Discussion: The Decentralized Validator Vault

This post serves as a forum to discuss a potential strategy that could be implemented to increase the pace of adoption of Distributed Validators via the Simple DVT Module by utilizing incentives from DVT Infrastructure providers. Given the timelines of other parties that will potentially be involved, if the Vault moves forward, it is expected that the implementation will occur in an expedited manner.

Background

In light of the recently updated ReGOOSE goals and as mentioned in the Simple DVT Expansion proposal, research has been underway in regards to a strategy that could be used to increase the decentralization of the Lido Node Operator set and by leveraging the addition of DVT based validators from Obol & SSV Network.

Since SSV Network’s mainnet launch, the protocol has seen significant success, partially boosted by its mainnet incentives program. Currently, SSV Network has 24,992 active validators representing over $2.8B of ETH staked, all of which are eligible to receive SSV token incentives.

In the coming weeks, the Obol team plans to announce a contributions program in conjunction with their 1% for Decentralization retroactive funding initiative. Stake that is deployed on Obol DVs will contribute 1% of their staking rewards to the retroactive fund. The expectation for Liquid Staking Protocols is that potential future Obol incentives will be allocated to stakers by taking into account the contributions made on the relevant staking platform.

Within Lido Simple DVT, Obol clusters are about to start the process of scaling their validators while the first SSV Network clusters are expected to go live in the coming weeks, with scaling to follow soon after.

The Snapshot vote for Expanding the Simple DVT Module successfully passed through governance, and an on-chain Aragon vote to raise the share limit of the module to 4% is expected in the next two weeks. This proposal has also greenlit the creation of Super Simple DVT clusters, that would allow for quicker scaling of both Obol- and SSV-based DVT clusters via the Simple DVT Module over the next two months.

Proposal

Given the additional capacity soon to be available within the Simple DVT Module, the upcoming launch of Obol’s contributions program, and recent revamp of SSV’s incentive program, an opportunity has been presented that can 1. Quicken the adoption pace of DVT via the Simple DVT module, leading to a more secure, resilient, and decentralized Node Operator set and 2. Drive net-new deposits to the protocol.

One way to manage the process is to use some intermediary “vault” solution to serve as a focal point for both user deposits and DVT provider incentives.

The vault strategy would offer capital allocators (stakers) the ability to deposit ETH or WETH into what would be called the Decentralized Validator Vault. This (W)ETH would be staked via Lido, with stakers earning the normal staking rewards from the protocol. 90% of the incentives generated via the Lido protocol Obol & SSV Network validators could be allocated to depositors of the vault, with the remaining 10% allocated to the Node Operators in their corresponding SSV & Obol Simple DVT clusters.

Why Do This?

The combination of the expansion of the Simple DVT Module, the launch of Obol’s contribution program, and re-work of SSV’s incentive program presents an opportunity for the DAO to increase the resilience of the Lido Node Operator set via DVT, drive a material amount of net-new deposits into the protocol, and offer capital allocators access to incentives that they otherwise would not receive (as SSV & Obol incentives are based on running validators).

With the Simple DVT Module expanded to 4%, there will be capacity for 11,868 validators evenly split between Obol and SSV over the coming months. Excluding the 60 active validators running through Simple DVT currently, this suggests capacity for an incremental 377,856 ETH of deposits into the protocol to fill the capacity of the Simple DVT Module.

Vault Mechanics

Structure

The vault could be introduced and curated by a DeFi protocol, integrating functionality to drive deposits to the Lido protocol and the ability to show monthly snapshots of the allocated points to individual stakers utilizing the vault.

The capacity of the vault would be controlled via the administrator of the vault (depending on the vault design), reflecting the current depositable capacity of the Simple DVT Module, with an up to 10% additional buffer. These parameter changes would reflect when key limits of clusters within the Simple DVT Module are raised, as explained in the Simple DVT Proposal and Expansion Proposal.

Incentives Eligibility

Similar to the current rewards share program, and in order to dissuade possibly deleterious effects to the protocol due to farming incentives, it is suggested that analysis be conducted on vault depositors. In order to be eligible to receive full vault incentives for the capital provided, depositors must:

  1. Hold a position for a minimum of 3 days in the vault through the conclusion of the Snapshot period.

  2. Not unstake existing stETH or wstETH that is then re-staked via the vault from the moment of vault launch. The incentives are calculated on the base of ETH deposited to and persisting within the vault during the relevant snapshot period minus any stETH withdrawn after the launch of the vault.

