RFC: Change C3's voting mechanism

cascade

CCG Ah, I'd take that document with a pinch of salt, with exception of yearly emissions, high-level distribution (10% to Klima DAO, etc) and possibly veC3 holder's cut.

All the other numbers have been superseded by being added to the governance voting system. UBO single sided staking is 4% if you believe the doc, compared to 45% in reality.

CCG

cascade Agree - I think Fourier confirmed to me a few months ago the amount of C3 distributed by that point was roughly the percentage expected for the first years' amount. I would certainly bet that the staking gauges have all been bundled together but what hasn't been?

The amount reserved for the C3 Team won't have been (except where some was allocated to support the initiation of MCO gauges?), the locked veC3 reward rate, and KlimaDAO's....but what about bridging? I'm not sure it is clear. Would be good to have a definitive statement on it! (and documentation update if need be!)

CCG

cascade The intention wasn't to focus on the single-sided staking, but I think it becomes a big part of the question if some of my assumptions hold (not sure if they do, hence focus on the commentary point from the leadership). To summarise my standpoint the below might be a TLDR:

1). Ignoring bridging as not sure if it is ringfenced or not (documentation suggests it is for the first year but might be an open question).
2). Personally don't see the need to separate partnership single-sided staking gauges like wsKlima from other single-sided gauges.
3). For me the real question is around friction between LP gauges sharing votes with single-sided gauges.
4). It would be helpful to understand the benefits foreseen by the Leadership team beyond the statements in the documentation (https://docs.c3.app/carbonomics/staking-gauges) which are a little high level.
5). Assuming the team does think the current tokenomics work in the "normal" ecosystem (tokenisation permitted) does the tokenomics work in the "current" ecosystem?
6). If the answers to 5 are "yes" and then "no" is there a need to tweak the strategy until such time Gold Standard and/or Verra permit tokenisation?

Another thing to consider, which I don't think I did a good job pointing out before, is if the friction between bridgers, market makers, and holders is theoretical or practical - I've mention before how I (assume) the sales pitch to a project from C3 would go "tokenise your credits with us and get rewards, put then in a LP to grow the market and get rewards, want to hold them because you think the price will go up in 6 months then get rewards, bond them to Klima and get rewards" meaning that all four types of gauge could be being invested in by the same person - in the normal ecosystem it seems quite likely to my mind.

cascade

CCG

Another thing to consider, which I don't think I did a good job pointing out before, is if the friction between bridgers, market makers, and holders is theoretical or practical ... all four types of gauge could be being invested in by the same person - in the normal ecosystem it seems quite likely to my mind.

The tension as I see it is between desirable activities rather than between imagined strictly delineated players. I fully understand that projects and individuals will act and vote for multiple types of activity. However, if C3 wants a liquid market it needs to incentivise activity that furthers that over activity that does not.

As to whether this is practical or theoretical: look at UBO! 🙂

climber

cascade But what about NBO which has 0 votes, and MCO2 which also has less votes than its paired counterpart?

I agree, the single-sided gauges do seem at odds with the other more beneficial paired gauges, but I'm not sure that's whats happening with UBO. If I'm reading the transactions correctly, its just one address accumulating and voting for UBO.

https://polygonscan.com/address/0x57d6c3ac6171b7c67262aa74bc05bda4ee3b4382

Its hard to follow when everything is locked up in gauges but I think this address is now rivaling Klima in total C3 owned (locked as veC3).

Maybe this is someone trying to gain curve war like control of the protocol, or maybe just someone wanting to be a future C3 whale. Hard to say, but it seems like they picked UBO as the accumulation vehicle, but that could also change since they could move all their votes to a different gauge.

Still, if there was no UBO gauge and this person had to use UBO/Klima instead, at least the ecosystem would gain from the increased liquidity. So I agree with the overall sentiment here.

Another lever we have is to increase (or decease) the C3 needed for boosting a gauge. The idea would be that you could disincentivize mercenary activity by benefiting players holding more veC3. But I'll admit that this wouldn't help here because this address owns so much veC3.

cascade

NBO and MCO2 have the same inherent risk and value imbalances. The only difference is no one has chosen to exploit them.

