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Incentive system
Ordinarily in DeFi, especially in lending protocols, users' incentives (often in the form of governance tokens) are being distributed pursuing incremental growth of the protocol TVL (total value locked/deposited). This is achieved by following one rule: low TVL corresponds to high incentives on deposit and borrow and vice-versa. The users are being incentivized indistinctly, and often happen to achieve higher Incentives on the borrow APR than on the interest APR, that the borrower has to pay. Since the revenue of a Lending protocol is specifically taken from the borrow APR, this makes this type of incentive system unsustainable in practice. Folks Finance developed an innovative incentive system rewarding only "good users". A "good borrower" is a user that repays their interest, receiving in exchange a discount of those interest repayments as an incentive. The protocol considers "good depositor" the user that interacts with the Lock & Earn and helps the protocol ensuring its soundness. To match the incentive system needs, the Rewards Aggregator has been implemented. This special tool allows the user to vest their incentives which allows them to earn higher rewards. Through the rewards aggregator, external users can be a Folks Finance rewards provider, allowing the protocol to distribute multiple incentives on the pools.

# Earning frToken repaying Interest

## Distribution Rate of frToken

The frTokens for users who repay interest are distributed following a Distribution Rate
$DR_{IR}=1$
, which means 1 unit of Token used for repaying interest always corresponds to 1 frToken.

## Interest Reimbursement rate

The Interest Reimbursement rate
$IR_{rate}$
is the percentage of "cashback" the user receives back when they repay their loan interest. The rewards are paid in frToken that should be swapped using the Rewards Aggregator.
Note that
$IR_{rate}$
also represents the exchange rate between a Token and the corresponding frToken. For instance, with a
$IR_{rate} = 90\%$
, 1 frUSDt is worth 0.9 USDt, and borrowers will get 1 frUSDt for every USDt paid back.

### Let's see an example

A user opens a USDt loan locking goBTC as collateral, and after one week the interest accrued is equal to 1 USDt. When they repay the interest, they will receive 1 frUSDt at a 1:1 ratio with the amount of interest paid back (i.e. distribution ratio for interest reimbursement:
$DR_{IR}=1$
).
The user earned 1 frUSDt simply by repaying a dollar of interest but how much is frUSDt worth? Intuitively, one might think that 1 frUSDt is worth 1 USDt. The reason why this is not true is that the exchange rate between frToken and Token (
$R_{Token,frToken}$
) embeds the percentage of interest reimbursement. More precisely:
$IR_{rate}=90\%$
Where
$IR_{rate}$
is the percentage of interest reimbursed, currently set at 90% for USDt loans.
Thus, the user who has repaid 1 USDt in interest will receive 1 frUSDt which corresponds to 0.90 USDt or 90% of the repayment on the interest paid.

# Earning frToken depositing in Lock & Earn

## Distribution Rate of frToken

The frToken issued to users who deposit into Lock & Earn are distributed at a Distribution Rate as follows:
$DR_{L\&E}=\frac{APR*\frac{Lock Months}{12}}{IR_{rate}}$
Where:
• APR is the annual percentage rate set by Folks Finance on the deposit in Lock & Earn pool for each Token.
• Lock Months is the number of months that the Lock & Earn require to lock the deposited token.
• $IR_{rate}$
is the Interest Reimbursement rate that represents the exchange rate between a frToken and the corresponding Token.

### Let's see an example

In the case where a user wants to earn incentives by depositing funds, the best choice is Lock & Earn. For instance, by locking 60 USDt at 9% APR for 2 months in Lock & Earn feature, they will earn 1 frUSDt, which is worth 0.90 USDt (according to the exchange rate shown above). Indeed, the amount
$DR$
of frToken received for each unit of Token locked in Lock & Earn is defined as follows:
$DR_{L\&E}=\frac{9\%*\frac{2}{12}}{90\%}=0,01666667 frUSDt$
Note that differently from the interest reimbursement, where
$DR_{IR}$
is equal to 1 for every asset, in Lock & Earn the
$DR_{L\&E}$
changes according to the number of lock months, the asset APR and the interest reimbursement rate.

# Swapping frToken into reward tokens

frToken can then be swapped in the Rewards Aggregator in exchange for reward tokens.
Currently, Folks Finance is distributing ALGO provided by the Algorand Foundation through the Aeneas Liquidity Program and goMINT provided by Algomint.
The final amount of reward token received is equal to:
$Rewards_{IR}=\frac{DR_{IR}*IR_{rate}*(1+boost)}{R_{Token,RewardToken}}$
$Rewards_{L\&E}=\frac{DR_{L\&E}*IR_{rate}*(1+boost)}{R_{Token,RewardToken}}$
Where:
• $R_{Token,Reward Token}$
is the price of the reward token denominated in Asset.
• $boost$
is the percentage of increase of Rewards Token distributed. It depends on the vesting period:
Boost
Vesting period (weeks)
10%
2
More vesting periods will be available in the future.
Considering the above examples, the rewards earned are (assuming that an ALGO is worth 0,78 USDt):
$Rewards_{IR}=\frac{1frUSDt*90\%}{0.78USDt}=1.15 ALGO$
$Rewards_{L\&E}=\frac{0.0166667frUSDt*90\%}{0.78USDt}=0.019 ALGO$
If the user chooses to vest the rewards for 2 weeks in the rewards aggregator, he gets a boosted yield of 10%.
$Rewards_{IR}=\frac{1frUSDt*90\%*(1+0.1)}{0.78USDt}=1.27 ALGO$
$Rewards_{L\&E}=\frac{0.0166667frUSDt*90\%*(1+0.1)}{0.78USDt}=0.021 ALGO$
The exchange rates between ALGO and other tokens distributed are not fixed values and they are updated according to the market status.