SYNTHR Protocol

DRASR Framework: Engineered Price Stability

The Dynamic Rewards Allocation for Spread Reduction is a framework designed to keep oracle and DEX prices at parity with each other. DRASR will execute this by reducing spreads between oracle quotes and DEX quotes for syAssets. Long and Short-Farm Vault rewards will be used as incentive mechanisms designed to artificially arbitrage DEX inefficiencies to create a capital-efficient synthetic asset trading protocol. The incentivization of user behavior in different scenarios is discussed below
  1. 1.
    DEX Price < Oracle Price
A scenario in which the DEX price is lower than the oracle price, the syAsset is said to be trading at a discount. Depositors of the LongFarm Vault will be incentivized as part of SYNTHR's LP program to bring the DEX price of the syAsset back to parity. The Long-Farm Vault will allocate half the deposits towards executing a large buy order on the DEX and subsequently depositing the other half, along with the newly purchased syAsset, into the DEX’s liquidity pool to generate LP rewards. The dynamic relationship of rewards to the discount is similar to that of perpetual funding rates – bringing synthetic perpetual futures prices back to parity with spot prices by toggling the funding rates. As the spread between the DEX price and the oracle price increases, so will the rewards.
2. DEX Price > Oracle Price
A scenario in which the DEX price is higher than the oracle price, the syAsset is said to be trading at a premium. As part of this scenario, the DRASR framework will disincentivize Long-Farm Vault depositors by lowering Long-Farm Vault APRs, consequently making ShortFarm Vault APRs more attractive. The Short-Farm Vault will generate returns by routing its stablecoin deposits to protocol arbitrage bots that will simultaneously mint and sell syAssets on the DEX, bringing the syAsset’s DEX price back to parity with its oracle price. Profits generated from exploiting this arbitrage opportunity will be distributed to the depositors.
3. DRASR Formula
The Dynamic Rewards Allocation for Spread Reduction for the Long Farm Vault can be represented by the equations below.
The chosen formula splits the reward rate into three parts. When the discount increases from 0% to 3%, the reward curve increases linearly. However, when the discount exceeds 3%, the steepness of the reward curve increases quadratically, and after a discount of more than 6%, it increases cubically. The maximum reward rate is achieved with an syAsset discount of 10%.
The three-part split is designed to control token inflation by adjusting the issuance to counteract syAsset price misalignments while maintaining low slippages. Indeed, when the price discount is small or null, there won’t be a need to issue massive amounts of tokens to incentivize price rebalancing, while the opposite is true to avoid potential negative price spirals. The greater the price discount of syAsset, the faster the increase in the steepness of the reward curve.
Figure 5: Relationship between Long-Farm Vault reward percentages (y-axis) and syAsset discount percentages (x-axis).
For the course of 60 EPOCHs, 1 month per EPOCH, 161.33 million SYNTH tokens (23.4% of the total supply) have been allocated for LP incentives, including the Long-Farm Vault incentive program. If there are no syAsset discounts for an entire EPOCH, Long-Farm Vault depositors will earn a reward of 0.3% of the allocated tokens. However, the DRASR formula will increase rewards with the relative increase in syAsset discounts, limited to a maximum of 100%. By the end of each EPOCH, all unutilized tokens will be carried over to the next EPOCH.