Authors: Dylan O’Reilly, Lee Poettcker, Chase Coleman
Summary
The UMA DAO should initiate a measured reduction in the current emissions rate to help optimize UMA’s token economics whilst maintaining a robust voting base to ensure protocol security and viability.
Motivation & Rationale
The current emissions are providing UMA stakers with an APY exceeding 27% per annum.
This is quite high relative to rates you can earn in the market today (ETH: ~5%, Stables: ~15%). Details on our current emissions:
Emissions Rate: 0.18 UMA per second (5,676,480 UMA per annum) (source: Etherscan)
Circulating Supply: 84,605,309 UMA (source: CoinGecko)
Current Inflation Rate: 6.7%
Cumulative Stake: 21.6M UMA
Current APY: ~26%
30 Day Average Voters (Dec 2024): 280
30 Day Average Voting Power (Dec 2024): 18.4M UMA
Participation Rate (Dec 2024): 22% (Voting Power / Circulating Supply)
There are several reasons why we think the UMA DAO should reduce emissions:
Potential Overpayment: Our current emissions may be higher than necessary to maintain our current staking and voter base.
Staker/ Voter Inelasticity: We believe the voting base is relatively inelastic and will likely remain stable even with reduced rates. UMA voters will still earn handsome rewards for their participation in the voting process even if current rates were to half.
Reduced sell pressure: Reducing excess UMA supply hitting the market could positively impact the value of the underlying asset.
Specification & Implementation
We propose lowering the emission rate over 3 separate cuts of 0.025 UMA per second, each signed off by individual votes and followed by analysis periods. The terminal emissions rate should not be lower than 0.105 UMA per second (~15% APR).
This first proposal will involve the following:
Cut: reduce emissions by 14% (0.18 UMA/s to 0.155 UMA/s)[~26.3% APR to 22.6% APR]
Analysis: assess impact on staking / voting base
Safeguard: Revert cut and pause further reductions if the 7 day moving average of voters who reveal falls by >20% of the 30 day moving average of the same metric on the day the vote passes.
Subsequent cuts: Additional 0.025 UMA per second reduction votes if analysis suggests the voting base has not decreased significantly.
These votes should occur every 2 months until the terminal emissions rate is reached or the safeguard measure comes into effect.
The recurring proposals should follow this flow:
Reporting is posted on discourse for information and discussion with community
Snapshot vote starts three days after the above is posted. If passed, move to DVM with bonds sponsored by RL as outlined in the governance docs.
DVM vote executes the setEmissionRate function on the VotingV2 contract through UMA DAO’s GovernorV2 contract.
Goals
Find the optimal emissions rate that balances rewards and participation
Reduce inflation while maintaining a healthy staking ecosystem
Improve overall token economics for UMA
Potential Downside
If the staking / voting base is more elastic than anticipated this could lead to a reduction in the economic security provided by the Optimistic Oracle as some voters unstake. There is a possibility that these persons exit from the UMA system and do not return. APYs should increase to make it more attractive for new stakers / voters to come in and replace these persons if this occurs. We also have our analysis safeguard in place to revert cuts if the staking base reaction is outsized.
Snapshot Voting
Proposal Duration: 5 days
Quorum Requirement: 3,310,413
Approval Threshold: Majority
A yes vote means that you would like to decrease the emissions rate from 0.18 UMA/s to 0.155 UMA/s.
A no vote means that you would like to keep the emissions rate at 0.18 UMA/s
DVM vote to follow if Snapshot vote is successful.
Thanks for putting this together. I agree with the proposal. Emissions were initially set high to encourage voters, but now it’s unnecessary. I like the controlled process described here of gently reducing emissions and monitoring the effects of voter participation.
As a separate topic, it would be great to get the community involved in a longer term discussion about what target voter base the protocol wants. what % of circulating UMA supply should vote, how many unique voters, participation of this group, etc. Emissions rate would be one tool in achieving these targets.
I totally agree with this and I am going further. We should be burning tokens instead of increasing them. UMA should start charging for it’s services such as polymarket, snapchat and etc. Revenues generated from those ecosystems should be utilized for burning tokens to ensure the stability of UMA’s tokenomics and protect the value of UMA tokenholders by aligning their long term voting interests.
If your main concern is that this proposal will reduce voter participation, rest assured, it won’t.
UMA.rocks now represents 10% of unique voting addresses on UMA. As long as we keep growing, then the voter participation on UMA is almost guaranteed to increase as well.
