The purpose of the EUL distribution is to decentralise governance of the Euler ecosystem among its users. The current system designed to achieve this is working sub-optimally. This proposal suggests a range of modifications to the current system to help widen the distribution. These include:
- creation of staking contracts designed to distribute governance votes to lenders (in addition to borrowers, who are the target of the current system)
- modifying the existing EUL distribution to increase the number of eligible markets from 10 to 40, whilst scrapping the quadratic voting on the gauges, and splitting a fixed amount EUL between staking (15,000 per epoch) and gauges (40,000 per epoch)
One of the main community complaints with the current EUL distribution mechanisms is that they do not distribute governance rights to lenders (only borrowers). Since the number of lenders on Euler outweighs the number of borrowers by roughly 5:1, this seems like a lost opportunity to help distribute governance more widely.
To remedy this, the proposal here is to create new staking vaults for eTokens. These would be Synthetix-style staking contracts where users deposit, for example, eUSDC, and receive a constant stream of EUL over time. To begin with, there should be a small number of such vaults, hosted over a short period of time, as a trial. The following three vaults are proposed initially: eUSDC, eUSDT, and eWETH. Each would receive an initial allocation of 5,000 EUL, to be distributed over a period of 6 epochs (roughly 3 months). Total cost: 5,000 EUL * 3 * 6 = 90,000 EUL. If this proved successful, it could then be rolled out with more tokens or to a wider set of markets.
Another concern with the current EUL distribution scheme is that it only includes 10 community-selected markets (voted on through the Gauges). This number worked well when Euler launched, nearly a year ago, and had only a handful of active markets. Today, however, there are over 100 markets on Euler and outside the stablecoins and majors (ETH and BTC), only a few longer-tail markets are eligible for a distribution in any given epoch.
Among those additional longer-tail markets, a large proportion of the EUL distribution is currently making its way to only a small number of users. For example, around 15,000 EUL per epoch is currently making its way to just 19 users of SDL, 15 addresses of STG, and a meagre 6 addresses of HMT. This is a result of the limited number of markets to which EUL is distributed, but is also compounded by the quadratic voting mechanism used in the gauges, which was initially designed to ensure long-tail markets did not get washed out in the voting by markets like USDC and ETH. In practice, however, it is clear that the limited number of users of long-tail markets does not justify the quadratic system.
The proposal here, therefore, is to remove the quadratic mechanism and increase the number of Gauges from 10 to 40 to allow users to vote on the WETH lending market in addition to all markets with a Chainlink oracle. Why Chainlink-only markets? Because all Chainlink markets on Euler have the highest oracle rating possible, whereas markets using Uniswap oracles have quite variable oracle ratings. In general, EUL should probably not be distributed to any market without a consistently strong oracle rating. In this way, Chainlink support would also help limit ‘fake’ tokens being listed on Euler and used to game the distribution.
Whilst the number of eligible markets is increased, the amount of EUL should also be capped. In recent times, around 55,000 EUL has been distributed each epoch. This number is set to gradually increase over time, a design which was intended to match growing user adoption of DeFi with increasing governance votes. Given the depressed state of the market, however, it is clear that increasing the amount of EUL distributed beyond its current level will only further centralise governance (since user growth on Euler and most dApps is rising slower than it was before).
Since an additional 15,000 EUL per epoch will be moved to the staking contracts the proposal here is for a freeze on the EUL amount distributed each epoch to 55,000 EUL, where 15,000 would go to the staking contracts, and 40,000 would be used in the updated gauge system.
A concern voiced by a number of people across various community forums, including @Jib0xD and @itbresearch here, is that distributing to too many markets could dilute the distribution too much, especially among popular existing markets. A modified solution is therefore proposed that would follow the 80-20 rule, and distribute 80% of the new distribution equally among the current top 4 gauge markets (USDC, WETH, USDT, and wstETH), holding their current distribution amounts fixed each epoch, with the remaining 20% distributed via gauges across 40 additional markets (as above).
This modified proposal strikes a balance between favouring distributions to the most popular markets with the most users, whilst still enabling smaller market communities to engage. The modified proposal would leave the current top 4 gauges receiving roughly the same EUL distribution that they receive today, whilst opening up broader community participation from holders of other assets.
In terms of specifics, the top 4 assets would remain relatively unchanged: USDC would change from 8,286.29 → 8,000, WETH would change from 7,991.66 → 8,000, USDT would change from 7,028.52 → 8,000, and wstETH would change from 7,108.70 → 8,000. All assets with a Chainlink oracle would then receive a share of 8,000 EUL as determined by the gauges. This modified proposal will go to vote via Snapshot and will take effect from epoch 17 if passed.