From my perspective 0x57 is a demonstration of the problem: they probably picked UBO because it is the most liquid of the two pools to buy their position and chose single-sided staking as it doesn't have IL risk and the guaranteed KLIMA rebase penalty.

This is completely rational and everyone should do it, unless they have the higher-minded goal of funding C3 liquidity at a loss.

I suspect the only reason early C3 supporters are not doing the same is they locked their LP positions before C3 introduced single-sided staking, as the team made LP gauges available before single-sided.

The problem isn't just that that UBO no longer contributes to liquidity. It is also that any small fish entering C3 today should follow the whale, buy UBO and lock it up, making the UBO-KLIMA pool even less liquid. They should also throw their veC3 weight behind more rewards for the UBO gauge, furthering the negative cycle.

Fourier

Hey Cascade,

Great write up and as promised I have been meaning to reply.

Let me address in steps the concerns.

Bridging Gauges: Bridging gauges is not a non-fundamental activity as described in your post. In fact, the protocol is functioning exactly as designed. UBO single staking is designed to reward and offer a hedge for maintaining your tons on chain rather than off chain in say a VERRA account. As there is currently no way to 1 way or even 2 way (although open very soon, 1 week or 2) bridge tons as all registries have prohibited the use of tokenization bridges. This basically means that these tons are now to be viewed as extremely risky, as KLIMA has also closed their bonding and the only place left would be to sell into the LP pools created by C3. The veC3 market participants voting for single side staking rewards makes perfect sense as there is little to no incentive to provide LP as the market has very much reduced itself to a few trades a day until the registries decide the fate of ReFi.

As for market making votes against bridging, this is also as designed, as the people bridging are often not those providing liquidity, the overlap between the groups is quite small. Bridgers are often single use users, who sell their bridged tons immediately after bridging. Directly against what LPs want in terms of robust liquidity. This results in the PvP nature you see in the gauges.

What you are seeing is exactly what ve style tokenomics create. A PvP arena for each actor to act in the interest of themselves.

Happy to answer more questions but hopefully this clears the picture and makes a good sense of the token design of the system.

cascade

Fourier

I am sorry Fourier, this will seem rude, but you've either missed the point or chosen not to engage with it.

I understand that it's a PvP arena driven by self-interest. This is a core premise of the RFC. I also get that it is working as designed. That is the problem.

The design choices that you've made that diverge from Curve and Frax have unbalanced the system.

Curve and Frax have market makers fighting it out in their voting pool over rewards for market making. This is one risk model for the participants and one value model for the protocol.

You have three or four different types of activity with unbalanced risk and value models.

Imagine you have a group of workers. They can choose what work to do and vote for what work gets the most pay. You offer them two options: (1) take the money and take the day off - have a nice holiday somewhere in Italy; or (2) graft for a day and if you're lucky you might get less pay then the others (because they're going to bleed KLIMA rebases). What do you think people will vote for? What do you think will get done? (Spritz! Right?)

It is a shit analogy but I hope you get it.

Ask yourself these questions:

Is it good that the best way to play the game you've created is to lock carbon off-market and make it unavailable for retirement?
Is it good that KLIMA holders need to actively vote against the growth of C3 to get their share of your tokens?

I've criticised you and Alessandro, so I imagine that this makes my message hard to receive. I am also an investor in your project and someone who believed in your early vision. However disillusioned I now am with it, I am trying to help you.

Anyway, I've said my piece. If you don't get it, there isn't more I can do. If other people in the community are reading this and agree with the sentiment of what I am saying, you need to make yourselves heard.

CCG

Fourier Hi Fourier, a question on this: if the current system is meant to reward off-chain actors to bring their credits on-chain, but that isn't possible until Gold Standard and/or Verra allow tokenisation to restart, or projects like Open Forest Protocol are able to win enough buy-in to provide a web3 native offering, does that mean there is a need to change the strategy for the current market conditions?

