Bootstrapping the Fringe Finance ecosystem — November 2022
Why bootstrap?
In the context of this article “bootstrapping” the Fringe Finance ecosystem refers to sustainably incentivizing user adoption towards long-term scalability goals. Sustainable adoption is the prime objective, which means finding a balance between underinvestment and overinvestment in incentivization programs.
Fringe Finance will conduct various bootstrapping programs over time with each having its own set of objectives and investment allocation. This article will describe the different approaches to best achieve user adoption.
Things to avoid — unsustainability
The early years of DeFi were dominated by projects that offered unsustainably high yields. A large swathe of participants was attracted to DeFi because of these extraordinarily high-yield opportunities, often with triple-digit (or even higher!) APYs. Many marginal participants were not attracted to DeFi because of its core utility, and once the high-yield opportunities evaporated, they departed. As such, we can safely state that high-yield opportunities by themselves do not result in user ‘stickiness.’
Furthermore, high yields were often funded from projects’ treasuries. This means that a material portion of their projects’ treasury was expended on high APY yield programs, only to leave the project with few users once they ended.
Unsustainable. Wasted treasury resources.
Sustainability
The current cycle of DeFi projects can learn lessons from early unsustainable yield programs. Accordingly, Fringe Finance intends to establish an incentive program that does not promote rewards for the sake of rewards but rather uses them to promote sustainable adoption.
Fringe plans to achieve this by offering measured incentives to nudge participants toward the PLP who are already in the market for the facilities offered by Fringe Finance.
This is a measured approach aimed to maximize the return on investment for rewards in terms of sustained adoption. In short, Fringe aims to reward users that are likely to continue using its platform in the future, rather than short-term opportunists.
Fringe’s bootstrapping framework
Fringe Finance has now delivered its Staking platform, which is integral to incentivizing user adoption. This, together with other bootstrapping resources, will allow Fringe to conduct nuanced incentive programs to achieve long-term adoption goals.
Fringe will incentivize lenders to participate in the platform via staking rewards, which will indirectly incentivize borrowers via lower borrowing rates.
Fringe will incentivize lenders by offering rewards when they stake their fTokens (e.g. fUSDС) on the Fringe Finance Staking platform. fTokens are Fringe Finance’s interest-bearing tokens received by lenders in return for depositing capital into the lending pool. Lenders will receive interest payments for their deposits into the lending pool in addition to staking rewards on fTokens. On net, the staking rewards result in lenders receiving higher effective interest rates on their deposits to the lending pool.
Fringe Finance can monitor the fToken staking programs and tailor the rewards and duration of the programs to suit adoption targets.
Additionally, Fringe Finance can inject capital directly into the lending pool (hence acting as a lender) and as a result reduce borrower interest rates, as well as increase capital available to borrowers.
This means Fringe Finance has a range of tools to incentivize participation with the ability to fine-tune the incentive program, ensuring the most effective use of investment capital aiming to maximize sustained user adoption.
The bootstrapping plan
The first phase of the bootstrapping program will consist of several milestone adoption targets. Details of the amounts that Fringe will deploy towards these milestones are yet to be decided and will depend on various factors, including the general prevailing market sentiment and any perceived opportunities.
Each milestone will have an objective to achieve a specific target of lender deposits. For example, Milestone 1 can target $X lender deposits, Milestone 2 can target $Y lender deposits, and so on. As mentioned, the mechanism to achieve this will be by incentivizing lenders with the extra yield on their staked fTokens.
Each milestone target of lender deposits will allow Fringe Finance to measure the effectiveness of the accompanying incentive programs and tailor them as required to achieve adoption targets.
Fringe Finance’s new interest rate model targets a specific utilization rate, and therefore borrowers will be incentivized by relatively low borrower interest rates until the target utilization rate is achieved.
While this incentive program unfolds, Fringe will continue to deliver on its roadmap of new functionalities for its platform. Roadmap milestones will coincide with further incentive programs to achieve progressive adoption targets. These roadmap items include multi-chain support, fixed interest rates, support for additional lending assets, a long list of additional collateral types, a decentralized frontend and backend, atomic loan repayments, our USB Stablecoin Platform, and more.
Once the first milestone adoption target is achieved, Fringe Finance can assess the performance of the incentive program to determine how best to achieve subsequent adoption targets. The definition of future milestones (i.e. milestones 2, 3, and 4) will be informed by the first milestone incentive program. Many factors will come into play in shaping future incentive programs, such as market sentiment, platform revenue, competitive landscape, and roadmap delivery milestones. We’ll soon provide detailed information about each adoption milestone, including investment amounts, schedules, and adoption targets.
Future incentivization
This article has described incentive programs for achieving higher adoption of the Primary Lending Platform. The Fringe Staking platform also allows for the incentivization of other types of participants in the Fringe Finance ecosystem. This will be described in future articles and will include a range of programs, including incentivizing $FRIN DEX liquidity provision, $FRIN staking, $USB stablecoin staking, and more. As a teaser, the following table illustrates the staking and rewards possibilities that are available with the Fringe staking platform.
Fringe’s Staking Platform
There are various approaches that can be taken regarding staking and rewards mechanisms. Therefore, it is worth mentioning the approach Fringe Finance has taken in the design of its Staking platform and why Fringe has taken this approach.
The Staking Platform adopts a grounded design without unnecessary elaborations that allows incentive programs to be tailored to meet the varied needs of its incentive programs. As such, the Staking platform dispenses with elaborate approaches such as vesting regimes.
In essence, vesting regimes create extra user friction because of the complications and delays for users in accessing their locked-up funds. Users can be willing to tolerate vesting regime inconveniences, but it requires them to be compensated. Fringe would need to incur greater costs to provide the additional incentives necessary to overcome lenders’ decreased interest in staking.
Given elaborate vesting regimes cost more, Fringe can achieve the same without vesting regimes by tailoring the incentive program to, say, last longer (i.e. spending the same amount over a longer period of time) and to taper down incentives, rather than ending them abruptly.
There are other reasons the Fringe Staking platform adopts a grounded design, such as time-to-market, security and support. Elaborate vesting logic takes longer to bring to market, potentially compromises security by introducing unnecessary attack surfaces, and requires more complicated user support processes. It also presents opportunity costs due to resources being diverted from delivering other roadmap items. The same effect as vesting (i.e. dampening volatility) can be achieved by allocating rewards in a tailored manner.
Summary
Fringe Finance has assessed effective ways to provide incentive mechanisms to promote the long-term adoption of the platform. Fringe is very aware of the pitfalls of unsustainable/unrealistic high-yield incentive programs that result in little long-term adoption and wastes finite treasury resources.
The approach Fringe Finance is taking is designed to foster the platform’s sustainable adoption.
Fringe Finance.
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