Today, we are introducing a significant change in the way Shell Points are calculated for certain pools. This adjustment is designed to more precisely guide the liquidity landscape of the protocol and more thoughtfully reward the most useful liquidity allocation.
The Current State of Shell Points
Shell points are currently awarded by taking the monetary value of a Liquidity Provider (LP) token in dollars and multiplying it by a set multiplier. Initially, these multipliers were designed to reward liquidity providers in riskier and more experimental pools. As the pools have matured, the concept of multipliers representing risk has become less urgently relevant. Multipliers also help drive liquidity to the pools where it is needed most. This is crucial for the efficient operation of the fractal pool system of Shell Protocol, as strong liquidity in core pairs (like Ethereum and stablecoins) is necessary for efficient swaps through the fractal network.
Although the current system has been effective in reinforcing the liquidity of core pairs, it is also a very broad brush and difficult to precisely tune. Small changes in multipliers can lead to massive shifts in liquidity due to users chasing the highest yield. For example, the liquidity of the Toucan pools decreased significantly a few months ago when the multiplier was reduced. Additionally, if the price of an asset decreases, then so does the number of Shell Points a user will receive, which can create a negative feedback loop (or alternatively a positive loop when prices increase).
A New Approach
To address these challenges, we are introducing a new way of awarding Shell Points, based on the total amount of a certain token type in the Ocean. Essentially, the lower the supply of a token (such as TOUCOIN or LP tokens), the more points per dollar value users will receive for holding them. As the supply increases, the multiplier decreases, and vice versa. This approach aims to find equilibrium resting points for certain pools and guide the liquidity of the protocol more thoughtfully.
Looking at it a different way, you can imagine there is a fixed number of points per day to be issued to holders of a token. Say there are 100 points per day to be issued and only 10 tokens in existence. This means each token would earn the holder 10 points per day. Now, if the supply increased to 100 tokens, each token would earn the holder only one point per day. With a supply of 200, each token would earn the holder half a point per day.
This can be compared to the Curve gauge model in its operation.
As this is an experimental change, we will initially implement it only for TOUCOIN and wrapped Toucans, which have often served as test subjects for new ideas. If this approach proves successful, we will roll it out to other pools and eventually the entire ecosystem.
We are hopeful that this new approach to awarding Shell Points will lead to a more balanced and efficient distribution of liquidity across the Shell Protocol ecosystem. We are excited to pilot this change today and ultimately implement it across the entire network.
Join the Shell community!