My take on CAKE Emissions Reduction

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The introduction of the Locked Staking and Supply Cap has noticeably improved CAKE's price performance relative to the market average.

The PCS team recently also introduced a marginal reduction in supply by burning a portion of their cut, which is very commendable.

The latest proposal however has a fundamental flow in its approach.

TL;DR Decreasing supply affects investors' profits negatively more than it affects inflation positively, it's far better to keep introducing features to PCS that generate revenue to be used to buy back and burn CAKE. Vote to Not reduce emissions.

At the current inflation rate, the Supply Cap is going to be reached in a little over 4 years, in which people will keep getting OK APR/APY on their investments, but at the cost of inflating the current supply by more than double (150%). We'll tackle this point later.

Now, there are two main categories of burns:

  1. Direct Supply Burn: These are fixed burns applied to the total supply, currently at 25.75 out of 40 CAKE are burned (40 – 25.75 = 14.25)
  2. Secondary Burn Streams: These are additional burns made possible by capturing funds from the various PCS revenue streams that are then used to buy back and burn CAKE, currently at an average of 4.15 out of 40 CAKE (40 – 25.75 – 4.15 = 10.1)

These two burn categories are combined to an average burn of 29.9 CAKE out of every 40 CAKE minted, effectively increasing supply by just 10.1 CAKE per block. This is great, but these two burn categories are distinctly different from each other in how they affect the CAKE ecosystem and economy.

The CAKE Supply (14.25 per block) is directly used to award investors in PCS, which means that while emission reductions reduce inflation they also directly decrease APR/APY, but the difference in scale exaggerates the negative effect of APR/APY reduction. To explain:

If you vote to reduce emissions by 0.5 CAKE, this is equal to ~5% reduction in effective emissions (10.1 – 0.5 = 9.6), which will result in a meager 1.7% reduction in inflation but farm rewards will fall by 11.76% in comparison (4.25 – 0.5 = 3.75). It's easy to see that 1.7% < 11.76%, and that the 1.7% will not make a huge dent, but an 11.76% reduction in rewards will negatively impact the attractiveness of investing in PCS altogether, which won't help CAKE price as originally intended.

On the other hand, burning CAKE indirectly by buying it back with the revenue then burning, has zero negative effect on the APR/APY, so it makes much more sense to focus all burn efforts in this direction.

Moreover, the more burns introduced, the further away the Supply Cap becomes. It's now 4 years and 3 months away at the current burn rate, but with upcoming 150% inflation, bad. The PCS team originally set the Cap at 750M to allow the current APR/APY to continue unaffected for the next 3 years, so in reality, they can reduce the Cap today by 100M to 650M, which will be reached in 3 years and 3 months and result in reducing the total inflation to 117% (-33%) with no negative impact. Easy win.

Numbers are sourced from the CAKE Supply Monitor

My take on CAKE Emissions Reduction