SLURP-59 | Partial DeFi-PoL Incentive Realignment - From Liquidity to Credit Markets

SLURPs
1

Abstract

Following the successful implementation of the DeFi-PoL fee (September 2024), the Curve stLINK-LINK pool has reached a mature depth of $6.4M, growing from 111K LINK & 114K stLINK to 419K LINK and 104K stLINK. This proposal seeks to reallocate a portion of the DeFi-PoL stLINK incentives, specifically 0.5% APY away from the Curve pool and reroute it to the newly deployed LINK Morpho Vault and wstLINK-LINK Borrow Market.

This adjustment will reduce the Curve pool APY from 2.19% to 1.69% for the stLINK-LINK LP incentives (SDL incentives remain at ~3.26% unaffected), with the liberated funds providing an incentive layer for the stake.link credit ecosystem on Morpho for bootstrapping purposes.

Rationale

The Curve pool has successfully achieved its primary objective: providing deep liquidity for future liquidations and secondary market swaps. Currently, the pool is heavily skewed toward LINK (80/20), indicating a high demand for $stLINK and a premium price on the open market.

By diverting ~$32,000/year (0.5%) to Morpho, we achieve two strategic goals:

  1. Bootstrap the Credit Layer: We incentivize lenders to provide LINK liquidity and borrowers to use wstLINK as collateral.

  2. Enable the “Looping Flywheel”: Subsidizing the borrow rate for wstLINK encourages recursive staking, which in turn grows the protocol’s stAUM (Staked Assets Under Management) and increases the DeFi-PoL revenue itself.

The Strategy: Profit and Arbitrage

This realignment facilitates a powerful dual-revenue stream for users:

  • The Morpho Loop: Users can deposit wstLINK, borrow LINK at a subsidized rate, and restake via the Priority Pool to amplify their own yield.

  • The Curve Arbitrage: Since stLINK trades at a premium on Curve (due to the 80/20 skew), users can restake through the protocol at 1:1 and capture the premium on the secondary market, feeding the cycle back into the Morpho vault. It also incentivizes arbers to “work” on the stLINK-LINK stablepool more often, keeping the peg healthy and in check.

Specification

  1. Reward Adjustment: The smart contract governing DeFi-PoL distributions will reduce the allocation to the Curve LP gauge by 0.5% APY ($32,000 USD equivalent at current TVL).

  2. Split Allocation: The liberated funds will be split evenly:

    • 50% ($16k/yr) to the LINK Morpho Vault to incentivize lenders. This can be provided as alphaLINK, which is the asset you receive when you deposit LINK in the Morpho vault, and can be redeemed 1:1 (think of stLINK-LINK LP tokens - same model to grow the vault systemically).

    • 50% ($16k/yr) to the wstLINK-LINK market to incentivize borrowers.

    • Incentives will be distributed as $wstLINK / alphaLINK (Deposited LINK in the LINK Morpho Vault) .

  3. Governance Oversight: The protocol maintains the flexibility to adjust the split budget to make sure it incentivizes the needed market between the two.

Projected Impact

With a target of $1M TVL in the Morpho markets, this proposal provides a 1.60% APY base incentives to both markets, paid in wrapped staked LINK. This makes stake.link the most competitive venue for LINK lending and leveraged staking in DeFi, further cementing wrapped $stLINK as a blue-chip yielding collateral asset.

3 Likes
SLURP-62 | Establish DAO-Owned Liquidity in the Morpho LINK Vault
2

This looks great, something i can get behind is expanding full stLINK utility and proliferation in defi.

3

I like this proposal.

But i would argue that only the link side need increased apy. The looping flywheel by itself will attract wstlink depositors.

4

Right now there is more LINK than wstLINK, but we will be able to closely monitor it and adjust by having short campaigns

5

Thanks for putting this together. I agree with the directional intent of the proposal, especially the idea of re-evaluating where marginal incentives create the most long-term value for stLINK. I also agree that credit markets are strategically important for stLINK’s maturation and balance-sheet relevance.

That said, I’m against this proposal as currently structured (expressing this here as Snapshot went live a few hours ago).

One of the most important properties for stLINK to be considered robust and institutionally viable is fee stability and predictability, changing the destination of protocol fees weakens this property and increases governance risk.

It’s easy to see how this blurs the line between protocol revenue and growth subsidies, it increases perceived governance risk, and it makes it harder for external actors to model stLINK long-term.

From my pov, fees should ossify as early as possible. Incentives can and should be flexible; fees should not.

If the goal is to temporarily rebalance incentives away from DEX liquidity and toward credit markets, SDL emissions are the right tool.

Also, at current prices the 250k SDL allocated for future DeFi integrations in SLURP-57 is roughly $86k and should be sufficient for a temporary lender bootstrap without changing protocol fees.

Using stLINK fees to grow external credit markets is a balance-sheet decision, not an incentive tweak. That’s a much stronger (and harder to reverse) signal, and I don’t think the proposal demonstrates why that escalation is necessary before exhausting simpler options like reducing SDL emissions to the Curve pool and redirecting them elsewhere temporarily.

I also don’t think borrower incentives are justified here. stLINK already offers a native positive carry trade via looping (or not). ~4.9% base stLINK yield, potentially ~7%+ via stLINK/LINK looping when borrow rates are low. That is more than sufficient to bootstrap borrow demand organically imho.

Incentivizing borrowers distorts rate discovery, subsidizes leverage that would exist anyway,
and weakens the signal that stLINK can clear on its own merits.

If incentives are used in credit markets, they should focus on lenders, be clearly time-bounded, and not by default.

