Activate Lido Protocol Governance with Revenue Share Staking

TL;DR:

  1. Introduce the $LDO staking module and buyback program.
  2. Allow token holders to stake $LDO in exchange for a proportion of Lido DAO revenue (via an $LDO buyback and distribution program).
  3. Increase $LDO utility by having $LDO stakers serve as insurance providers of last resort.

Abstract

Over the past few years, Lido has grown from an early-stage DeFi protocol to the dominant leader in the liquid staking space with over 30.19b in TVL.

Despite Lido’s success, $LDO token holders don’t directly benefit from the revenue generated by the protocol and $LDO has no direct utility. These points are a principal concern for current and prospective token holders.

This proposal aims to catalyse a discussion and propose a solution to the utility and value-accrual issues facing $LDO.

Proposal

Goal: Introduce $LDO token utility and align protocol incentives between all Lido-associated parties.

Exact Parameters/Mechanism:

1. Revenue Share

a. Redirect 20-50% (toggle-able parameter based on governance) of future Lido DAO revenue from the protocol treasury to stakers of $LDO

b. The Lido DAO currently has a treasury exceeding [$482m] at the time of writing, including, $127m in major assets.
i. Since DAO operating costs are an estimated ~$16m annualized 59, the Lido DAO currently has an estimated runway of 30 years, suggesting minimal-to-no operational impact from revenue redirection.

c. Distribute Lido DAO revenue to $LDO stakers in $LDO tokens weekly through a buyback and distribute mechanism (exact mechanics will be determined separately)
i. This mechanism allows all $LDO holders (not just stakers) to benefit from the revenue generated by the protocol
ii. All stakers will ‘receive’ tokens every week. All ‘earned’ tokens will be vested for 6-months before distribution.
iii. I propose the buyback be executed on-chain via a VWAP or TWAMM

2. Set minimum size for the LidoDAO insurance fund
a. As previously discussed, set minimum size of the Lido insurance fund at ~6k stETH
b. If insurance fund reserves dip below the minimum threshold due to a slashing event, the protocol will redirect all revenue from stakers to the insurance fund until the minimum reserve is re-established.

3. Staking Terms
a. 14-day unstaking cooldown for all stakers
b. Potential loss of up to 30% (industry standard) of staked $LDO in the event of a major slashing event
i. Similar to stAAVE, staked Lido will be auctioned off to the market
ii. Loss waterfall will initially be as follows: insurance fund (once exhausted) → $LDO stakers (up to 30% staked tokens slashed) → socialized loss via stETH holder negative rebase

  1. While this may make staking $LDO seem high-risk, the Lido staking program will be improved in the future to include NOs, especially after permissionless validators and DVTs are integrated with the staking router. In this case, I’d anticipate NOs will take most of the slashing risk themselves.

Simulation/Analysis

Source: TokenTerminal, Dune

[Staking APR](https://imgpile.com/i/xaw6wx)

Staking yields will be as depicted in the attached estimations, three cases are assumed with different combinations of $lido staked & revenue share agreed upon.

In the base case, the staking yield can be expected to be 9.15% (approx) on the basis of 40% revenue share & it is expected that for a conservative Eth bull case of 5k, this could potentially float around 20%.
Note: It is assumed TVL will grow at 30% in Y+1 & Y+2.

FAQ/Concerns

Q: Wouldn’t this cause $LDO to face additional regulatory scrutiny (especially from US regulators)?
A: Perhaps, but the proposed model is an industry-standard, with several DeFi protocols adopting a similar standard over the past 5-yrs including Maker, Aave, and Yearn.

Q: Is this proposal likely to increase the potential of SEC enforcement action?
A: The Lido DAO is a fully decentralized organization with no legal entities. Lido DAO’s only tie to the US is the employment of US-based persons as contractors. Lido has not received any enforcement or warning communication from any US-based regulatory body to date.

Q: This proposal doesn’t quite address additional utility for the LDO token.
A: Token holders are more aligned with node operators’ success and the protocol’s general success. I also believe that node operators need to be more aligned with the protocol

Next Steps

After 7 days of discussion, I propose moving this proposal to a signaling vote on the snapshot.

I am in the process of drafting a second proposal that will impose an obligation on NOs to stake $LDO. Staked $LDO will ensure validators have skin in the game if they get slashed. IMO this is a necessary strategic move to fortify the alignment of incentives across the protocol. I will share the new proposal in the coming week.

I’m excited about the future of $LDO and believe that this advancement will help underscore the protocol’s commitment to $LDO token holders as well as continued growth and resilience.

6 Likes

Since we had this discussion less than a year ago, I’ll briefly reiterate why I see this as a bad idea. It results from several flawed assumptions about the economic health of the Lido protocol.

