Converts: Changing Price from Within
In order to prevent value from being extracted from the protocol, Pinto rarely takes any action in the open market (e.g., buying and selling). Instead, it creates and regularly adjusts incentives to encourage participation in protocol maintenance.
At a high level, there are three primary incentive structures in place within the protocol.
The Stalk System creates an incentive to Deposit value into the Silo and leave that value Deposited.
The Field creates an incentive to lend to the protocol to reduce supply.
The Convert System layers additional incentives on top of the Stalk System to incentivize participation in protocol maintenance with value that is already Deposited in the Silo.
What is a Convert?
Simply put, Converts take one form of value Deposited in the Silo and Convert it into another form of value Deposited in the Silo.
Converts don’t change the overall liquidity in the Silo, but can change the price of Pinto or the distribution of the liquidity. The effects of a given Convert on the state of the protocol depend on the type of Convert.
There are four types of Converts within the Silo.
Primer on AMMs
If you already understand automated market makers (AMMs), feel free to skip ahead to LP → Pinto Convert (i.e., Convert Up).
The price of Pinto is derived from the value that it trades against in various 2-sided AMM liquidity pools (LPs). The most basic way to understand pricing in 2-sided LPs is that at all times, half of the value in the pool is Pinto, and half of the value in the pool is the non-Pinto asset that Pinto trades against.
Therefore, in order to derive the USD price of Pinto from a liquidity pool, the number of the non-Pinto asset multiplied by its USD price is divided by the number of Pinto.
Anyone can buy Pinto from and sell Pinto to Pinto LPs at any time. When someone buys Pinto, they add non-Pinto assets to the pool and receive Pinto in return, resulting in the price going up. Conversely, when someone sells Pinto, they add Pinto to the pool and receive non-Pinto assets in return, resulting in the price going down.
Anyone can provide liquidity to Pinto LPs. When one adds liquidity to an LP, one receives an LP token that represents pro-rata ownership of all the liquidity in the LP. At any time, one can redeem one's LP for the underlying liquidity in the pool. Liquidity can be added or removed in (1) equal proportions to the value already in the pool (i.e., a 2-sided deposit or withdrawal), (2) just one of the assets in the pool (i.e., a 1-sided deposit or withdrawal) or (3) any proportion in between.
In practice, a 1-sided deposit into the pool has an identical outcome to trading the single asset into the proportion of assets in the pool, and then adding 2-sided liquidity. Similarly, a 1-sided withdrawal has an identical outcome to withdrawing 2-sided liquidity and then trading one of the assets into the other.
For more information about Pinto's AMM's refer to the Pinto Whitepaper.
LP → Pinto Convert (i.e., Convert Up)
During an LP to Pinto Convert, a one-sided withdrawal of Pinto is made from the liquidity pool, and the Pinto that are received are left Deposited in the Silo as pure Pinto (i.e., not in any pool).
For the individual Depositor that Converted, the exposure of their Converted assets changed from LP (i.e., half Pinto and half non-Pinto) to 100% Pinto. For the protocol, the total amount of liquidity remains constant.
However, while the liquidity in the system is constant, the price of the Pinto in the liquidity pool increases as a result of the LP → Pinto Convert because of the removal of Pinto from the pool.
Depositors who Convert the price of Pinto back to $1 make money.
Pinto → LP Convert (i.e., Convert Down)
Pinto → LP Converts are the mirror of LP → Pinto Converts.
During a Pinto → LP Convert, a one-sided Deposit is made with Pinto that was already in the Silo into the liquidity pool selected by the Convertor.
For the individual Depositor that Converted, the exposure of their Converted assets changed from 100% Pinto to LP (i.e., half Pinto and half non-Pinto). Similarly to LP → Pinto Converts, the amount of liquidity in the system remains constant.
Opposite from LP → Pinto Converts, the price of Pinto in the liquidity pool decreases as a result of the Pinto → LP Convert because of the addition of Pinto into the pool.
LP → LP Convert
During an LP → LP Convert, a two-sided withdrawal is made from the source liquidity pool, the non-Pinto portion is sold into another non-Pinto asset, and a two-sided deposit is made into the destination liquidity pool. All three parts of the LP → LP Converts occur atomically.
For the individual Depositor that Converted, the exposure of their Converted assets changed from having the non-Pinto element of the source liquidity pool to the non-Pinto element of the destination liquidity pool. The same has occurred for the protocol.
LP → LP Converts do not change the overall amount of liquidity in the protocol, nor do they affect the price of Pinto (except for very small loss in value due to slippage from the sale of one non-Pinto asset into another).
Lambda → Lambda Convert
Due to volatility in the price of Pinto and non-Pinto assets in liquidity pools, the Pinto Denominated Value (PDV) of a Deposit can change over time. Lambda → Lambda Converts reevaluate the PDV of a Deposit to update its Stalk and Seeds.
