LDO token economics - Proposal [draft]

Draft Proposal

Allocate some LDO tokens to a token economics professional to make LDO token economics better.

Justification

The token economics need an upgrade. Currently the LDO token has very significant sell pressure b/c of constant emissions - these emissions do not seem to be ending any time soon. There is no reason to hold it other than voting in the DAO, which is very likely controlled by the team.

There needs to be a reason to hold LDO and not just dump it immediately upon receiving it as a reward. As per the reWards committee, these LDO emissions will continue to go on ā€¦

and on the merge / cex listing / mkt maker - maybe the price will pump, but if the rewards continue without a reason to hodl LDO (beyond ā€˜votingā€™), the mkt maker will likely have to absorb a lot of sell pressure. its better if there is significantly less sell pressure

price of token is important, it helps build community. currently the general DAO narrative is something like

ā€˜we bought at a much lower price (e.g. team .01 usd) so we dont care and we just want to ā€˜decentralizeā€™ the project as much as possibleā€™ - decentralization is great and important, but there MUST be a reason to hold LDO token and not dump it if these rewards will continue ā€¦

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I agree to update tokenomics but it is better to provide a solid solution with more details and data. Otherwise, this kind of thread doesnā€™t really matter in the community.

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i dont disagree, this was a draft with hopes of the community contributing it

its difficult to commit myself to creating a solid solution when a majority of voting tokens is controlled by the team for which they can veto as they see fit.

also its strange that none of the 2022 goals contemplate the LDO token. just to be clear, all the teams tokens unlock this year + rewards do not stop any time soon.

this is equal to hundreds of millions of USD of potential sell pressure. if there is no utility besides governance for the token, and the liquidity on the -2% + 2% depth is $300k range, lol, what is expected to happen?

ALSO this is not really how a community is built, this is really cringe and if this is the case, why not do a tesla cyber truck giveaway? https://twitter.com/StakingRewards/status/1483052873013501954?s=20

a community is built around token economics, otherwise its pure mercenary ā€¦ this is taking mercenary to extreme ā€¦

why does the team not care about the purpose of the LDO token?

its wonderful they are prioritizing decentralization and TVL, but this seems as if its coming at the expense of building an organic community ā€¦

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NB: team had never voted with their tokens, except for small votes (<100 LDO) for testing purposes. I am personally not opposed to tokenomics designs but I think itā€™s very easy to butcher a good project with bad tokenomics; I think until weā€™re out of the next bear market (and see for ourselves what is actually resilent) itā€™s prudent to keep our options open.

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The crux of the issue seems to be a perceived barrier for newer members to join the DAO and feel like they are getting fairly compensated while having a voice in governance in the long term.

The rest of the arguments are making huge assumptions that our key members and supporters will turbo dump 64% of the total supply over a year. They are the ones literally building and supporting Lido as a protocol (node operators, core team, etc). The better solution would be to collude and farm the recurring revenues instead of sell from an EV perspective.

The compensation one is a false flag. Lido is actively looking for talented people to join the DAO and contribute.

From the governance voice perspective I agree, and that is something we are working on, again as mentioned in other threads. We cannot force our early members to sell but we can continue thinking through mechanisms that make holding LDO valuable both for large AND smaller holders. Just because it wasnā€™t listed as one of our top OKRs for the year does not mean it isnā€™t on the list at all. No one will read a list 15 pages long and it dilutes from top

Also, the slap against the marketing campaign isnā€™t fair either. A cyber truck vs getting active participation on an interview are largely different in value. Marketing is always an attempt at increasing awareness, finding new users or community members and driving adoption. Should it have been $5 or $100,000 is an open question that the marketing people have to coordinate.

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No. Even if its just 10% and not 64% as you state, thats $200 million USD. Where will that be absorbed? On a market that has -2% +2% 300k usd liquidity? That will certainly destroy the price.

What is the downside to hiring token economics people and paying them in LDO to see what they come up with? What is the downside to this?

ā€œWe cannot force our early members to sell but we can continue thinking through mechanisms that make holding LDO valuable both for large AND smaller holders. Just because it wasnā€™t listed as one of our top OKRs for the year does not mean it isnā€™t on the list at all. No one will read a list 15 pages long and it dilutes from topā€

  1. I would read a list 15 pages long bc I think this is one of the most important projects in history of crypto.

  2. My point is as you state - the LDO token is NOT a priority for the team. This is due to misaligned incentives as the team is already paid off by more than 100x, which IMO congrats to the team for everything they have done so far.

But what it causes is poor community based incentives as the LDO tokens under go severe inflation and constant sell pressure due to rewards, unlocks etc. LDO tokens are being used almost exclusively for liquidity.

