About System Incentives
In this section we’ll expand on some of the incentives that uphold the SPOT system, but first it’s worth noting that minting, redeeming, and rolling over, are power user methods. We expect most holders of SPOT and AMPL will simply be buying and selling the assets on the open market. For an overview of minting, redeeming, and rolling over see About Minting, Redeeming, and Rolling Over.
Minting is the process of depositing senior AMPL tranches in exchange for SPOT. There are two main minting incentives:
- Borrowing Against Collateral
- Arbitrage
Minting allows users to borrow against existing collateral while maintaining their AMPL position. This is similar to taking out a loan against a piece of land in the form of a mortgage.
Example 1: Imagine Alice has a long-term position in AMPL, but she also has near-term cash flow needs. Alice can tranche her AMPL into junior and senior tranches. Then she can mintSPOTwith her senior tranches while holding onto her junior tranches. Now she can spend or invest herSPOTwhile maintaining most of her equity position in AMPL
If
SPOT is trading at higher than the market value of its collateral, users can mint SPOT to capture the difference.Redemption is the process of exchanging SPOT for proportional slices of its collateral set. There are two main redemption incentives:
- Liquidity
- Arbitrage
Typically if a user wants to exit their
SPOT position they would simply sell it on the market, but SPOT is always freely redeemable for its collateral. If a user believes they can exit their position with less slippage by first converting to the underlying, this option is always available to them.If users believe
SPOT is trading at less than the market value of its collateral, they can redeem SPOT to capture the difference.Rolling over is the process of withdrawing senior AMPL tranches that are nearing maturity and depositing an equal value of AMPL tranches from the active deposit bond. Timely rollovers ensure that the system is maximally insulated from supply changes. A percentage reward is paid to users who rollover, based on the
SPOT denominated amount of collateral being rolled out. See About Minting, Redeeming, and Rolling Over for an overview. There are two sources for the rollover incentives:
- Fee Buffer: A balance collected from minting and redeeming fees
- New Emissions: Rewards from new SPOT emission. Once the fee buffer is exhausted, rewards come from emission. For more details on how this affects the system see About Debasement.
The general reward case pays out from the Fee Buffer:
Example 2: Imagine Alice rolls out R fully collateralized tranches representing 1% of the collateral set value, and rolls in R fresh tranches. If theSPOTsupply is 1M, theSPOTdenominated value Alice rolls over is 1% of 1M = 10,000SPOT. If the rollover reward is 2%, Alice will receive 200SPOTas reward for her work.
If the Fee Buffer is exhausted the rollover reward comes from new emissions:
Example 3: Imagine the same Alice rollover example as above. Alice is owed 200SPOT, but there are only 100SPOTremaining in the fee buffer. Alice will receive those 100SPOTplus 100 freshly mintedSPOT.
This emission has the effect of diluting
SPOT holders, but only by a rule-bound, constant, rate. We regard a fixed k% emissions system to be perfectly acceptable, but we will launch with rewards and emissions set to 0%. This can be later enabled through governance. For more information see About Debasement.A rollover action consists of an equal value of tranches entering and leaving the system, which implies there is a valuation function applied to tranches. To value a tranche in the rollover scenario, the system looks at the Collateral Debt Ratio of the tranche–essentially how many AMPL are behind each tranche.
Example 4: Imagine Alice rolls out R half-collateralized tranches representing 1% of the collateral set value. Alice would then roll in R/2 fresh tranches, because each incoming Tranche holds twice the underlying AMPL as each outgoing tranche. The remaining fee computation is the same as above. Rolling out 1% of the collateral at a total supply of 1M and a reward fee of 2% would yield Alice a 200SPOTreward.
The tranche valuation function can be further refined over time through governance. See About Debasement for further discussion of this scenario.
Last modified 3mo ago