ADR 17: Burn System Income Lever

Changelog

  • 19/05/2024: Created

Status

Proposed

Context

The original ADR for lending ADR-11-Lending discussed the requirement for a burn of system income once Circuit Breakers were hit to pay down the liability of the system.

This has not yet been implemented. A possible imperative to accelerate this feature is two-fold:

  1. Post-CB features should be implemented before hitting CB, as a method of calming the myopia "what-if" and reduce the uncertainty.
  2. Nodes have a tool up their sleeve to temporarily increase Burn Rates to a non-zero amount, to play more into narratives affecting the market.

Post CB Safety Lever

Adding the feature now will give more certainty to users wondering about the Post-CB state. This certainty thus reduces the myopia about those users entertaining the idea of the Post-CB state.

Public Posts such as this reinforce the misunderstanding of such a state, and adding the Lever now will partly address (or give a tool for supporters to address) the issue.

Additionally, it immediately gives nodes a tool to address supply issues if the CB is being approached, before trigging it. Currently they have no such ability.

Market Narratives

With EIP-1559; the market converges around the Fee-Burn narrative much more strongly, leading to short-medium term influence on market sentiments. By building such a lever now, the Network can respond to the need for such a narrative much more rapidly.

Economics

Burning the fees does not directly benefit LPs-Nodes, since it temporarily reduces their income. However it does theoretically enrich all holders equally. The stronger aspect at play here; is that LP-Nodes are part of a long-term capital-allocating cohort, so a short-term drop in income doesn't measurably affect their positions. Instead, this mechanism should influence short-term allocators and give Nodes an ability to calm markets; similar to Overnight Bank Funding Rates which directly influences the market, but does typically does not affet 5-10year bond participation rates.

Lifetime System Income is 16bn RUNE, so this proposal would have burnt 1.6m RUNE in the last 3 years.

Proposal

New Mimir

SystemIncomeBurnRateBP = 0.0001 //1BPS

This immediately starts burning 1% of system income (prior to be split to Nodes-LPs). It can be increased or set to 0 to turn off completely.

Decision

TBD

Consequences

The System Income will start burning 5%.