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Other: The proposal as written also falls apart on some out of date details.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.