To not include LDO token as a priority - whats the point of all this? Check out the cash tag $LDO on twitter. Do you see any community members mentioning it? I am in cypto for a decade.

So the plan to build a community is to pay people with LDO? lol, like come on. The team is technologically genius without a doubt, but the community building side is severely lacking tgo the point that you need to pay people to listen to you talk about LDO. Does not get more gimmicky than that.

I apologize if I am being harsh, but its of the utmost importance a proper community is organically grown. Massive VC allocations, massive team unlocks and mercenary capital aint the way.

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Is there a tokenomics change or feature that you specifically want to see incorporated into the protocol? Or is there a token economics professional that you have in mind, or an example of tokenomics analysis that is relevant for LDO?

Youā€™ve made similar posts several times, and to me it seems to boil down to wanting the price of LDO to be higher. I think most everyone here would also want to see price go up so youā€™re not alone there. But your statement that ā€œthere is no reason to hold it other than voting in the DAOā€ misses the point. LDO is a governance token, that is its purpose. When you say ā€œwhy does the team not care about the purpose on the LDO tokenā€ I would ask what purpose you are referring to.

What sort of token design feature do you think could be implemented that would cause someone to hold LDO instead of selling (as tokens are vested, rewards are paid, etc.)? There are features like vote escrows, staking or locking to earn rewards or a share of protocol revenue, or deciding to reduce the LDO spend on grants or LP rewards.
There are lots of short-term games people play with token design, but many of them boil down to creating an illusion of rewards or APY that is really just dilution in another form. Itā€™s not clear what you want to see happen or really what the issue is in your opinion (other than falling LDO price), so difficult to propose a solution that might satisfy you.

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Thereā€™s truth in both sides of the argument.

You can think of tokens as equity in a startup. If you have them, you own the company and are incentivized to make it grow in the long term because you will either get cash-flows (e.g., dividends) or an exit (e.g., IPO, acquisition).

The big difference between tokens and shares is that tokens are much more liquid, which means that we have a price to look at (and worry about). This allows outsiders to get in and insiders to cash out earlier than they would in a traditional startup. With crypto in particular, token price also helps bring attention to the project (similar to funding rounds do for startups) which can create a community around it (many times ends up looking like a Ponzi).

In a nutshell, my POV:

  • Should we worry about $LDO in the short term? Probably not, this is a startup (long term game)
  • Should Lido provide an economic reward to LDO holders? Definitely, one day but itā€™s not necessarily a short term priority. We need to grow a lot and make lots of money first. However, it would be nice to have a high-level roadmap that outlines how and when we get there
  • Should we worry about continuous increasing supply of LDO? Yes, any tokens (aka equity) given away should have a clear benefit to the project that more than compensates the dilution. It sometimes looks like we are making LDO rain now
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very good points all around.

price of lido certainly plays, as does the liquidity of the stETH - ETH pair. are LDO rewards the only way to make this happen? is there nothing else that we can do?

what is the best way to compound value on LDO token? it just a constant supply dilution for the next 350 days the best way to do it?

No, there are proposals in place to test other means of incentivizing or owning liquidity for staked asset pairs. You can see more detail on this in the reWARDS January budget. But I think itā€™s fair to say that stETH-ETH parity is a mission-criticial feature of this system so any changes to how that parity is maintained need to be done carefully. There wiIl be more analysis coming on this and if you have ideas of tactics or strategies to consider I think they would be welcomed.

In the long term LDO emissions are not the best way to pay for every expense, thatā€™s clear and i donā€™t think anyone disagrees. In the short term they are the most efficient and practical source of capital for these expenses. The only concrete proposal iā€™ve seen in your recent post is to have LDO holders stake to claim further LDO rewards. If this is the type of compounding youā€™re talking about, then I would argue that you just want dilution in a different form that provides the illusion of APY.

Token prices are down all across DeFi. I donā€™t like it either. It doesnā€™t change what Lido and LDO are. And I donā€™t think Lido should be overly reactive to short-term price action by implementing a near-sighted scheme to put upward price pressure on the token.

