Initially, the core team assigned discretionary multipliers to newer, more experimental pools. Multipliers were used to reward liquidity providers for smart contract risk and updated by hand as pools matured.
Multipliers also help drive liquidity to the pools where it is needed most.
As Shell has matured and the pools have survived the test of time, driving liquidity appropriately has become far more important than compensating for smart contract risk.
Why dynamic multipliers?
Good liquidity allocation is crucial for the efficient operation of the fractal pool system of Shell Protocol, as strong liquidity in core pairs (like ETH and stablecoins) is necessary for efficient swaps through the fractal network.
Although the original system was effective in reinforcing the liquidity of core pairs, it was also a very broad brush and difficult to precisely tune. Small changes in multipliers can lead to massive shifts in liquidity due to users chasing the highest yield.
Instead, Shell is moving to a self-regulating system for dynamic multipliers, replacing the previous system of the core team assigning discretionary multipliers.
This new approach to awarding Shell Points will lead to a more balanced and efficient distribution of liquidity across the Shell Protocol ecosystem.
How dynamic multipliers work
Essentially, the lower the supply of a token (such as TOUCOIN or LP tokens), the more points per dollar value users will receive for holding them. As the supply increases, the multiplier decreases, and vice versa. This approach aims to find equilibrium resting points for certain pools and guide the liquidity of the protocol more thoughtfully.
Looking at it a different way, you can imagine there is a fixed number of points per day to be issued to holders of a token. Say there are 100 points per day to be issued and only 10 tokens in existence. This means each token would earn the holder 10 points per day. Now, if the supply increased to 100 tokens, each token would earn the holder only one point per day. With a supply of 200, each token would earn the holder half a point per day.
This can be compared to the gauge model by Curve or Balancer in its operation.