It could be Gold Standard allows tokenisation by Christmas and Verra sometime next year, but also it could take longer. If there is a finite amount of C3 to distribute over the next 4 years should more weight be given to market making activities in the meantime as, in the current environment, it does seem the best course of action for any investor is to pile into the UBO gauge and sit there until tokenisation restarts.

Appreciate there are issues with changing the strategy which might make it not worth the hassle (e.g. reputational damage/investor confidence in changing the rules only a few months after opening up single sided staking gauges).

Thanks.

optima

I think this is extremely important for the longevity of C3.

The PVP design, originally used by Curve and Frax exclusively for market making (positive sum), has introduced potential options that are not positive-sum, that are simply neutral (buy & hold) - and when voted on as opposed to other options - create worse equilibria. This is C3's opportunity cost problem.

We should explore a solution very seriously if we want to see C3 be positive-sum and sustainable.

Currently, the system is left vulnerable and inefficient.

At a protocol-level, we need incentives to reflect that:
A) bridging isn't happening (let's set aside those rewards separate from the gauges.)
B) One gauge to vote on market-making and holding tonnage creates equilibria that spends emissions for neutral actions, at the expense of positive-sum actions. This is an unnecessary cost.

Bifurcation of the gauge voting rewards to fix this opportunity cost problem should be explored.

Wonderful work by @cascade , CCG , and others i'm sure i'm overlooking here. Changing incentives to reflect that C3 benefits by rewarding market-making (voting on liquidity pairs), more than sequestration (hodling) - is intuitive.
These activities should not be in competition. We have seen the negative knock-on effects in the C3-Frax pool, the lifeblood of this protocol, as it dwindles daily. We should be more mindful of how we allocate these emissions over time.

Moving forward, I support freezing all protocol emissions for non-market making activities. (Snapshot vote 1)

Then, seeing as we would want protocol-level rewards for each of these activities: market-making, sequestration, & bridging, we'd need to decide how we split allocations for these. (Snapshot vote 2)

Then we can explore resuming other emissions.

This is a period in the market where we have the time to refine this decentralized bridge. Let's begin acting on this now.

optima

cascade I think this is extremely important for the longevity of C3.

We should explore a solution very seriously if we want to see C3 be positive-sum and sustainable.

Currently, the system is left vulnerable and inefficient.

At a protocol-level, we need incentives to reflect that:
A) bridging isn't happening (let's set aside those rewards separate from the gauges.)
B) One gauge to vote on market-making and holding tonnage creates equilibria that spends emissions for neutral actions, at the expense of positive-sum actions. This is an unnecessary cost.

Bifurcation of the gauge voting rewards to fix this opportunity cost problem should be explored.

Moving forward, I support freezing all protocol emissions for non-market making activities. (Snapshot vote 1)

Then, seeing as we would want protocol-level rewards for each of these activities: market-making, sequestration, & bridging, we'd need to decide how we split allocations for these. (Snapshot vote 2)

Then we can explore resuming other emissions.

This is a period in the market where we have the time to refine this decentralized bridge. Let's begin acting on this now.

optima

optima Upon conversing and reflecting with intelligent people, I have modified my opinion:

I do think C3 can benefit from evaluating, at a protocol level, where to allocate rewards between: 1) liquidity, 2) single-asset staking, & 3) bridging - and could dictate a stance that:

Liquidity > single-assets > bridging;

the reality is this is the designed and intended application of the protocol, and obtaining consensus to a fundamental change is unlikely.

Internally, this conversation has sparked the KlimaDAO policy team to begin considering our free-market options of locking and voting our C3 to weigh in on the gauge decision.

In my opinion, the macro conditions generally, and bridging situation specifically, are the single biggest factors dictating the fate of C3 in the short, mid, and long term.

Tokens will continue to be accumulated by free market participants and fought over in a one-gauge, PVP arena. Market participants will want to assume the least risk, while the protocol will benefit from them assuming more - this does not need to necessarily be harmful long-term, although in the short-term there will likely be a large portion of C3 tokens flowing to risk-off activities that do not optimize for protocol health.

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