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Welcome back! In Part 1, we looked at how to stake the ILV token to earn staking rewards, the differences, pros and cons of the ILV and Sushi liquidity pools, and the impact of flexible or locked staking. Today, let’s get into the rewards you can earn and long term benefits of being staked with ILV.
Disclosure & Disclaimer - I am long ILV, and this is for entertainment and educational purposes only, not financial advice.
How do the ILV staking rewards work?
Now that you’re staked and earning awesome rewards, what do you do next other than hit refresh on the Illuvium.io Staking Dashboard and watch numbers go up?. Once your rewards reach at least 0.01 ILV in either pool, you will have the option to claim the rewards. Claiming either ILV or SLP rewards automatically moves them to the ILV pool (at a weight of 2), where they are staked for one year, and earn the maximum rate for the ILV pool (again, currently around 85%). This effectively compounds the interest of your ILV rewards. Note, rewards must be claimed in order to compound. When they sit waiting to be claimed, they just hang out, and they do not earn the same APY as the staked tokens, and they are not eligible for revenue distribution. Once rewards are claimed, the one year vesting period begins. Unlike the Team and Seed tokens (see my article on ILV Tokenomics), these tokens are completely available one year from the date you conduct the claim transaction. For example, if you claim rewards on August 20, 2021, these rewards would be unlocked and available for you to withdraw on August 20, 2022.
Note - all of these staking and rewards claiming activities occur through smart contracts on the Ethereum blockchain, and thus incur Ethereum gas fees, which have been quite high lately. Claiming rewards can cost from $20 in ETH gas fees at low gas times, up to over $100 when gas is high. The primary benefits to claiming rewards are three FOLD - first, you start the one year clock for when they will be available. Next, claimed reward ILV are revenue distribution eligible. Lastly, you move the rewards to the ILV pool to compound interest. Certainly with the ILV pool APY decreasing over time, there is greater value to claim early in the yield farming process, but those compounding gains must be evaluated relative to the cost of gas if you claim only a small amount. Here is a link to a calculator where you can estimate the value of the compounding relative to the gas fees (Claim tab).
Critical note on claiming: If you have funds in both the ILV pool and the SLP pool, click claim only on the SLP! Not only does that pool essentially always have more rewards, as part of the transaction, your rewards in the ILV pool will automatically be claimed. This has been set by the team as a means of minimizing gas fees. Even if you only staked in the SLP, after the first time you claim your rewards, you will now have value both in the ILV and SLP pools since SLP rewards are directly placed in the ILV pool as they vest.
Is Claiming Worth It? Examples
I see a lot of people rush into claim, or claim with no idea what the potential economic value of their claim timing relative to gas fees. My calculator should help put this in perspective for your individual situation, though let’s look at a couple examples to show the long term impact of when you claim. Each claim transaction is a smart contract interaction, and takes gas paid in ETH. I encourage you to watch gas prices on a website like gasnow.org, and try to conduct transactions at low gas times, which tend to be late evenings in the US, particularly Friday night, and early in the morning on Sundays. The worst times are typically during US business hours on weekdays.
As a general rule, the smaller your reward to claim, the greater the impact of gas fees on your gains. I also encourage you to track your gas fees, at least in the United States, your gains from staking will be taxable, and your gas fees can be claimed as a deduction or investment expense. Consult your tax advisor or accountant for more information.
The factors that matter in your claiming decision are: the current ILV pool APY, the number of ILV rewards you have to claim, the current gas cost, and your estimated value of the ILV token in one year.
For example 1, let’s assume you have 0.5 ILV available to claim, the current APY on the ILV pool is 84%, gas is a little high at $40, and you estimate ILV will be worth $550 in a year. In this case, your expected compounded interest will net you an additional 0.2379 ILV worth a little over $90 once you subtract your gas fees. Overall, gas fees ate up over 30% of your potential gains.
What if rather than claiming now, you wait a while and you rack up 5 unclaimed ILV rewards. The new ILV pool APY is 75%, as several weeks have passed, more people enter the pool, and you move to a later fortnightly period with lower rewards. You’re a little more bullish at this point and estimate the ILV token will be worth $600 in a year. You wait until gas is lower at about $20. In this case, you expect to earn 2.1245 ILV from compounding interest in one year, worth $1254 after gas fees. Now, your gas fees only reduced your gains by about 1.5%.