To be clear: I support the strategic discussion this proposal opens and I agree that credit markets are too priority for stLINK. However, I don’t think redirecting protocol fees is the right first step.

Fee ossification, clean incentive separation, and predictable economics are critical for stLINK’s long-term credibility, and this proposal weakens those properties from multiple optics.

Happy to keep discussing refinements, especially around incentive-only approaches that preserve fee stability.

6

Thanks for the reply @Ari

The protocol fees, specifically the DeFi PoL one taken from both pools, remain untouched. The only thing this proposal asks is to re-route a portion of said rewards from Curve LPers, to Morpho borrowers and lenders. I do not understand how is the governance perceived risk is affected by this. I am not asking to introduce a new fee from stLINK.

As long as stLINK’s yield is much higher than native staking, the protocol should capitalize on that to leverage it’s own DeFi initiatives, to make sure the flywheel is running as quickly as possible. This is not growth subsidy, it is a direct funnel to align stakedotlink’s DeFi users with the product offerings (stLINK, stPOL etc) by incentivizing to partake in DeFi. External actors modelling stLINK will view stLINK as is and can always see the fee table, which is not commonly adjusted.

SDL incentives are finite. In contrast, stLINK incentives are directly correlated to the protocol’s growth, and are not affecting the protocol’s main treasury holdings in SDL, which is highly illiquid and with low market capitalization. I’d also argue that most DeFi participants will prefer their yield in stLINK and not SDL.

The 250K SDL incentives is as you said temporary to bootstrap. The DeFi PoL is not. The Curve pool is and was healthy for over a year now, yet it is still incentivized with stLINK. I do not believe that SDL incentives are the right tool to incentivize long term DeFi participation. stLINK does - for reasons stated above.

All fees, from the DeFi PoL, to the SDL stakers rake, and in theory even the core contributors fee should and would be adjusted in order to stay competitve. This is repeatedly suggested in each relevant SLURP: stay above 4.32% to have the highest rewards in comparison to native staking or other future LSTs.

The SLURP suggested to remain flexible and determine where to distribute the incentives: if there is plenty of wstLINK deposited, the allocation will go to the lenders, and vice versa. It can be run in short timeframe campaigns e.g weeks.

While we know stLINK is a blue chip collateral asset, DeFi protocols are not as sold on it as you and me are, speaking from experience. We simply do not have the scale CEXs and DeFi protocols are looking for, which is why I believe we should do everything we can to make sure the moat is as sticky as it gets - especially with a golden funnel like stLINK incentives that scale with the protocol’s growth.

7

Happy to see we actually agree on core objectives and the disagreement is mostly about precedent, optics, and sequencing, not the end state.

I agree the rate and the DeFi-PoL mechanism can remain ossified while venues evolve. My concern is less about the math and more about the signal: once protocol fees start being actively re-routed, external observers tend to model that as discretionary governance risk, regardless of intent. That is why I am cautious about touching fee flows, even if the structure remains unchanged.

I fully agree SDL incentives are temporary by nature. That is precisely why I see them as the correct first lever. Using SDL to test whether lender-side demand materializes lets us validate the thesis cheaply and reversibly before escalating to balance-sheet or fee-derived rewards.

That said, I do want to ask whether you, or anyone you are aware of, is actively exploring ways to source LINK on the borrowing side through CEXs, custodians or other entities with large LINK balances. If such discussions are happening, I fully understand why those counterparties would prefer stLINK-denominated rewards over SDL.

I agree Curve likely does not need the same level of support it once did, and a partial reallocation or reduced baseline makes sense.

I also understand the argument that early credit-market usage is riskier when liquidity and TVL are low. That risk should naturally decline as TVL grows. For that reason, I strongly believe incentives should be goal-oriented: TVL targets, utilization bands, or explicit caps, similar to how Curve incentives are now being reduced because sufficient depth has been achieved.

TL;DR I am not against reallocating incentives toward credit markets. I am against doing it in a way that weakens fee ossification. A staged, target-driven approach feels like it gets us capital efficiency and preserves long-term credibility.

8

GM, glad we’re actually aligned on the endgame here

the DeFi-PoL mechanism was explicitly designed to be flexible on venue allocation. This isn’t discretionary re-routing - it’s the governance variable we’re supposed to adjust, currently on a per-vote basis.The fee rate stays locked and should unwind if stLINK APY drops substantially (i.e below 4.4%). Where those incentives go (Curve vs Morpho vs future venues) is what governance decides. Morpho’s already at 90% utilization with total $1.58M worth of value. we should be scaling what’s already working.

SDL worked great for bootstrapping Curve. But for credit markets at scale, stLINK just makes more sense: borrowers and lenders want yield in the asset they’re using, It scales with the protocol instead of draining treasury and it’s sustainable long-term

We are constantly looking for ways to reach out to LINK holders, whether it is individual entities or CEXs. It could be quite challenging as we do not have the scale necessary yet - a bit of a chicken & the egg issue. I think it is up for the protocol’s stakeholders (SDL stakers, stLINK holders etc) to assist with that too - it shouldn’t necessarily be done in a hierarchy top to down path - “retail” community LINK holders can easily make this market much bigger - and then CEXs and bigger players can get in.

We can always add quarterly reviews with conditions after the DeFi landscape powered by SDL is a big bigger, and we could structure it like keeping the SDL incentives running through Q2 now, partial DeFi-PoL shift (split Curve/Morpho) implemented with utilization trigger and later on full optimization based on what’s actually working. this gives us your staged approach while still moving on what’s already validated.

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