  3. Not sell existing stETH on DEXs/CEXs: this condition does not expel a depositor from all incentives, but reduce corresponding amount of capital provided by the volume of sold ETH. Similar to the above, the incentives would be calculated on the base of non-swapped ETH deposited to and persisting within the vault during the relevant snapshot period.

Summary

With the expansion of the Simple DVT module imminent, it is an opportune time to consider utilizing both Obol and SSV’s mainnet contributions and incentivization programs to quicken the pace of DVT based validators being added to the protocol.

This strategy would allow for a faster flow of Simple DVT validators being activated, for capital allocators to access DVT provider incentives, and most importantly, hasten the pace that DVT is rolled out across the expanded Simple DVT Module.

Parties interested in providing the infrastructure required for such a DVT vault are asked to respond to this post, noting that there is an expedited timeline due to the estimated launch of DVT provider incentive programs.

As a member of the Lido Alliance with relevant infrastructure capabilities, the Mellow team has been made aware of this discussion post and asked to provide a public showing of interest if they believe they are capable of providing a solution that would cover the above listed requirements. However, this does not preclude another party from expressing interest.

14 Likes

We are looking forward to working with Lido with our upcoming Obol Contributions program, designed around our Retroactive Funding model (1% For Decentralisation: A Funding Model For Ethereum). Obol has introduced a funding model aimed at bolstering and decentralizing Ethereum’s consensus layer. Users of Obol distributed validator clusters will contribute 1% of their staking rewards to a retroactive funding pool, which will support projects in the Ethereum ecosystem. Obol will begin tracking and recognising those that make early contributions to this retroactive fund by running or staking to Obol Distributed Validators.

10 Likes

Mellow team is fully supporting the launch of this solution.
We are interested in implementing the system and will follow up with Lido contributors to discuss a potential architecture in more depth.

7 Likes

It’s an excellent initiative to accelerate DVT adoption and enhance the decentralization and resilience of Lido’s validator set.

The only question we got is on the ratio of incentive distribution.
The current proposal suggests allocating 90% of incentives to vault depositors and 10% to DVT Node Operators. Given that improving the economics for DVT Node Operators is still in progress and that rewards from DVT incentives are not accessible for stakers without this initiative, we might want to consider adjusting this ratio slightly more in favor of the Node Operators.

2 Likes

Thank you for the feedback!

My thoughts below, and I’d also ask @Mol_Eliza to weigh in.

In general, I think that with the recent expansion proposal for the Simple DVT module a lot of progress will be made over the next couple months in terms of improving participant economics, especially if the vault strategy is tied into it.

One of the issues we saw in the first key limit raise for Cohort 1 was it took some time for the clusters to receive deposits, meaning Node Operators were running infra but they were not receiving any rewards. If the vault strategy is implemented and successful, it should mean that deposits are driven to clusters quickly and that participants will receive rewards sooner. This will become more material for participants as well with the higher expected number of validators per cluster.

That point depends on the vault being attractive enough for capital allocators to deposit to it therefore driving stake to Simple DVT validators.

The other point to mention here is that Simple DVT Node Operators already receive a higher rewards share vs. Node Operators in the the Curated Module, and given that they also are not required to put forward a bond for participation, this feels like a fair balance where they are still included.

However, one point I think that should be added to the incentives eligibility is the following: “The 10% of potential incentives for SDVT participants would be split evenly across respective Obol and SSV clusters, with each participant earning a share of any incentives from the provider whose software they utilize based on the number of clusters they participate in.”

What this would mean in practice using 3 operators as an example:

Operator A - participates in 1 normal cluster
Operator B - participates in 2 normal clusters
Operator C - participates in 1 normal, 1 super cluster

Operators B and C would receive the same amount of any allocated potential incentives, with operator A receiving 50% of that amount (or the per cluster participant amount).

In practice, Operator C would be receiving the highest amount of validator rewards, with the combination of the super cluster and normal cluster, however operators A & B would be receiving a higher relative share of any incentives compared to if it was just calculated on the total number of validators they are running.

Again, thanks for the feedback and happy to continue the discussion. We plan to post an updated version of this as an official proposal over the next two days.

