Proposal for Fair and Inclusive Reward Distribution to Retail Users in the Morpho Protocol

Governance
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As Morpho’s usage continues to grow, ensuring fair distribution of rewards is critical to encourage broader participation, especially among retail users. This proposal outlines a reward system designed to be inclusive, genuinely rewarding for smaller participants, and sustainable for long-term growth.

1. Tiered Reward System: Prioritizing Fairness Across All User Sizes

To balance rewards between large and small participants, a tiered reward model can help distribute emissions fairly:

  • Low-Tier Rewards: Offer a baseline reward rate to smaller depositors and borrowers. By offering meaningful incentives, we can attract smaller retail users who contribute to a decentralized, resilient user base.
  • Medium and High Tiers: Larger positions would receive incremental, but not excessive, reward boosts to avoid the risk of overshadowing smaller participants.

This approach ensures that smaller retail users can enjoy rewards proportional to their contributions without competition from large positions dominating the reward pool.

2. Time-Based Reward Multipliers: Rewarding Loyalty and Stability

By introducing a time-based multiplier, retail users who maintain their positions for longer periods are rewarded more generously. This structure provides benefits beyond the size of one’s position, such as:

  • Stability Incentives: Reward multipliers increase the longer a user holds a position. This way, retail users with smaller but consistent contributions receive fair compensation over time.
  • Encouraging Long-Term Engagement: This multiplier system discourages short-term, high-volume positions from capturing a disproportionate amount of rewards, focusing instead on loyal, retail-friendly participation.

3. Reward Cap Per User: Preventing Dominance by Large Holders

To prevent large users from capturing the majority of daily rewards, a maximum daily reward cap per user could be implemented:

  • Setting a Fair Cap: A reasonable cap on rewards ensures that no single user can dominate emissions, promoting a healthier distribution and greater inclusivity for retail participants.
  • Transparent Thresholds: Publishing reward caps will offer transparency and assurance to retail users that rewards are not skewed towards institutional players or large investors.

4. Boosted Rewards During Low TVL Periods: Aiding Consistent Participation

By offering boosted rewards when the protocol’s total value locked (TVL) is low, the Morpho protocol can sustain engagement from smaller users during off-peak periods:

  • Incentive for Early or Lower TVL Stages: Reward boosts during periods of lower TVL encourage retail users to continue participating, stabilizing protocol engagement and rewards across market cycles.
  • Retail-Friendly Mechanism: As smaller retail users tend to be more affected by reward fluctuations, these TVL-based boosts ensure they stay engaged, even when larger players shift funds elsewhere.

5. Encouraging Retail-Centric Participation Actions

To further support a fair distribution, specific actions that align with retail user behavior should be prioritized for rewards:

  • Small Transaction Bonuses: Smaller deposits and borrowing actions can receive slight reward boosts, encouraging retail users to take part without feeling overshadowed by large transactions.
  • Governance Participation Rewards: To cultivate a retail-focused community, governance actions (such as voting and discussion participation) could yield modest rewards, allowing small users to actively shape protocol decisions.

Conclusion

This proposed reward distribution model seeks to make Morpho a more inclusive and rewarding protocol for retail participants. By focusing on loyalty, fair caps, TVL boosts, and retail-friendly incentives, we can create an environment where small contributors feel genuinely valued and encouraged to participate. This balanced approach aligns with Morpho’s mission to create a sustainable, decentralized ecosystem accessible to all users.

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Do the same rules apply with WELL rewards to accomplish the same goal. As a new supplier I am shocked to see the recent outperformance of the WELL token relative to its peers, since lauch +1000% according to Coinmktcap. Rewards for WELL and Moprho are acccrued and paid monthly with most of the reward in the form of WELL tokens increasing thevolatility of the APY of the glagship fund. I fail to see the utility in buying the WELL token on the open mkt and or staking the WELL token rewards. For those that would prefer to hedge the WELL token exosure, I do not know of any perps to short WELL. Is there a loan mkt where one could supply USDA against WELL?

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If you don’t want the well exposure you can use other vaults that only pay in EURC/USDC/etc. You can see the breakdown of a vaults rewards when hovering over the Net APY.

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I was going to suggest a cap too - happy for it to still be a relatively large value to cap at. Excess morpho could go to treasury, given out as a bonus to long time users, added as incentives when trading on dexes, and more.

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How and when does this proposal make its way to a vote?

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The proposed reward distribution system can be adapted to WELL rewards to achieve similar goals of fairness and inclusivity. By implementing tiered rewards, time-based multipliers, reward caps, and boosted rewards during low TVL periods for WELL tokens, we can ensure that retail users are fairly compensated and encouraged to participate actively. This approach aligns with the overall objective of creating a decentralized and resilient user base across different reward mechanisms.

For those who wish to hedge WELL token exposure, there are a few alternatives. While there might not be any perpetual contracts (perps) to short WELL directly, you can look for loan markets where you can supply USDA against WELL. This allows you to leverage your WELL tokens without being directly exposed to their price volatility. Additionally, using vaults that only pay in stablecoins like EURC or USDC can provide a more stable reward structure, mitigating the risks associated with holding WELL tokens.

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To bring this proposal to a vote, it typically needs to go through the governance process of the Morpho protocol. This involves submitting the proposal on the Morpho Governance Forum, where it can be discussed and refined by the community. Once there is sufficient discussion and consensus, the proposal can be formally submitted for a vote. The specific timeline and requirements for moving a proposal to a vote may vary, so it’s important to follow the protocol’s governance guidelines and participate in community discussions to build support for the proposal.

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Implementing a cap on rewards is a prudent approach to prevent large holders from dominating the reward pool. A reasonable cap ensures a fair distribution, promoting inclusivity for retail users. Excess rewards can be redirected to the treasury, given as bonuses to long-term users, or used as incentives for trading on decentralized exchanges (DEXes). This balanced approach ensures that rewards are distributed equitably while also fostering the protocol’s growth and stability.

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Not sure if we’re missing anything, but we’ve been depositors and users for almost a year now, and it’s out understanding that the morpho tokens we’ve been accruing is directly related 1:1 to the (upgrade) token when it becomes transferable. Not sure if any additonaly boosts or anything are planned, but honestly don’t think it should be necessary. Is there a seperate airdrop bucket planned that you are seeing.

To us, after using the protocol for a while, this conclusion/line of reasoning is obvious one. Not sure if we just missed something entirely.