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Hereā€™s a few ideas I have for either reducing the supply pressure from LDO emissions or increasing demand to hold LDO:

  1. Implement a protocol-owned liquidity model
  • I think there are some flaws to the Olympus Pro model. Some experiments have shown that the LDO used to purchase liquidiity really just increases selling activity in the short-term (auction participants buy, dump, and recycle). Maybe the bonds could be tweaked to have longer or more dispersed vesting, but its unclear how much demand there would be or how to even structure something like that.
  1. Raise ETH or stablecoin capital to pay for protocol expenses for X months.
  • To again avoid near term price pressure on LDO, you could (among other strategies) arrange for a private sale with a vesting period or look to borrow ETH or stablecoins with LDO pledged as collateral. I personally would probably favor taking debt using LDO collateral, but that would either need to be arranged in a OTC transaction or would need to prioritize onboarding LDO as collateral for lending pools. I think eventually some sort of debt funding or operating profit would obviously be a much better source of funding for protocol expenses (doubt anyone wants to be issuing LDO forever).
  1. Use a vote-escrow model to ā€œlock upā€ token holders
  • This relies on the being a heavy demand for the governance token. I think the reason this feature has been implemented in other projects is that the governance token can easily be used to direct or obtain value, so you want people to make sure that activity is controlled by long-term holders. I donā€™t think a lock up would be that useful if LDO is not used to directly control emission etc (like using a gauge vote). So until there is a compelling reason to implement such a feature, I donā€™t think a lock-up provides much value.
  1. Implement LDO staking rewards for holders
  • Once there are excess protocol revenues that are not needed for insurance or protocol expenses, I think this would make sense. Right now, itā€™s at best a long term goal on the roadmap.
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Perhaps Iā€™m missing something but it seems that the best way to stop the emission of LDO is to make Lido profitable.

Currently Lidoā€™s only source of revenue is the 10% rewards fee that is distributed between node operators, the DAO and a coverage fund.

How close to profitability are we?

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Pretty far in the black if we discount liquidity incentives, but pretty far in the red if we donā€™t. Thereā€™s a need to maintain huge liquidity pool for stETH until withdrawals are available, but after that we can use incentives much more sparingly.

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Awesome @vsh ! This means that with the Ethereum PoS merge we should be able to reduce a lot the LDO emissions. A clear path to increasing the price of LDO.

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  1. Lido owns ETH and stETH, we could use these to LP in different pools like Curve. The downside I see is the amount of liquidity the treasury has right now is quite small compared to the amount of assets the Curve pool has and wonā€™t make much of a difference. Most of the ETH and stETH may also be needed to cover expenses as of now. However it could be a viable strategy as the treasury grows, some of the stETH can be swapped for ETH or vice versa, and LP in the most important pools to guarantee a 1:1 peg.

  2. Does the treasury need more ETH right now? Thereā€™s already close to 21k ETH in the treasury which can be used, if thereā€™s fears of a bear market part of it can be sold for stables. How much are the yearly expenses right now? We should calculate those and assure thereā€™s multiple years worth of it.

  3. Token holders could lock up LDO + ETH for higher staking APR. Example, you need to pair every 1 ETH with 10 LDO and lock it for 1 year, as a reward instead of 5% of your rewards going to the LDO treasury, you will get a reduced rate of 4%, increasing your APR. If you lock 1 ETH with 20 LDO, 3% goes to the treasury. The rate could change based on the amount of locked LDO and/or how long you lock it for.
    This would offer a higher staking rate for those willing to lock LDO and reduce the LDO selling pressure. What we are doing is taking value out of the treasury by charging a reduced fee, the amount gained by those locking LDO would be equivalent to the amount not going to the treasury, making the flows equal but distributed in a different way. The value previously accruing to the treasury would instead go to the LDO token by reducing sell pressure and to the staker locking up LDO through the higher APR.
    Even if theoretically the flows are the same, I could see how offering a solution for stakers that want higher APR and at the same time believe in the long term success of LDO be a net positive for everyone.

I strongly suggest lido change the leader, TVL reaches 10B, and token economy is the worst. You canā€™t say too much about it yet, and if you do, youā€™ll be guilty of short-term opportunism!

generally speaking, paying stakers of L1 blockchains in the native currency is a clean incentive mechanism to achieve consensus that has generally been very successful.

while LIDO is not a layer 1 blockchain it directly participates in the consensus mechanism of several different chains.

the closer the LDO token can get to L1 consensus incentives the likely better off it will be in the long run. generally speaking, L1 consensus has a very clean and efficient incentive mechanism while DeFi governance tokens are generally lacking in performance.

this likely entails some combination of MEV, LDO rewards, DeFi LDO as collateral and/or LDO consensus.

is it possible for LDO to directly participate in consensus of its own network?

Regarding your first point on POL via Olympus Pro bonding, Olympusā€™s v2 bonds launched this month and allow for flexible vesting ā€” this flexibility in vesting period will also be available to protocols utilizing Olympus Pro.

If this is something that the Lido team has interest in exploring, Iā€™m happy to help make the connection to the Olympus folks.

Relevant links:

lol alright, lets keep dumping guys! infrastructure provider massive dump, they must be big believers!

mercenary capita community only! we have to pay people to listen to us talk lol

blz sirs muh familie

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mr beezy, does this meet your definition of a ā€œturbo dumpā€ ? its okay to be wrong sometimes ā€¦