Incentivize Interlay iBTC capacity as Polkadot common good

Firstly, a way to obtain BTC 100% supported and in a decentralized way is something necessary, interlay has been offering this service for 2 years, now we need to support this service so the community can use that btc in synergies with already approved proposals, and more freely on the eco

Personally, I think that option 1 is the most reasonable, and converting them to vdot makes more sense, since when they are distributed throughout the year, it will undoubtedly increase the rewards and be more efficient with the same capital.

Option 2 is something that I simply do not agree with.

and with option 3, although I would like to increase the capacity directly with the dot, this would require a non-trustless method (for the moment) and at the same time to ensure the stability of the funds and not put them at risk, a much larger amount is required. largest DOT

Therefore I think that option 1 makes more sense.

like an extra, if after establishing decent liquidity and usage, we can change some DOT to iBTC for Treasury diversification like with USDT/USDC

Thanks for putting forth this discussion, Spaz

Personally, I would love to see Option 3, but I also know that literally requires a ton of work and human resources. Even today when DOT and most alts went into free fall, the Lucky Friday Slack was buzzing with pager duty for the Interlay vaults. Plus option 3 would require more trust than the others.

I believe the most pragmatic approach, then, would be Option 1. It would provide the necessary capital / incentives to help vault operators (APRs have been on the decline for quite some time) and hopefully encourage new vaults opening should additional BItcoin come into the system.

Option 1 is the most stable at the moment which will generate similar rewards for vault operators like 561 will do. Less risk also, because this capital will only be used as rewards. It’s been the battle tested approach everywhere on DeFi which will also create more traction in the parachain in the future so that INTR rewards and fees can create a self sustaining environment in the future.

Option 2 Achiles heel is the dependency on Polkadot’s native staking rewards as the source of the incentives. The “Assuming a staking rewards rate of 15%” part. We already have chatter about reducing the staking rewards so such approach could be deprecated soon. Just imagine a switch to 3.3% inflation, we would require to multiply the collateral in order to maintain the max iBTC cap. Just like with Composable’s proposal, we should have an escape hatch and plans in case the conditions are not the same so that this capital doesn’t get stuck in a less-than-optimal situation and it could be used in some other way eventually. Even if it’s a perpetual loan, this option is required because forever is quite a long time and market conditions can change in the blink of an eye, at least an escape to option 1 should be considered. We would also prefer options that guarantee a full return to the treasury because of potential changes in the parachains, deprecation of Interlay, hacks and changes on Polkadot itself so that it’s not a perpetual loan in case of very bad incident occurs like a hack (an Euler situation maybe?) or a radical change in the design of Polkadot.
It would be the best option if the token holders are completely in favor of locking a significant amount of DOT and also if there is a way to change strategies swiftly as needed through the use of Interlay’s and/or Hydra’s governance.

Option 3 also requires a similar amount of DOT like option 2 and it will require heavy trust in the vaults operators making it the least appealing option. However, it is an interesting concept as it could potentially increase the iBTC max cap through a 1kv-kind of program as vault operators could re-balance and increase collateral and vaults as needed. For this, a clearer path regarding funds should be a must, something like legal agreements or ideally a way to guarantee the control of funds through proxies or multisigs. So hopefully, such changes come so that we can go for this option which will be potentially the one that fosters the most growth in iBTC capacity.

Option 1 is the only viable option at the moment in our view but option 2 shows promise.

Now option 1, after core time, and once core time here I think two can be good!

I think that once the volatility has passed and a certain decline in the market for buying and selling block time passed, or that's called the agile block time space, the second option should be reconsidered more carefully. I consider here, also, an decrease of inflationary of to soustain the solidity of value of dot who will become an asset for purchasing a resource. That is to say than if we down inflationary, the dot wil be more credible to be considerated like an actif solid and become a viable collateral to support IBTC, in addition to USDC, USDC, as well as DAI which seems to me not to be a bad idea.

Why the this choice : Because BTC is the Boss, and do the dot are source for access datas resource, and, in the same time a collateral of choice would not only enhance the value of the asset but would too make it a security asset which would really enhance the image security specific to what polkadot claims to be itself, and to all its ecosystem indirectly. Unstoppable expansion marketing here.

Thank you Spazcoin, we follow your work and really support your activity!

As for the proposal.

Option 1 looks optimal and, importantly, without complex additional development on the Interlay side. Direct stimulation does not require large DOT inflation and frightening numbers (millions of tokens) for the treasury.
Option 3 - kills decentralization. There needs to be a lot of discussion on the OpenGov side to go through with this and select trusted community members and agree on all the details.

But the bridge capacity is important NOW!

Maybe we could consider runing this as a phased campaign. Secure the ammount suitable for Option 1 & 2 together under the bounty fund.

Implementing a bounty-driven approach with phased stages, curated by prominent Polkadot DeFi experts, could add an extra layer of adaptability and community engagement.

Phase 1: Initial Boost with Option 1

Option 1 seems most aligned with immediate needs. It's simpler to implement and manage, offers a significant boost to the APRs for vault operations, and is less risky compared to the other options, making it a good starting point.

As the system stabilizes and perhaps the staking rewards consensus becomes clearer and more favorable, we could transition to Option 2

After the phase one incentives dry out, those great DeFi minds could deliver the report and asses the system's stability, vault capacity expansion, and the sustainability of treasury funds. evaluate the DeFi market conditions in relation to staking rewards.