  1. Lido treasury isn’t ~$500m but actually $130m. LDO should be fully discounted

  1. Lido’s annual cost isn’t $16m but was $100m in 2023 and projected to be $50-60m in 2024.

  1. Lido’s surplus is 0, so there isn’t anything to distribute yet

  1. If you tapped into revenue (not surplus) like suggested, you’d have to

    1. Drain the treasury, which isn’t big to begin with. If ETH goes down 50% (to levels last seen 10/2023), both treasury and revenue would halve. This would put us at $65m treasury and ~$30m revenue, while costs would stay the same. That’s less than 2 years of runway.
    2. Increase revenue. The DAO is working on that, but it takes time.
    3. Reduce cost. The only way to do this is to reduce the budget allocated to implementing the DAO’s agreed-on strategic priorities. Given the competitiveness of the staking market, I would see that as a terrible mistake.
    4. Issue more LDO to make up the shortfall. Self-defeating for obvious reasons
  2. So instead, I propose the following steps

    1. Let’s get Lido to a place where it generates a surplus
    2. and can defend that surplus from erosive forces of competition with a solid market position
    3. Closer to that point, establish a good mechanism to share surplus with LDO holders. I’m highlighting the “good” because the current proposal of requiring NOs to post a bond would both (i) undermine Lido’s differentiation to other protocols and (ii) further lower its net income by increasing the cost of revenue.

All charts taken from https://dune.com/steakhouse/lido-safu

17 Likes

The below serves just as a personal perspective, held by the Steakhouse team. n.b. we are DAO grantees since September 2022. For the below reply we draw not only on our experience leading the Finance workstream for Lido DAO since then, but also on our experience contributing to other DeFi protocols and stablecoins, where some of these proposal mechanics have been tried and failed.

Abstract

Our view hasn’t changed much since the last time we replied to this proposal:

The proposal is not without its merits. We believe that the long-term destination of the LDO token could well look something like this. However, we also believe that it is not the right time at the moment, LDO is not the right tool for protocol insurance, and that the future of the protocol is more interesting for LDO token users as a thriving marketplace.

  • 1. The market is not mature yet and neither is Lido’s position in it
  • 2. Lido as a marketplace is a destination that is considerably more interesting than buybacks today
  • 3. LDO is a highly unsuitable token as an insurance provider of last resort

Other: The proposal as written also falls apart on some out of date details.
Conclusion: We appreciate your continued participation in governance, but respectfully disagree with the premise and will vote to reject the motion.

Points of contention

1. The market is not mature yet and neither is Lido’s position in it

The corresponding blockchain subsectors Lido is exposed to (Ethereum, staking, liquid staking, integrations on top or further to liquid staking, etc), are far from mature as the proposal suggests. Lido’s position in them, also, is rapidly evolving. We don’t believe that there is a good enough reasoning that justifies redirecting DAO surplus to token users at this stage. We suggest that, apparently, LDO token users agree, judging by their approval of the DAO’s Vibe Check, the GOOSE goal setting process, their approval of the DAO’s GOOSE goals, and their approval of the most recent st2024 v1 budget from January to June 2024 to offer grants to seek contributions towards those goals.

Redirecting protocol surplus to LDO token users now puts the GOOSE goals further afield and assumes the market is static. LDO token users can obviously change their minds on the GOOSE goals, as on-chain votes are the primary mechanism for DAO governance. However, a self interested LDO token user could also well believe that executing this proposal change today is highly short-termist in outlook, given the abrupt change in direction and the implicit decision that the market is ‘good enough’ for LDO token users today and forever.

The Lido protocol and the DAO have been live since 2020. Although many elements of blockchain governance, including Lido DAO’s, are unprecedented and have no parallel in traditional organizations, I challenge the proposer to whether they would make this same recommendation in a startup, in a rapidly changing market environment, for a project that was less than 4 years old.

2. Lido as a marketplace is a destination that is considerably more interesting than buybacks today

The primary benefit of using the LDO token at the moment is to guide governance through open-source contributions that advance the Lido protocol. In our perspective, the long-term objective of governance should eventually be to automate itself and disband altogether, to let market forces take over.

The implications of the Staking Router are that, in the long-run, the equilibrium between node operators, staking router modules and LDO token users should balance towards incentivizing the best possible behavior and maximum decentralization from the validator set, combined with the easiest and best performing staking solution for stETH users.

We believe that this outcome is still a few years ahead, but clearly not a pipe dream at all - itshappening.gif. To wit, the DAO recently launched the first Staking Router module outside of the curated set. Rather than redirecting protocol surplus today, we believe LDO token users should actually be incentivized to guide the protocol to a state where it is a dynamic marketplace for node operators, stakers, router modules and indeed themselves. We believe this outcome is the most likely to create thriving competitive dynamics on decentralization, performance and price, and better outcomes for all classes of token users and stakeholders in the Lido protocol.

In this outcome, we actually agree that some form of LDO burn could well be the right framework for delivering on a market incentive for LDO token users. However, it would need to be in combination with some form of continuous governance minimization in favor of a dynamic fee marketplace, and should involve no changes in risk to the protocol, as the below point elaborates.

3. LDO is a highly unsuitable token as an insurance provider of last resort

We’ve thought a lot about surplus management and about determining what the right balance of surplus is. We refer to this dashboard for details on the composition of certain wallets. Today, the slashing provision wallet has 6.3k stETH – already above your proposed level, which you suggest with no further reasoning. How do we know if it is the right level at all? Our own view was that the slashing provision should be even higher. The sobering reality is that stETH users hold the risk of a mass slashing event, which could quickly overwhelm the surplus.

