Updated RFC:
Summary
This proposal introduces an optional DUST claim path that routes rewards into a time-locked DUST/USDC liquidity commitment, with longer commitments receiving a larger share of the Merkl rewards. Commitment may be funded using nUSDC (veDUST revenue or collateral), or their in-wallet USDC, subject to final implementation parameters. The final DUST/USDC LP ratio remains subject to Neverland development team modeling and governance approval.
A suggested 50/50 ratio of DUST to USDC would provide a similar outlet for DUST same as the existing 50/50 Uniswap V2 liquidity pool. The even nature would mean it would take equal numbers of buys and sells to affect DUST price.There would be no DUST fee penalty for using this proposed option due to the risk of LP impermanent loss. Lock durations would be lengthy, initially proposed at three (3), six (6), nine (9), and twelve (12) month options subject to approval in the final proposal in consultation with the Neverland development team.
Problem Statement
The current DUST economy is polarized between immediate selling of short-term DUST locks and long-term veDUST locking, leaving limited middle-ground utility for users who want to support liquidity without incurring the currently structured DUST claim fee penalty. DUST also currently has limited utility beyond immediate claim or veDUST locking, and LP provisioning is relatively high-friction. Current market conditions have not provided enough natural buying pressure to support deep, sticky DUST liquidity. The original finite LP rapidly dried up as it absorbed selling epoch after epoch until it was depleted.
A time-locked LP DUST claim route could broaden participation and deepen liquidity by rewarding longer commitment periods more heavily than shorter ones. Users could easily fund the commitment using nUSDC or fresh USDC, reducing the friction of entering LP while introducing a commitment requirement. The requirement rewards both participants and the protocol with shared Merkl USDC/MON. The protocol may hold or distribute its share to veDUST holders. In bear markets, this may attract new USDC (organic DUST buyers) or act as an additional LP flywheel.
The mechanism is intended to increase long-term DUST alignment and create a deeper committed DUST holder base while also allowing a cushioned time delayed and price-sensitive selling mechanic through the LP until lock expiration. The protocol flow imbalance would be further stemmed by the proposed middle road DUST utility, requiring commitment while subsidization from scaled Merkl rewards incentivizes the depth of the LP to help if selling pressure increases. This avoids every passing epoch creating the next wave of liquid supply 30 days out by time locking liquidity.
Low Level Details / Rewards
Rewards:
Today, DUST rewards are effectively limited to immediate liquidity with a penalty or locking into veDUST for USDC revenue rewards. There is currently no lower-friction route for users who want to support liquidity without incurring the immediate DUST claim fee penalty. This proposal is intended to further support building deeper, longer-committed sticky liquidity while allowing users to partake in scaled Merkl rewards split 60/40 with the current 50/50 Uniswap V2 LP based on the Neverland development team’s final discretion. Incentivizing this new pool requires reduction of incentives to the current 50/50 pool in trade for more sticky participation.
Users choosing this path are betting on either netting a higher yield for their DUST rewards via the LP if the price of DUST increases or accumulating more DUST for cheap as the price decreases. This could mimic a daily cost average DUST investment for the length of the lock duration. Since the elimination of the protocol farm-and-dump mechanics has potentially reduced the risk of liquidity provisioning, current and newer users may be more inclined to participate in LP for scaled Merkl rewards as another option to put their DUST to work.
Distribution:
This works to build sticky liquidity which benefits the protocol though delayed selling of DUST, opens an outlet for emissions currently stuck in holder’s hands. This could reduce the concentration of DUST/USDC liquidity, increase its depth, stabilize volatility, and broaden participation thereby lowering the threat to the protocol’s decentralization. The recent changes to the protocol mechanics should lead to higher DUST price allowing users to “long” DUST while receiving scaled Merkl incentives.
Under the proposed framework the DUST and veDUST USDC revenue distribution continues at the current schedule. At claim time, the receiver chooses a LP commitment duration, and the share of Merkl rewards received scales with that commitment. A full commitment claims the full amount of available rewards while a shorter commitment claims a fraction and returns the rest of the Merkl rewards to the protocol for distribution. Per the final proposal, in consultation with the Neverland development team’s discretion, the Merkl USDC/MON rewards would be held by the protocol or redistributed to veDUST holders in a proportional manner similar to the USDC revenue.