5 Likes

As mentioned above, here is the updated version following discussions related to this topic. It is suggested that this proposal be included in the upcoming Snapshot period for the DAO to consider.

Proposal: The Decentralized Validator Vault

The below proposal follows the discussion post created on June 20th 2024.

This proposal seeks DAO support for the implementation of a vault solution by the Lido Alliance member Mellow that would be used to serve as a focal point for user stakes and DVT incentives.

Voting for this proposal would mean that:

  1. The Mellow team would be responsible for the implementation of a vault that accepts ETH and stakes it to the Lido protocol with the goal of driving net-new stakes to the Simple DVT Module;
  2. 90% of potential future Obol contributions and SSV mainnet incentives (both calculated off-chain) will be allocated to the vault, with the remaining 10% allocated to the Node Operators in their corresponding SSV & Obol Simple DVT clusters. Any potential Mellow incentives would be directed to users of the vault;
  3. Cross-team coordination will take place to facilitate staking to the Simple DVT Module. Relevant data will be provided in support of off-chain contribution and incentive programs.

Background

In light of the recently updated ReGOOSE goals, Simple DVT Expansion proposal, and as discussed in the Decentralized Validator Vault discussion post, a vault strategy can be implemented that will increase the pace of adoption of Distributed Validators via the Simple DVT Module.

Since SSV Network’s mainnet launch, the protocol has seen significant success, partially boosted by its mainnet incentives program. Currently, SSV Network has 26,685 active validators representing over $2.9B of ETH staked. If the Snapshot vote is successful, a proposal to the SSV DAO will be shared to greenlight the allocation of Lido related SSV incentives in an off-chain format to the vault, with user eligibility following the format described below.

In the coming weeks, the Obol team plans to announce a contributions program in conjunction with their 1% for Decentralization retroactive funding initiative. Stake that is deployed on Obol DVs will contribute 1% of their staking rewards to the retroactive fund. The expectation for Liquid Staking Protocols is that potential future Obol incentives will be allocated to stakers by taking into account the contributions made on the relevant staking platform.

Within Lido Simple DVT, Obol clusters are about to start the process of scaling their validators while the first SSV Network clusters are expected to go live in the coming weeks, with scaling to follow soon after.

The Snapshot vote for Expanding the Simple DVT Module successfully passed through governance, and an on-chain Aragon vote to raise the share limit of the module to 4% is expected in the next two weeks. This proposal has also greenlit the creation of Super Simple DVT clusters, that would allow for quicker scaling of both Obol- and SSV-based DVT clusters via the Simple DVT Module over the next two months.

Proposal

Given the additional capacity soon to be available within the Simple DVT Module, the upcoming launch of Obol’s contributions program, and recent revamp of SSV’s incentive program, an opportunity has been presented that can 1. Quicken the adoption pace of DVT via the Simple DVT module, leading to a more secure, resilient, and decentralized Node Operator set and 2. Drive net-new stake to the protocol.

This opportunity can be capitalised on by implementing what would be called the Decentralized Validator Vault, implemented by the Mellow team. The Mellow team has indicated that they can provide the proposed solution in a timely manner that is integrated into the Mellow front-end, allowing for Lido community members to access the vault.

The vault strategy would offer capital allocators (stakers) the ability to stake ETH or WETH into the vault. This (W)ETH would be staked via Lido, with stakers earning the normal staking rewards from the protocol. 90% of the potential incentives generated via the Lido protocol Obol & SSV Network validators would be allocated to stakers of the vault, with the remaining 10% allocated to the Node Operators in their corresponding SSV & Obol Simple DVT clusters.

Why Do This?

The combination of the expansion of the Simple DVT Module, the launch of Obol’s contribution program, and re-work of SSV’s incentive program presents an opportunity for the DAO to increase the resilience of the Lido Node Operator set via DVT, drive a material amount of net-new stake into the protocol, and offer capital allocators access to incentives that they otherwise would not receive (as SSV & Obol incentives are based on running validators).

With the Simple DVT Module expanded to 4%, there will be capacity for 11,868 validators evenly split between Obol and SSV over the coming months. Excluding the 60 active validators running through Simple DVT currently, this suggests capacity for an incremental 377,856 ETH staked into the protocol to fill the capacity of the Simple DVT Module.

