The launch of SaucerSwap v2 is fast approaching, pending the release of a final audit report by Omniscia and some remaining work on the front-end. In the meantime, the SaucerSwap core maintainers are excited to introduce the Liquidity-Aligned Reward Initiative (LARI), a novel feature of SaucerSwap v2 that will be available at launch.
SaucerSwap v2, a concentrated liquidity market maker (CLMM), affords liquidity providers (LPs) the potential for higher real yields through increased capital efficiency. However, token incentives are still crucial for bootstrapping liquidity, ensuring a broad distribution of SAUCE, and strengthening protocol governance.
LARI provides users with token incentives for their active and efficient liquidity contributions. This system represents an advancement from traditional yield farming, addressing certain limitations of SaucerSwap v1’s Masterchef contract. Notably, the obligatory staking of LP tokens, which transfers LP custody, is not optimal. Moreover, it is inefficient to reward LPs without accounting for their performance. Every reward token, such as SAUCE or HBAR, should not only incentivize liquidity but also ensure its optimal use, with rewards reflecting this objective.
LARI addresses these design shortcomings. As with swap fees, LPs no longer have to stake their assets to begin earning token incentives. Once an LP provides liquidity to a v2 pool, LARI is activated for their position. Furthermore, rewards are automatically distributed at the end of each two-week reward period, or ‘epoch’, greatly simplifying the UX and optimizing for gas efficiency. Unlike the SaucerSwap v1 implementation of Masterchef, which only supports SAUCE and HBAR rewards, LARI can be configured to emit HBAR and any number of HTS tokens for each pool. This enables projects to tailor campaigns for their liquidity pools, rewarding LPs with their protocol token.
How it works:
- Initialization: Before the epoch begins, each liquidity pool is assigned a weight of token emissions. For example, the HBAR/USDC pool may receive 15% of the total SAUCE rewards over this 14-day period.
- Monitoring: During the epoch, the v2 pair contracts are continuously listened to for liquidity mint and burn events; these events are captured and stored. By epoch-end, each LP’s number of ‘liquidity hours’, representing liquidity in the active ticks (corresponding to token price), is multiplied by the time passed in hours.
- Reward Calculation: As the active tick changes, the LP’s liquidity position may fall in and out of range. SaucerSwap’s algorithm for calculating rewards takes into account the position’s time spent within range of the active tick and only accumulates rewards while the position’s liquidity is being used. The final distribution of rewards to LPs per epoch is calculated by:
- Distribution: At the end of each epoch, rewards are automatically sent to the participants via an airdrop. If any issues arise, such as a token not being associated, the distribution specific to an LP is rescheduled for the next epoch.
This system ensures maximal efficiency by only rewarding active liquidity. This focus not only improves the overall health of liquidity pools but also maximizes the utility and efficiency of each token distributed as a reward.
Example:
Alice and Bob both decide to provide liquidity to the USDC[hts]/USDT[hts] pool on SaucerSwap v2. This pool has a 0.05% fee and a tick spacing of 10, where every tick represents a 0.01% change in price.
Alice’s Strategy: Alice has a relaxed strategy and provides $10k of liquidity over a wide price range of $0.95 to $1.05, or 1,000 ticks.
Bob’s Strategy: Bob, on the other hand, has a more focused strategy. He provides $10k of liquidity over a much narrower price range of $0.9995 to $1.0005, or 10 ticks.
We assume that, throughout the epoch, the price of the pool remains stable and stays entirely within the $0.9995 — $1.0005 range.
Given his focused strategy and the price staying within his range, Bob accumulates 336,000,000 liquidity hours over the 14-day epoch. Even though Alice and Bob provided the same capital, Alice’s liquidity hours in the active price range tally up to only 33,600, given the distribution of her liquidity.
Bob’s decision to provide liquidity in a narrow, focused range where he anticipated price activity led him to outperform Alice in terms of rewards by a factor of 10,000. Alice’s broader strategy, although safer in terms of exposure to price movement, did not capitalize as efficiently on the rewards during this particular epoch.
See the table below for a breakdown:
It’s worth noting that the probability of USDC[hts]/USDT[hts] consistently trading within the $0.9995 — $1.0005 range over a 14-day epoch is low. In a real-world scenario, Bob’s accumulated liquidity hours would likely be less than the theoretical maximum provided in this example.
Tokenomics:
As the community will recall from the Tokenomics v2 Proposal, there will be a 60% cut to the inflation rate of SAUCE and a reallocation of SAUCE emissions as follows:
- 90.91% → 47.16% to v1 farm rewards (decrease)
- 9.09% → 9.09% to devcut (no change)
- 0% → 43.75% to the DAO treasury (increase)
The full 43.75% DAO allocation (55.49 SAUCE / min) will go towards LARI for the first four epochs. For subsequent epochs, half the allocation will tentatively go towards LARI, while the other half is retained by the DAO for future use.
At the beginning of SaucerSwap v2’s launch, the rewards will be highest. This will boost yields and facilitate a seamless migration of liquidity to the v2 pools. Rewards will then be gradually tapered, stabilizing at approximately 559k SAUCE per epoch by week eight.
Summary:
SaucerSwap v2 introduces the Liquidity-Aligned Reward Initiative, or LARI. This revamped system not only rectifies the shifted custody concerns for LPs, but also aligns rewards with LP efficiency and broadens the scope by accommodating HBAR and any HTS token as rewards.
Additionally, LARI integrates well with the updated tokenomics model, especially as the DAO now receives an allocation of SAUCE minted by the Masterchef contract. Directing a portion of this SAUCE to v2 pools via LARI results in a balanced, equitable, and streamlined incentive framework post-inflation adjustment.
In short, LARI aims to ensure a smooth transition to the CLMM and an enhancement in overall functionality and user experience on SaucerSwap.
