Lido for Polygon - Proposal by Shard Labs

Motivation

Decentralization is one of the cornerstones of every blockchain project. Having a more decentralized project means that it’s also becoming more robust and resistant to attacks of any kind. The advantage of using Lido on Polygon is that users won’t need to have Matic locked in a staking contract, but will be able to use stMATIC inside the DeFi ecosystem on Polygon which then greatly improves incentives for users to delegate and stake their tokens. Our aim is to help improve decentralization of staking on Polygon even more and contribute to the decentralization of Polygon and Lido.

Suggested Design

The proposal’s base is to create a liquid staking token (stMATIC) that will accrue staking rewards and represent staking positions with Lido validators on Polygon. The stake deposited to the Lido contract on Ethereum mainnet will be distributed to these validators following a logic similar to the Lido Ethereum liquid staking solution. Full logic will be implemented on the Ethereum mainnet, and the users will need to move stMATIC to Matic chain via bridges if they so like. This version of Lido will have a fee mechanism similar to that of stETH, allowing splitting fees between node operators and Lido treasury (e.g. to be used for insurance funds). Lido node operators, and parameters such as the fee, will be controlled via the governance of LDO holders on Ethereum. In the initial version, governance decisions will be carried out by the Lido. A more detailed approach is defined under: Timeline and Future work & Next steps.

Why Polygon?

Quite successfully, for some time now, Polygon (ex. Matic) has been the DeFi chain of choice for many. Because of that, the utility for Matic tokens is real and vast. Due to the staking mechanism on Polygon (Matic), which locks Matic tokens inside a smart contract on layer 1 (mainnet). Those same tokens can’t be used for other DeFi related dapps and protocols on the Matic chain itself. Due to the reason mentioned above, we propose using Lido design for ETH staking and creating a similar solution for staking Matic tokens (more details in the following sections).

Also, one important point is decentralization of staking on Polygon itself, with which Lido can help immensely. As decentralization is a cornerstone of this space, we see Lido as one of the enablers of decentralized staking on Polygon.

Why Shard Labs?

We are a startup founded in 2018, and we accompany our clients on the path to a holistic digital transformation. Profound blockchain tech knowledge coupled with business understanding allows us to create unique solutions and deliver excellence.

We believe and enjoy working on blockchain, especially when projects bring alliances, partnerships, and talent from every aspect of the blockchain ecosystem.

Shard Labs is a team of researchers and developers oriented towards cutting-edge initiatives such as this one. The team has extensive experience working with multiple solutions and clients such as Ethereum Foundation, Polygon, Polkadot, NEAR, etc.

Our lean team of blockchain software developers ensures all components of successful project execution, from strategy and conception to digital solutions.

We are determined to improve the Polygon ecosystem by bringing liquidity staking (stMATIC) to contribute to the Polygon DeFi ecosystem even more.

Some of the projects we currently work on:

From the inception of the idea of Lido on Polygon, Polygon team has been really forthcoming and crucial for making this idea a reality and with their backing we want to make this dominant staking solution on Polygon itself.

Timeline and Future Work

  • Phase 1: Research and specification [Jul-Aug 2021]
  • Phase 2: MVP Development and testnet deployment [Jul - August 2021]
  • Phase 3: Production v1 development and audit [August 2021 - December 2021]
  • Phase 3: Mainnet deployment of v1 [January 2022]
  • Phase 4: Maintenance and support for v1 and planning for v2

Suggested Incentive Structure

It is a great challenge, but also an opportunity to build a Lido solution for the Polygon ecosystem. We are determined to put our best resources into this project to make it the best possible and grow the dedicated team and the project itself in the future.

We are proposing the following incentive structure that aligns with the long-term success of the Lido as well as Lido on Polygon:

  • Lido Token Incentives: Using vested tokens distributed according to agreed milestones
  • Revenue Share: Agreed ongoing revenue share between Shard Labs and the Lido

For delivering liquid staking solution we propose the following:

  • 100,000 LDO tokens issued with vesting with 2 year vesting when Lido for Polygon manages to capture 2.5% of the staked MATIC supply
  • 100,000 LDO tokens issued with vesting with 2 year vesting when Lido for Polygon manages to capture 3% of the staked MATIC supply
  • 100,000 LDO tokens issued with vesting with 2 year vesting when Lido for Polygon manages to capture 3.5% of the staked MATIC supply
  • 100,000 LDO tokens issued with vesting with 2 year vesting when Lido for Polygon manages to capture 4% of the staked MATIC supply
  • 100,000 LDO tokens issued with vesting with 2 year vesting when Lido for Polygon manages to capture 4.5% of the staked MATIC supply
  • 500,000 in additional LDO tokens vesting over a 2 year when Lido for Polygon manages to capture 20% of the staked MATIC supply

Revenue share incentives between Lido and Shard Labs: will be used to incentivize future growth and cover development and maintenance costs. As the lead development partner of Lido on Polygon, we suggest that Shard Labs receives 20% of the fee going to the Lido treasury, while the treasury itself retains the rest.

If the agreed KPIs are not reached, but the product is developed and delivered, we suggest the compensation of 100,000 $ to cover the basic development and audit costs.

We are excited to bring Lido to the booming Polygon ecosystem as we see this as the start of another milestone in Lido development.

We also want to thank Chorus One for their help with the proposal.

Note: each point will have to be reached and maintained for a month for the milestone to be achieved. For example if Lido reaches 2.5% MATIC supply and maintains it for a month, then milestone 1 is achieved, not before.

