Optimizing Liquidity Distribution via the Seed Gauge System

In order to minimize the potential for manipulation and value extraction, Pinto does not directly control the value Deposited in the protocol. Instead, it creates incentives to encourage individual participants to collectively oscillate the Pinto price across the value target and align the distribution of Deposited value with the protocol's explicitly stated optimal distribution.

Seeds yield more Stalk every Season (i.e., each hour). Stalk entitles Depositors to a portion of future Pinto mints based on their pro rata ownership at the time of minting. By changing the distribution of Seeds among whitelisted assets in the Silo, Pinto incentivizes Depositors to change their exposure.

There are two dimensions over which the distribution of value within the Silo is evaluated: Pinto vs LP, and the distribution of LP tokens.

Pinto vs LP: The Crop Ratio

The Crop Ratio is the ratio between the number of Seeds per Pinto and 1 Pinto Denominated Value (PDV) of the LP token on the Deposit Whitelist with the highest number of Seeds. The Crop Ratio enables the protocol to adjust the distribution of Seeds between Pinto and LP tokens Deposited in the Silo.

A Crop Ratio of 50% means the top LP (by number of Seeds) receives half as many Seeds per 1 PDV as 1 Pinto. At 100%, it receives the same number; at 200%, it receives twice as many, and so on.

By using the LP with the highest number of Seeds as a proxy for all LP tokens on the Deposit Whitelist, the protocol is able to directly control the attractiveness of holding Pinto vs any LP token. This enables the protocol to clearly incentivize Converts between Pinto and LP tokens.

When the protocol wants more Converts from Pinto to LP, it increases the Crop Ratio. Conversely, when the protocol wants more Converts from LP to Pinto, it decreases the Crop Ratio. At the beginning of each Season, the protocol changes the Crop Ratio based on its desire to change the distribution of Deposits between Pinto and LP.

The protocol has parameters for a Minimum and a Maximum Crop Ratio. The current Minimum Crop Ratio is set to 50%, and the current Maximum Crop Ratio is set to 200%.

Previously, the Maximum Crop Ratio was set to 100% such that the protocol never incentivized holding Pinto in the Silo more than all LP tokens. However, due to the overwhelming preference demonstrated by Depositors to hold LP tokens over Pinto, the Maximum Crop Ratio was changed to 150% and then 200%. A future upgrade to the protocol may remove this Maximum Crop Ratio altogether.

For specific information on how the protocol changes the Crop Ratio at the beginning of each Season, see the Crop Ratio Changes.

LP Distribution: Seed Gauge Points

Amongst LP tokens on the Deposit Whitelist, the distribution of Seeds in a given Season is proportional to the Seed Gauge Points allocated to each asset.

Seed Gauge Points are an internal protocol metric adjusted for each whitelisted asset at the beginning of each Season based on the actual distribution of LP tokens within the Silo compared with the optimal distribution. The further the actual distribution is from the optimal distribution, the more aggressively the Seed Gauge Points are changed. Anyone can see the Pinto Dune to view the current vs. optimal LP allocations and distribution of Gauge Points.

If the Pinto denominated value (PDV) of an LP token as a portion of the total PDV of LP within the Silo is within 10% of its optimal distribution, its Seed Gauge Points remain constant. If it is more than 10% but less than 33% above (below) its optimal distribution, its Seed Gauge Points decrease (increase) by 1 point. If it is more than 33% but less than 67% above (below) its optimal distribution, its Seed Gauge Points decrease (increase) by 3. If it is more than 67% above (below) its optimal distribution, its Seed Gauge Points decrease (increase) by 5.

By letting the number of Seed Gauge Points allocated to each LP token fluctuate freely, the protocol is able to respond flexibly to market conditions (e.g., Depositors’ preferences with respect to LP token exposure, changes in the value of non-Pinto assets in the liquidity pools) to continuously incentivize the actual distribution of LP tokens in the Silo to approach the optimal distribution, which is ⅓ value in each of the three whitelisted pools.

The Seed Gauge, Step by Step

At the beginning of each Season, the number of Seeds allocated to each asset on the Deposit Whitelist is recalculated. Pinto takes the following steps to calculate the appropriate number of Seeds for each asset.

First, the protocol sets the total number of Stalk for the Season. For more information on how the protocol calculates the total Seeds, see "Time to Catch Up" in the Stalk System or the Pinto whitepaper.

Next the protocol adjusts the Crop Ratio and Seed Gauge Points.

Finally the protocol calculates the Seeds for each asset in a given Season by solving a system of equations such that the Crop Ratio and Seed Gauge Points distribution, as well as the total number of Stalk are all honored.

Thus, the Seed Gauge dynamically adjusts the incentives to hold various Deposits in the Silo in response to the protocol's and participants' preferences.