There are technically two types of these Converts: Lambda → Lambda Converts and Anti Lambda → Lambda Converts. For simplicity, neither are explicitly available on the pinto.money UI.
Lambda → Lambda Converts allow a Depositor to update the PDV of her Deposit and combine multiple Deposits of the same asset into a single Deposit. Lambda → Lambda Converts never decrease the PDV of a Deposit, and they happen automatically when farmers claim Stalk.
Anti Lambda → Lambda Converts ensure maximum efficiency of the protocol by enabling anyone to eliminate a Deposit’s excess PDV. Anti Lambda → Lambda Converts remove the negative incentive that would otherwise prevent Depositors from Converting if it caused the PDV of their Deposit to be reevaluated lower. These Converts do not happen automatically. Instead, they exist as public functions at the protocol level that can be called permissionlessly by anyone on-chain at any time, instead of imposing excess computation on the protocol to regularly check and update the PDV of every Deposit.
Why Might Someone Convert
There are a variety of incentives to Convert at any given time. Some of the incentives are created by the protocol while some naturally occur due to the nature of the system.
Seeds
Seeds yield more Stalk over time. The protocol changes the numbers of Seeds allocated to different Deposited assets each Season based on the current distribution of value Deposited in the Silo compared with the optimal distribution of liquidity.
Farmers are incentivized to Convert from one Deposited asset to another due to the difference in Seeds between the assets. By Converting, farmers can increase their Seeds to earn more Stalk over time, thereby increasing the portion of mints they receive when the protocol grows.
Change Asset Exposure
In addition to optimizing the number of Seeds, Converting allows a Depositor to change their exposure to various assets within the Silo.
Depositors holding LP tokens have Pinto exposure and exposure to a non-Pinto asset. Converting from LP to Pinto enables them to increase their Pinto exposure and decrease their exposure to the non-Pinto asset.
Conversely, Converting from Pinto to LP enables the Depositor to decrease their Pinto exposure.
Converting from LP to LP enables the Depositor to change their non-Pinto asset exposure depending on market conditions.
Price (i.e., Buy Low and Sell High)
An individual Depositor Converting from LP to Pinto is effectively buying Pinto. Because LP → Pinto Converts are only allowed when the price of Pinto is below its value target, LP → Pinto Convertors are effectively buying Pinto when the price is low.
Similarly, an individual Depositor Converting from Pinto to LP, is effectively selling Pinto. Because Pinto → LP Converts are only allowed when the price of Pinto is above its value target, Pinto → LP Convertors are effectively selling Pinto when the price is high.
In short, Converts to and from Pinto allow Depositors to buy low and sell high, respectively, actively making money as they participate in protocol maintenance.
Stalk Bonus (SOON)
With the introduction of the Stalk Bonus, Pinto will start to offer a Stalk Bonus for performing Converts that improve the health of the protocol.
Once this system is live, an efficient Stalk maximization strategy will have to factor in the potential to earn a Stalk Bonus for Converting in addition to optimizing for the maximum number of Seeds.
Why Might Someone Not Convert
Waiting For Better Prices
Given the ability to buy low and sell high, if a Depositor believes that the Pinto price is going to move further away from the value target, it may be in their interest to wait for a better price before they Convert.
PDV Reevaluation
At the time of a Convert, the PDV of the Deposit is reevaluated. In instances where the PDV of an LP Deposit has decreased since the last time the PDV was updated, the loss of Stalk and Seeds due to updating the PDV may discourage Depositors from Converting.
Anti Lambda → Lambda Converts were introduced to minimize the instances where PDV reevaluation is a disincentive for Depositors to Convert.
Waiting For a Bigger Stalk Bonus (SOON)
Similarly to how a Depositor might wait for better prices to Convert – or in the instance of the Field, wait for higher Temperatures to Sow – Depositors may wait for a bigger Stalk Bonus to Convert.
Stalk Penalty
Certain Converts (e.g., Pinto → LP if price < 1.005, LP → Pinto if price > 1) are discouraged by the protocol via a Stalk Penalty of 100% of Stalk accumulated from Seeds. Depositors may not Convert to avoid this penalty.
In instances where price > 1.005, the Stalk Penalty changes dynamically depending on how many Seasons the time-weighted average price has been above the value target. Similar to the Stalk Bonus, Depositors may wait to Convert for the penalty to decrease.
In Summary
Pinto rarely intervenes in the market directly through forced sales – it shapes incentives to encourage participants to actively contribute to protocol maintenance. Converts are one of Pinto’s three core incentive mechanisms, allowing Depositors to shift between different assets within the Silo without changing overall liquidity, and rewarding participants for their contributions in the form of additional Stalk and Seeds.
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