Expected Outcome:
In the short-term, since the dis-incentivization of systematic farming behavior, this returns some net liquid supply but duration locked specifically to LP. Normal DUST distribution continues, and new LP locks widen DUST ownership with Merkl rewards until release from LP lock commitment.
In addition, interested provisioners are potentially acquiring more DUST for veDUST locks / eventual liquid use, or more USDC as the market dictates.
Mechanism:
After enactment, DUST claims would pass through a redemption menu. At claim time, the user chooses either immediate claim or an LP commitment. Immediate liquid claims incur the fee penalty which is burned per the existing protocol structure. LP lock commitments incur no fee penalty maximizing user rewards.
Example LP Options (Final to be determined by Neverland development team):
- Model: $20k total LP rewards - User owns 1% of liquidity pool
Standard (Current) Option - 50/50 Uniswap v2 Pool - 30% total LP rewards → $6k total pool rewards
| Commitment Duration to Exit | User Reward Percentage | User Rewards Received | Rewards Returned to Protocol |
|---|---|---|---|
| None, no commitment, (Immediate liquidity) | 100% of 1% of 30% total LP rewards |
$60 | $0 |
New (Secondary) LP Lock Option - 50/50 Uniswap v2 Pool - 70% total LP rewards → $14k total pool rewards
| Commitment Duration to Exit | User Reward Percentage | User Rewards Received | Rewards Returned to Protocol |
|---|---|---|---|
| 12 months (Exit at lock expiration) |
100% of 1% of 70% total LP rewards |
$140 | $0 |
| 9 months (Exit at lock expiration) |
90% of 1% of 70% total LP rewards |
$126 | $14 |
| 6 months (Exit at lock expiration) |
80% of 1% of 70% total LP rewards |
$112 | $28 |
| 3 months (Exit at lock expiration) |
70% of 1% of 70% total LP rewards |
$98 | $42 |
Merkl reward percentage is based on LP lock duration and Merkl rewards returned to the protocol are held or distributed to veDUST holders.
Distribution is unchanged: Gross DUST rewards continue at the current schedule. There is no early LP lock release in the current proposal as this LP option is intended to be sticky, but offering a DUST-USDC decaying-penalty alternative based on the final Neverland development team prescribed pool ratio is up for discussion.
Affected Systems:
The new claim path would route a portion of a DUST claim into LP commitment funded by nUSDC or user-supplied USDC. The lock duration determines the share of Merkl incentives the user receives versus the share returned to the protocol over the lifetime of the lock, before output to the Merkl claim path.
Rollout and Contract Readiness:
This would require work for new contracts and audit coverage. The Neverland development team has estimated cost to the protocol would be $5k-$15k but could be recouped over time from a percentage of the returned to protocol Merkl USDC/MON rewards. Time to rollout determined by the Neverland development team.
Migration Requirements:
None for current 50/50 Uniswap V2 provisioners unless they wish to opt-in by switching their position and committing to a more rewarding LP lock. Current LP users would otherwise be untouched except by the reduced 40% share of the Merkl incentives due to 60% directed toward the new proposal. A new migration action and vault contract would need to be created to provide a way for users to lock their current Uniswap V2 LP tokens into the new pool, or they may be subject to loss by manually withdrawing from the current Uniswap V2 LP and switching to the new LP lock pool.
Economic Implications:
There are hurdles to participating in LP and while hurdles are necessary to prevent DUST farming, they should be minimized for those that want more DUST utility and to provide liquidity. This may potentially benefit protocol onboarding while still allowing time-delayed exit. Voters should assume lower DUST prices in the medium-term and normal LP based potential illiquid losses while receiving scaled Merkl incentives.
For veDUST holders, there may be added benefit if the DAO decides to redirect returned to protocol Merkl USDC/MON incentives proportionally to them, but the protocol may also hold its returned Merkl rewards for other uses. Having no early LP lock exit ability, which would require a decaying DUST-USDC penalty (To be returned to the protocol), eliminates the provisioner behavior under stress. However, this carries potentially higher impermanent loss risk to the user in exchange for no DUST reward claim fee penalty.