In no scenario - especially not a mass slashing - would we suggest using LDO is a reasonable alternative. When executed as written, your proposal turns LDO into an endogenous, highly reflexive token, and puts the entire protocol at risk. stAAVE as a precedent is also not a great one, as it has not been tested under stressed conditions. We wager that should stAAVE ever have to be employed as a token of last reserve, its price will spiral and it will fail to accomplish its mission. The same would likely happen with LDO.

We are confident this is the case. In part, because of the logical reasoning that concludes endogenous collateral never works as a backstop. Also, because every other time it has been tried, it has played out in exactly the way we would expect. At Maker, in March 2020, the minting of MKR to cover losses from bad debt failed to stabilize the protocol for exactly this reason.

When you cite the market value of LDO tokens in the treasury, we get very nervous. LDO tokens that are not circulating are very unlikely to be valued at the market price. Using metrics such as FDV or including native tokens at their market valuations creates a false sense of security that does not play out in reality.

For that same reason, using LDO as NO collateral is also highly unsuitable and dangerous for protocol stability. stETH and ETH are the only collateral types we would believe can actually serve as suitable collateral or backstop assets, whether for the protocol, for individual modules or for node operator collateral.

Other details missed

As @hasu explained above, the $16m figure you cite is about 2 years out of date, and it was also out of date the last time you made this proposal. Since then, there have been multiple budget requests proposed and approved, to fund grants to contributions to the protocol. The latest approved budget is st2024 v1 and we will be providing a community call update on March 13th, 2024, on its progress.

Conclusion

The proposal is not without its merits. We believe that the long-term destination of the LDO token could well look something like this. However, we also believe that it is not the right time at the moment, LDO is not the right tool for protocol insurance, and that the future of the protocol is more interesting for LDO token users as a thriving marketplace.

We appreciate your continued participation in governance, but respectfully disagree with the premise and will vote to reject the motion.

10 Likes

A decentralized protocol with an unknown number of staff would cost hundreds of millions of dollars a year. Don’t you think this number is outrageous?

1 Like

How much does a traditional developer cost in this market now? Don’t use all the funds in the treasury to pay wages to the founding team for their enjoyment. The future of the agreement should also be considered. This bull token should be worth $500, not its current price.

This idea needs to be discussed further. Otherwise we are going to miss the greatest bullrun.

Also,

Thats crazy, how is it that high??

1 Like

Faced with the current predicament, lido should actually come up with another proposal
Let each node participating in lido Ethereum pledge a certain proportion of ldo tokens for lock-up. For example, a node pledges two LDO tokens worth Ethereum.

1 Like

Using the token read to maintain security for other projects in the crypto world would be a good idea to raise funds and a new business model for Lido. Stakers would earn the value of payments from other protocols that use Lido stake as security, and there could still be a 1% annual inflation of the Lido token to pay the stakers. When Lido has a significant revenue from Ethereum stake, a portion could be allocated to Lido stake.

2 Likes

ETH is likely to grow three times its current price, which means Lido will have a TVL of 105 billion even if Lido doesn’t see user growth in staking, which I find hard to happen, as institutions will want to use staking. This could be the biggest Bull Market, and it’s time to prepare for it by giving utility to the Lido token.

2 Likes

Is this going to a vote? $LDO needs additional features besides governance and a revenue share is the most fundamental component.

Pendle is miles ahead and it’s not the only one.

Seeing your shared experience, how about collaborating on a proposal that serves everyone’s interests. A flat $LDO is not a good thing. Emission / revenue share should be a no-brainer and does not burden the system. Doing nothing will not serve to advance the project considering aggressive, intelligent and insightful competing teams with solid projects.

There’s a world of difference between “doing something useful” and “doing something useful with the token”. I’d argue if anything to be done re:LDO utility (and don’t get me wrong, that part feels like a powerful lever), it must be interwined into holistic strategy. The current one (and areas of focus) is outlined in GOOSE proposal: Snapshot

1 Like

since you’re more familiar with GOOSE, what’s the reason to hold $LDO instead of $pendle?



2 Likes

I was very sad to see this. Lido is losing a lot of eth every day. Everyone has lost confidence in the project.

1 Like

Quite bold statements. Could you provide more specific details and argue how this is related to the Revenue Share Staking topic?

The reality is $LDO is unattractive now compared to at least half a dozen other projects in the space and the market action has attested to that.

Sitting here and talking for the sake of talking is a fool’s errand. $ and people will leave $LDO even faster. This needs to be fixed and it can be easily fixed. Adding a revenue share component is the low hanging fruit action in the right direction and should be done NOW.

Even small projects like Origin understood they need to merge their OGN and OGV tokens to merge their revenue and voting components.

Snapshot vote started

The Activate Lido Protocol Governance with Revenue Share Staking Snapshot has started! Please cast your votes before Mon, 08 Apr 2024 05:03:00 GMT :pray:

This proposal should be listed separately, and the official Twitter should help forward it, because many people don’t know about this proposal yet and cannot participate in the vote in time, thank you

1 Like

can you ping them to list?