At that stage we can have community vote to decide whether to continue with Option 1 or transition to Phase 2, based on curator recommendations and economic indicators.

Option 2 offer a more sustainable and perpetual incentive mechanism, utilizing the growth in value from staking rewards. By then, if the approach is refined to mitigate risks associated with fluctuating staking rewards and complexity, it could serve as a robust long-term solution.

Phase 2 - Option 2 or Option 1 continuatuon.

From my perspective, such phased approach allows us to capitalize on immediate opportunities adapting to the evolving conditions and insights gained during the first phase. It also keeps the governance and financial structure agile.

Agile Treasury. Agile Polkadot

When only the above 3 options are limited, option 1 is most suitable in the initial stage. But there is no guarantee that the vault that received the reward will continue to increase the collateral, even if the APY is increased to 80%+, HydraDX and Stellaswap have more rewards, why not invest in them instead of Interlay.

In addition to the options provided above, I have an additional one: the treasury uses DOT to purchase INTR as a reserve, and stakes it to Interlay and converts it into vINTR to become a shareholder. The DOT community can not only share the development benefits of Interlay, but also indirectly increase INTR token price to benefit valuts. It is estimated to be most easily accepted by the community.

But in the long run, the Interlay should be self-sufficient. Based on the principle of who uses who pays, the direct beneficiaries now are parachains and DApps, although it indirectly drives the prosperity of the polkadot ecosystem (So, support from the DOT treasury is still appropriate, but less):

1. The current vault capacity is almost full, which means there is insufficient supply of IBTC in the market. The simplest and most direct way is that the interlay should adjust the bridging fee based on the percentage of the vault’s issued capacity to directly provide the income for vaults.
2. As more and more IBTC earn income scenarios, Interlay should break the 1:1 exchange rate between BTC and IBTC, and gradually reduce the value of IBTC over time so that holding IBTC also requires cost.

Thanks for presenting this proposal, @spazcoin . It's fantastic to witness the Polkadot community taking the lead on initiatives that could significantly enhance Polkadot's DeFi ecosystem.

Before we provide our perspective, we believe it's important to consider why iBTC holds significance for Polkadot. Here are some key points to ponder:

• BTC stands as the largest asset by market cap in the crypto space and has been utilized by other ecosystems to offer functionality to BTC holders and provide liquidity to dApps.
• The Interlay team has been instrumental in driving iBTC integrations across the ecosystem. Presently, iBTC is available in all active parachains like Moonbeam, Hydra, Acala, and Astar. Increasing the flow and issuance of iBTC will benefit the broader ecosystem and encourage other parachains to include iBTC among their registered assets.
• The recent market rally has demonstrated a clear demand for iBTC, with certain iBTC/wBTC pools showing a premium on iBTC. This is primarily due to the limited vault capacity compared to the unrestricted flow of wBTC through Wormhole. Addressing this capacity constraint is crucial for iBTC.
• iBTC represents the safest form of BTC within the Polkadot ecosystem. Unlike alternatives such as wBTC, iBTC eliminates the need to trust both BitGo (custodian/issuer of wBTC) and Wormhole, the bridge that mints the wrapped version of wBTC on Moonbeam. However, iBTC faces a capital efficiency issue due to its prioritization of stability and decentralization over scalability.

Given these reasons, there's a good case to make for the Polkadot treasury to intervene and inject capital to increase vault capacity for iBTC.

Regarding our preferred option, we believe Option 1 offers the most straightforward solution to our current capacity issue without the need for significant operational overhead by a middleman. We recommend disbursing funds in vDOT rather than plain vanilla DOT to allow for staking rewards while distribution occurs. This would also extend the proposal's benefits to an additional parachain beyond those receiving iBTC.

Additionally, we'd like to address the implementation details. While a 40% APR may suffice presently, it may not be adequate in the coming months. The APR received by vault operators should be viewed as the cost of capital, a metric that fluctuates frequently in crypto markets. Therefore, we suggest adopting a phased approach, dividing funds into epochs (e.g., quarterly tranches). A group of experts with relevant experience can then retrospectively analyze data and propose the payout amount for the next quarter. This approach would offer greater flexibility and make sure the treasury is meeting its goals without having to overpay for capital.

Thanks to everyone who contributed to the conversation! With the final vote being 17-0-3 in favor of Option 1 ("Polkadot Treasury grants DOT to pay out as vault rewards"), that is what we will proceed with in the official proposal.

However, we wanted to inform the community about a limitation that we learned of from the Interlay team. Whereas we thought we could add another token type (DOT or vDOT) as direct rewards for vault operators, we found out that only INTR can be used to pay out vault rewards.

Therefore after the on-chain proposal is passed, we will initiate follow-up Interlay governance referenda to:
1a) send the entire DOT grant to the Interlay sibling account on Bifrost chain.
1b) stake the DOT on Bifrost chain to receive VDOT.
2a) move the staked VDOT on Bifrost to the Interlay sibling account on HydraDX chain.
2b) Initiate a 12-month-long DCA to sell that VDOT for INTR.
3) increase the INTR vault reward rate according to the additional DOT rewards granted by the Polkadot treasury in order to incentivize the additional iBTC capacity.
4) Periodically move purchased INTR on HydraDX back to the Interlay treasury to continue payouts to vault operators.

The goal will be to time the increased INTR vault rewards emissions and the purchases of INTR from the Omnipool to overlap and cancel each other out.