand this further.

I think HBB needs more incentives for its holders so I think Staking Options would be pretty neat. Curious to hear what others think !

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This is an innovative solution to the ever-present emissions tokenomics problem that plagues DeFi. My biggest concerns are the depth of liquidity in the HBB derivative market (or lack thereof) and the upward price action required for the SO incentives to beat a fixed emissions model.

Without a robust HBB derivatives market to sell into, an LP farmer would need the price of HBB to rise at least 20% to realize any farming incentives beyond the LP trading fees. The model compensates this risk by increasing the quantity of SO received by 2.4x relative to a fixed emissions model. However, even with the increased incentives, the price would need to double for that profit to exceed the profit generated by a fixed emissions model under similar market conditions (as the graph above shows.)

The benefit of limiting HBB emissions is obvious and should have a positive price impact over time. However, in the near-to-mid term, the parameters of the SO incentives would need to be changed to either increase the likelihood of being exercised (by making the options ITM or ATM) or to increase the upside (by increasing quantity) for this plan to make sense to me.

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This is an impressive, and comprehensive post. Thank you for providing so many background details and links.

My only concern is the extra rewards for being an early partner (needs more clarification). Rewards should be based on when a person starts, and the length of time they remain. The real world application of increased rewards for early partners is contributing to a centralization of wealth in whales. What I would like to see is a way that encourages any size investor to gain ground financially.

Really great innovative idea, and I’m mostly on board with the idea of finding safe increased value for long term holds.

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Great points, part of the beauty here is the additional parameters to dial in to fit what the community feels is best. ATM & ITM have trade offs, creates a higher probability of getting a positive payoff at expiry but would reduce the upside leverage.

On the HBB liquidity side, I am working with OMMs to facilitate as liquid of a market as possible (I previously ran an illiquid OMM desk at a major crypto firm). An alternative here is building our own gamma trading models as a backstop within Dual. We already have this for our DIP product. Rest assured, its definitely one the highest priority features so that any skeptics can liquidate SOs with minimal slippage.

Good idea, provide DUAL SO rewards as a function of the longevity of the partnership.

The initial idea is just to have simplistic model for rewarding project communities who see the potential value in this incentive structure and are willing to take that leap with us.

This wouldn’t exclude additional DUAL option grants for continued partnership