Therefore this proposal can safely be implemented.
I will be voting against this proposal. I would appreciate it if you took a moment and let me explain why I think you should do so too. First, I want to say I have the utmost respect for the people who put forward this proposal and are supporting it. They are acting in good faith with the best interest of the protocol in mind. I also want to note that I am much less of an expert on the financial and technical side of cryptocurrency in general and the UMA protocol specifically. Now that all being said, I oppose this proposal for four main reasons.
Reason 1: Timing
The first main reason for my opposition to the proposal is that this is a poor choice of time to make this change. We are a little bit less than two weeks behind a significant drop in UMA token price. This drop in price came at least in part as a result of the decision not to provide gas rebates anymore for anybody who was staking less than 500 tokens. This is important for two reasons. First, people who have a smaller investment in UMA already have an incentive to leave the protocol and I am concerned that this will create even more of an incentive for people to leave or for them to not buy tokens in the first place. Second, I am concerned that we are making this decision as a response to the drop in token prices without seeing the longer term impacts of the changes to the gas rebates program.
Reason 2: No Need
The second main reason for my opposition to this proposal is that I do not necessarily see the need to make this change. If you look at the price graph for the price of the UMA token, it does not have the trajectory that would typically correspond with the price being diluted by inflation. If there is a significant concern about inflation, I believe there are other ways to address this, including some that also address other problems that people generally have with the protocol.
Reason 3: Does not account for a drop off in new holders
The third main reason for my opposition is this could slow the growth of the user base. This is already a somewhat precarious time for UMA, especially with regards to adding new users. Polymarket, which is the largest integration we have, is losing significant numbers of users since the election ended. This has real implications for the price of the UMA token given that the token’s price is backed in large part by the power it has in resolving disputes. If fewer people are using Polymarket, that means fewer people are interested in the resolutions, which means that fewer people want to buy UMA tokens to influence resolution decisions, which ultimately leads to slower growth of the UMA user base and fewer buyers. Lowering the emissions rate could drive away potential UMA buyers at a time where the growth of the user base is already in a position where it could be shrinking. The proposal is designed with safeguards that address the issue of people who are already members of the user base leaving, however, it does not address the lack of an increase in the user base.
Reason 4: Lack of discussion
My final reason for opposition to this proposal is that I don’t think that the idea of lowering the emissions rate, and its potential problems, have been discussed enough. As Kevin said, I think we need to have a larger discussion about the community’s goals for the protocol, goals relating to voting, and what the different options are in addressing our problems and reaching our goals
I agree with aajjss. Now is not the time to be reducing emission. I say what UMA need is marketing to new potential voters. Reducing emission can be implemented when unique voters are growing week by week.
Hey, thanks for your sharing your thoughtful feedback @aajjss . Here are my responses:
Reason 1: Timing
Wallets affected by the gas rebate rule changes (<500 UMA) as of December contributed only 0.23% of UMA staked. We all want as many stakers as possible and as much of the community as possible to participate in dispute resolution. But UMA dispute resolution is is a staking system (like Ethereum PoS) where a stakers contribution to security is proportional to their staked amount. So the loss of these stakers will not meaningfully affect UMA’s economic security. Assuming they sell, I don’t expect that volume would meaningfully affect UMA price either.
From my point of view, reducing emissions is something we have considered for a while and not related to any recent price movement.
Reason 2: No Need
I think increasing supply always creates some downward price pressure. I think other protocol changes to staking rewards could definitely be interesting (I have some ideas on this too!), but in my opinion that does not prevent this proposal from moving forward. In fact lowering the emissions may make other protocol level emission related changes easier as the staking reward load would be smaller.
Reason 3:
Lowering staking rewards should lead to some amount of unstaking, but how much is to be seen. Reducing emissions could also lead to more people holding a scarcer asset. As per the proposal, we want to make small incremental changes and adapt to changes in staking behaviour.
Reason 4:
I’m open to discussing more here or in Discord (tag me @pumpedlunch).
I totally agree with you.
What does apy consist of?
When does the UMA protocol actually generate revenue?
If other projects that use UMA’s oracle are reluctant to use UMA due to the usage fee (either using UMA or paying other fees) or use other oracles, UMA is already uncompetitive.
I want to believe that UMA is competitive in the market.
I think UMA should move to a burn mechanism that generates revenue and covers emissions.