While claiming rewards is permitted as soon as you earn 0.01 ILV, claiming at that point is almost certainly a terrible idea. Let’s say you’re super impatient and claim at this point. You’d be claiming today, so APY on the ILV pool is at 85%, it’s Friday night so gas is relatively low at $20, and you estimate ILV will be worth $600 in a year. In this case, you’ll actually lose $17. To break even claiming 0.01 ILV, you would need the token to be worth $4154 in a year, or almost a 10x increase from where it is today, and that is just to break even on your gas fees. In short, don’t claim 0.01 ILV. That is financial advice.
But wait, there’s more! Revenue Distribution
In addition to the Illuvium governance power for staking, a key benefit of the project is revenue distribution. The organization has stated that staking the ILV token enables voting rights in electing the Illuvinati council, but also a share of the revenue generated in game. While not yet launched, the intent is for 100% of revenue generated by the DAO to be distributed to the community on a per ILV staked basis. Let’s suppose there are 1 million staked ILV, and the DAO generates revenue of $10 million. In that case, the DAO purchases $10 million in ILV from the Sushi Liquidity pool, and distributes those equally to all current stakers, at the rate of $10 ($10 million/1 million staked ILV) per ILV.
Here’s where that weighting factor comes in again. If you are staked for the full 52 weeks, your weighting factor is 2, which means you earn double the staking rewards. It also means you earn DOUBLE THE REVENUE DISTRIBUTION! If you stake 5 ILV for 52 weeks, your share will be as if you had 10 ILV in the pool! From the above example, you would receive $100 rather than just $50.
Just because you’re unlocked doesn’t mean you should withdraw
Once you are staked, as long as you don’t withdraw, your weighting factor stays the same. This means that even though you are allowed to withdraw your ILV or SLP after your selected lock up period ends, if you don’t withdraw, you will continue to earn rewards with the same pool weight. For example, if you were locked for 52 weeks today starting today (8/20/21), you would be eligible to withdraw your tokens on 8/20/2022. Your tokens would carry a weight of 2 in the pool, counting for double for both staking rewards and revenue distribution. If you never withdraw them, you will continue to earn at 2x weight. Remember that staking rewards are scheduled to last though mid 2024, and revenue distribution is planned to continue for the duration of revenue generated by the Illuvium DAO, which includes all future Illuvium games, not just the initial planned launches. Think long and hard before you withdraw and give up your hard earned weighting factors.
But I Have Rewards and Want My Moneys Now!
For those who are focused more on having funds to play the game, the DAO has enabled a mechanism to claim staking rewards to have the funds available sooner than a year. Rather than claiming ILV tokens as rewards and starting the one year vesting (and compounding) period, the staker can claim their rewards as sILV, or synthetic ILV. The sILV token is uniquely generated from the staking protocol, and enables the immediate availability of funds for use in game, with the price of sILV pegged to equal the price of ILV. The sILV token is available immediately, but does not generate interest. Remember, the primary currency in game is ETH, though the sILV token can be used in place of ETH for in-game transactions as a benefit to early stakers.
There are two things to note with sILV. First, sILV claimed will essentially “burn” an ILV token, reducing the eventual possible 10 million ILV. Technically, these ILV will never be minted, and the absolute number will be reduced. Remember, only 3 million tokens are issued as staking rewards, so the maximum reduction is 7 million, though I assure you, a significant number of those 3 million will be claimed as ILV and not sILV due to revenue distribution and compounding. sILV tokens are also not eligible for revenue distribution nor will they generate revenue to distribute. This means if $500 of sILV is spent in game, that just eliminates the issuance of the ILV, but no revenue is distributed to the token holders. That’s cool though, as remember for every sILV claimed, that’s one less token you need to share revenue with as an ILV token holder.
One more thing to note on claiming sILV - there is currently no use for the sILV, with the likely first use to be the upcoming land sale, which was just approved by the Illuvinati council. Based on the timeline of the proposal, the land sale auction is tentatively expected to happen at the end of October at the earliest, though the expectation is for the auction timing to coincide with the launch of the city builder style mini game, Illuvium Zero, which I estimate to be on November 1. If your goal is to claim all of your rewards for sILV, I would advise you to wait until closer to the date of the auction. Since every claim is a smart contract interaction, and there is no compounding or benefit to holding sILV, it makes the most sense to wait until you want to use the sILV and then claim in a single transaction.
That’s all for today on the rewards of staking ILV. Thanks as always for reading, and check back next time to estimate what the future value of your ILV stake may become!
