Summary

In preparation for the first reward rate reduction approved pursuant to KIP-3, some new data has come to light regarding Polygon, block times, and rebases. To date, our average rebase has been around 7.2 hours (not 8 hours), resulting in much higher APYs than what has been reported both on our Dune dashboard and the website. These APYs are not in line with the rate reduction framework recently approved in KIP-3 so the Policy team proposes adjusting the reward rate to account for these additional rebases in our targeted APYs and bring such APYs in line with KIP-3.
KIP-3 approved a reduction of the reward rate from 0.5% to 0.46% - to account for the shorter rebase times, this proposal will lower the reward rate from 0.46% to 0.417%.

Motivation

The frequency of each rebase is determined in the contracts by setting the number of blocks in each epoch before each rebase. When Klima launched, the average block times (i.e., the amount of time it takes to produce a new block) over the prior 3 months were reviewed and a block time of 2.5 seconds was used to set the epoch length for rebasing. In other words, we expected 11,520 blocks to be produced every 8 hours and so each rebase was set to occur after 11,520 blocks. As shown in the chart below, since launch, and especially recently, average block time has trended towards 2.3 seconds, which means that we are reaching 11,520 blocks in less than 8 hours (close to 7.2 hours).

Because we are rebasing (and therefore compounding) at a faster pace than planned, this has led to an effective reward APY that is higher than expected for the formulas based on 8 hours per rebase. As shown in the chart below, when we adjust the APY formula to reflect the average time per rebase for the previous 30 rebases, the resulting APY is significantly higher than the reported APY based on our standard calculation assuming 1,095 rebases.

As a result, our effective APY currently (prior to the first reduction passed in KIP-3) is 69,000%

Proposal

In an effort to remain aligned with the framework approved in KIP-3, the Policy team proposes to further adjust the reward rate to factor in these additional rebases.
Factoring in a rebase period of 7.25 hours per rebase, a resulting 1,200 epochs per year (rounded down to be conservative) can be utilized for the APY formula.
To achieve our target APY of approx 22,000%, the reward rate should be set to 0.417% (assuming 92.5% of KLIMA is staked).

As a reminder, consult the equations determining APY (note the use of 1200 as the exponent instead of 1095):

KLIMA distributed = KLIMA totalSupply * rewardRate
rewardYield = KLIMA distributed / KLIMA staked
APY = [(1+rewardYield)^1200] - 1

As such with current info:

Total KLIMA supply: 705,257
KLIMA distributed: 705,257 * 0.00417 = 2,941 KLIMA
rewardYield: 2,941 KLIMA / 643,820 KLIMA = 0.4568% yield
APY = (1.004568 ^ 1200) - 1 = 23,626% APY

This change would be made over an additional 25 epochs (8 days) after the conclusion of the change approved in KIP-3.
The Policy team will continue to monitor the block and rebase times to ensure the reward APYs are consistent with community approved APY targets, and propose additional adjustments if necessary.

Polling Period

The informal forum poll begins now and will end at 16:00 UTC on December 1, 2021. Pending community feedback, this vote will go to Snapshot at 16:00 UTC on December 1, 2021 concluding at 16:00 UTC on December 6, 2021.

Upon a successful Snapshot vote, the KIP will be implemented and the adjustment of the reward rate will initiate on December 7, 2021.

KIP-5: Rebase Timing and APY Alignment