Under the Hood: Incentive Pendulums

On THORChain: active validator nodes, Liquidity Providers (LPs) and Savers share the yield, which is comprised of the Block Rewards from the Reserves, and the Slippage Fees (paid by Swappers and LP/Savers/Borrowers deposits/withdrawals).

THORChain algorithmically distributes the yield between the recipients via a couple of Incentive Pendulums.

The first Incentive Pendulum distributes between the Nodes vs the Liquidity Pools (which comprises of Dual LPs and Savers). It first checks the RUNE bonded by the bottom 67% of active nodes and compares it with the total non-RUNE assets in all the Asgard Vaults (which will either be in the Pools proper, or in the Trade Accounts). It then distributes the yield to the all the active nodes (but capped by the effective bond of each node), and to Liquidity Pools (but not to the non-pooled assets in the Asgard Vaults). Check here for a more technical read.

The second Incentive Pendulum then takes the yield for the Liquidity Pools, and further splits it between the Dual LP positions vs the Savers. It first pro-rates the yield to each individual pool (e.g. the BTC:RUNE pool, the ETH:RUNE pool and all the rest) based on the swap volume of each pool.

Then, for each individual pool, the Incentive Pendulum checks the Synth Utilization of each pool:

• When Synth Utilization is zero: Dual LPs get 20% while Savers get 80%
• When Synth Utilization is >=60%: Dual LPs get 100% while Savers get 0%

This Incentive Pendulum design is an elegant, self-correcting way to ensure all the different parties participating in the protocol are economically motivated to keep the system in balance.

Feel free to hop into the TC University Discord to chat about this, or any other THORChain questions that you may have.

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