Vault Mechanics

Structure

The vault would be introduced by Mellow with one of the existing Mellow Curator teams, integrating functionality to drive stake to the Lido protocol and the ability to show monthly snapshots of the allocated points to individual stakers utilizing the vault.

The capacity of the vault would be controlled via the Mellow administrator, reflecting the current stakeable capacity of the Simple DVT Module, with an up to 10% additional buffer. These parameter changes would be communicated to Mellow when key limits of clusters within the Simple DVT Module are raised, as explained in the Simple DVT Proposal and Expansion Proposal.

Incentives Eligibility

Similar to the current rewards share program, and in order to dissuade possibly deleterious effects to the protocol due to farming incentives, analysis would be conducted on vault stake. In order to be eligible to receive full vault incentives for the stake provided, stakers would need to:

  1. Hold a position for a minimum of 3 days in the vault through the conclusion of the Snapshot period.
  2. Not unstake existing stETH or wstETH that is then re-staked via the vault from the moment of vault launch. The incentives are calculated on the base of ETH staked to and persisting within the vault during the relevant snapshot period minus any stETH withdrawn after the launch of the vault.
  3. Not swap existing stETH on DEXs/CEXs: this condition does not expel a staker from all incentives, but reduce corresponding amount of stake provided by the volume of sold ETH. Similar to the above, the incentives would be calculated on the base of non-swapped ETH staked to and persisting within the vault during the relevant snapshot period.

The 10% of potential incentives for SDVT participants would be split evenly across respective Obol and SSV clusters, with each participant earning a share of any incentives from the provider who’s software they utilize based on the number of clusters they participate in.

Summary

With the expansion of the Simple DVT module imminent, it is an opportune time to consider utilizing both Obol and SSV’s mainnet contributions and incentivization programs to quicken the pace of DVT based validators being added to the protocol.

The vault strategy implemented by Mellow would allow for a faster flow of Simple DVT validators being activated, for capital allocators to access DVT provider incentives, and most importantly, hasten the pace that DVT is rolled out across the expanded Simple DVT Module, improving the resilience of Lido Node Operator set.

6 Likes

Snapshot vote started

The Proposal: The Decentralized Validator Vault Snapshot has started! Please cast your votes before Thu, 04 Jul 2024 16:00:00 GMT :pray:

2 Likes

Thank you @Tane for a question.

The problem of determining the split structure is definitely could be opinionated and worth discussing.

In addition to @KimonSh arguments, i’d like to provide two points used within evaluating parameters of the proposal.

1. Different rewards sensitivity for capital providers and NO

As rewards for participating in staking are tied to amount of capital provided, i think the important factor within actor (capital provider) decision making is APR in terms of total rewards / incentives for the amount of capital provided with high sensitivity on every percent point (as base staking rewards are determined by network state and universal for all participants).

For the NO, participating in SDVT cluster, the rewards structure is tied to the total amount of validators within a cluster, therefore focusing on ensuring faster module growth within protocol would provide Node Operator more sustainable rewards flow.
E.g. if we consider two different scenarios of SDVT module growth (to target share of 4%):

  • Fast growth: 3% in first two months, reaching 4% in first quarter.
  • Moderate growth: gradually growth with to 4% through a year

The increase in total rewards for a year for NO within Fast scenario to Moderate scenario would be ~+77%
As it’s close to relation between area under adoption graphs:
image

Therefore it seems reasonable incentivizing APR for capital providers and faster SDVT growth, creating a positive effect both for validator set resilience and NO participating in SDVT sustainable inflow.

2. Incentive distribution within NO participating
As incentive distribution within NO is proposed to be split evenly across respective Obol and SSV clusters it provides a way to shift incentivization in favour on smaller clusters.
Within the assumption on 50% of module consisting of smaller clusters, running ~80 validators each, and 50% on super clusters, running 500 validators each, splitting the incentives evenly by clusters would lead to:

  • 86.27% of incentives allocated to smaller clusters
  • 13.79% of incentives allocated to super clusters

Shifting the 50:50 validators split to 6.25 : 1 split in favour of Node Operators participating in smaller clusters, providing additional sustainability.

7 Likes

It is very reasonable that the quickest way to reach the SDVT share cap of 4% is optimal for everyone, given that the key variables determining rewards differ between NOs and stakers. Thank you for the clear explanation, @Mol_Eliza !

3 Likes