In general, the design trades flexibility for liquidity depth. It may improve committed liquidity and reduce immediate sell pressure, but it also introduces lock-based opportunity cost and may not remain attractive if external incentives fall. The Neverland team will be consulted on all details (LP ratio, lock durations, and Merkl reward percentages) and if using Merkl rewards in this manner is positive or negative for the protocol in terms of the LP APR clearing a hurdle with relation to DUST market prices currently or in the future.
Alternatives Considered
Before settling on this secondary DUST claim option being Merkl rewards driven, I had originally wanted to have it based on DUST itself. I was unable to think of a mechanism that would make that possible as the source of the DUST would need to come from users which defeats the purpose of having no LP lock fee. Another option would be to convert Merkl DUST/MON rewards back to DUST which would be returned to the protocol for burning, holding or distribution to veDUST holders.
The swap seemed inefficient and may not be as rewarding due to DUST market prices and would compromise the value of the subsidization being redirected to the proposed secondary DUST claim option. Any suggestions and other alternatives from veDUST holders are requested for discussion and will be considered by the Neverland development team prior to proceeding to a vote.
Open Questions
- What is the optimal LP ratio (50/50 suggested) or should it be weighted to allow more DUST?
- Will current LP providers absolutely require the new migration action and associated vault contract for increased willingness to switch to the new pool, or would they be willing to accept losses by manually switching from the current Uniswap V2 LP to the new LP lock pool?
- What are the optimal lock durations (3, 6, 9, and 12 months suggested) to prevent pseudo-farming or gaming the proposed DUST claim mechanism?
- What is the optimal lock duration scaled Merkl rewards distribution (100, 90, 80, 70% suggested)?
- What is the optimal pool shared Merkl reward percentage (60/40 suggested)?
- How would the proposal be affected if or when Merkl rewards decline materially?
- Would the secondary DUST claim option remain viable with lower Merkl or different rewards?
- Would the secondary 50/50 (Suggested) LP lock DUST claim option effectively fully replace the current 50/50 Uniswap V2 pool?
- Do users value not having a lock and be more prone to meeting the 50/50 entry point for the freedom to remove LP at will?
Closing Statement
This proposal adds a middle-ground utility path for DUST. Users can support deeper liquidity while accepting a time commitment in exchange for access to incentives. The intended result is more durable DUST liquidity and a healthier protocol-wide supply structure. There should be a tradeoff for LP providers who are not willing to commit while those who believe in Neverland and want to support the protocol by investing in liquidity should receive their due.
veDUST holders also stand to benefit if the protocol decides to redistribute the returned to protocol Merkl rewards. In the long term and with the hopeful rise in the price of DUST, a deep and wide “sticky” liquidity pool benefits both the protocol and users from epoch to epoch and cushions the effects of bear markets. The liquidity pool may rebuild stronger and faster with greater sustainability in the future.
Before progressing to vote, weigh the following tradeoff; this proposal could allow a pseudo-farming behavior depending on the available durations of locks which may need to be adjusted accordingly by the Neverland development team. It is intended to work in conjunction with the recent protocol mechanism changes, but requires modeling by the Neverland development team to ensure it does not raise further issues and that it has sustainable viability under various market conditions and buy/sell pressure.
If keeping hurdles to liquidity participation or allowing those less committed to be the primary provisioners is deemed important, please share why and if modifications or another plan should be considered in this post. This proposal can evolve before reaching its voting phase.
I was encouraged (probably unwillingly) to write up an RFC and consult @Nal_X and those more experienced than myself (Jack Farrington), including the Neverland development team (Hyper and Catalyst). I apologize if by stream of consciousness I have adopted the ideas of others, because there have been a lot of good ones provided by everyone, and they are welcome to take credit in the comments. Also, thanks to Nadette for her review and helping me think through the proposal in greater depth. The Neverland development team will decide whether or not to promote this as a viable and technically sound design that is open to changes during the RFC phase.