Next Steps

We are in contact with multiple stakeholders from the Lido and Polygon ecosystems. There is already a first version of the technical specification that can be viewed and the feedback provided. We will also work on the frontend integration for https://stake.lido.fi/.

We are open to suggestions and feedback from Polygon and Lido communities on this proposal and the proposed specification.

Our next step is to issue a Snapshot vote to determine whether the Lido favors supporting our proposal and the spec. If it passes, we will build an MVP and release it in the Polygon to boost it’s DeFi ecosystem even more.

Team breakdown per phase:

Phase Solidity DevOps Marketing Frontend
MVP 1 senior 0 0 1 senior
V1 2 senior 1 senior 1 1 senior
V2 2 senior 2 senior 1 1 senior

Tokenomics

We did a detailed research on Matic staking rewards and potential ROI for Lido. Graphs are added for easier overview and detailed numbers are present in this excel sheet.

MATIC rewards in USD per day are: 538,429.9878 $ and average price for LDO for the last 30 days is 2.0365 $ which means that when Lido captures 2.5% supply of Matic it gets issued 12114.67473 $/day on average.

Which then means that if 500,000 LDO tokens are issued to Shard Labs for this milestone Lido gets this investment back in 84.05 days.

When we add the second milestone to this, the one of 20% captured MATIC, then for issuing an additional 500,000 LDO tokens investment for Lido is returned in 10.5 days or if we calculate a total of 1,000,000 LDO, investment is returned in 21.01 days.

Yearly revenue for the Lido would be as follows:

  • At the 2.5% Matic stake captured, yearly revenue will be 4,421,856.275 $
  • At the 20% Matic stake captured, yearly revenue will be 35,374,850.2 $

Note on the lock and vesting:

In this space, we often see that the capital is more valued than what one team can bring in the sense of productivity.

Comparing the availability of capital to the availability of teams that can deliver (where the first one is abundant and the latter is the opposite), Shard Labs is best vested considering the proposal. The risk is capturing the market on Polygon, not just building the technical solution. We believe that the critical tipping point will be to reach 2.5% of the market share.

Challenges that we will face:

  • Delivering production ready withdrawal process that can potentially even be used for the ETH staking
  • Adapting the whole process for the Matic staking
  • Capturing the first market shares and getting validators to validate with Lido (crucial part)

Until this point Lido takes almost no risk and Shard Labs takes all of it. After this point ROI for Lido is 84 days for the first phase and 10.5 days for the second.

On the other hand we understand that Lido wants teams who are aligned long term with the project and have incentive to stay long term. That’s why we propose a middle ground, where there won’t be lock (after a target is reached) but only vesting period which is defined under Suggested Incentive Structure.

Revenue itself will be used for funding development and all the expenses and LDO tokens are intended to be used only for governance purposes.

We are open for discussion on this part.

Additional

Note: If you are interested how we extracted these numbers, here is the github repo:

Process is as follows: We went through all NewHeaderBlock events which are generated at checkpoints (all 17k of them) and counted all rewards from those events. That happens here: lido-tokenomics/checkpoints.js at from-checkpoints · Shard-Labs/lido-tokenomics · GitHub In the end we got a number which corresponds to the matic’s API number.

Minimal data processing is done here: lido-tokenomics/process.py at from-checkpoints · Shard-Labs/lido-tokenomics · GitHub

Demo is currently been developed and soon will be deployed on testnet, repositories are here:

5 Likes

Hi,

As a user of Polygon, I like seeing a proposal to create stMATIC with Lido. On a back of the napkin calculation the fee and payment structure proposed looks good, yet it would be good for Lido to have a more complete analysis on the economics of the deal. One similar to the Delphi proposal for Aave would be great. If you need any help putting together a model, I can help out, I am not that familiar with the staking economics but I can get up to speed pretty quickly.

3 Likes

Absolutely agree with this proposal. Let’s get it done.

1 Like

Definitely makes sense. Will try to get someone from the Polygon team to also join us on this topic.

2 Likes

Thanks @Edi_ShardLabs for kicking off this proposal, and for Shard Labs’ excitement and support.

Zooming out, I like the general motivation behind the proposal and that it could be mutually beneficial to both Lido and Polygon if structured correctly.

A few specific questions/comments:

  1. Understanding the economics. I strongly agree with @josebaredes’s point – from Lido’s perspective, the critical point is to understand the rough “payback period.” It would be helpful to share a table e.g. showing the anticipated fee stream currently, and it’s sensitivity to 1) the amount actively staked 2) changes in yield as a result 3) other fees, like the proposed revenue share.

  2. Another DAO? Can you clarify: “In the initial version, governance decisions will be carried out by the Lido DAO. If the decisions become more frequent or complex, there is a possibility to spin a new DAO.”

  3. Long-term alignment. If the goal of LDO-denominated compensation is “[alignment] with the long-term success of the Lido DAO”, would you be open to adjusting the terms to a 1y cliff, followed by a linear 1y vest? This is identical to the terms other Lido contributors such as Paradigm have received.

  4. Revenue share. What is the motivation for the revenue share fee in addition to LDO compensation, and how did you settle on 20%? Without context on what this represents (in rough notional terms), it’s hard to reason about – this is where illustrating (1) could help as well.

2 Likes

Hi and tnx for the questions.

  1. Definitely agree this is a crucial part and we are currently working on it.
  2. Another DAO would only be created in a case where there will be a lot of governance proposals for the current one. Idea there is only for it to be spun off if there are too many governance decisions for the current/main one).
  3. We are definitely open to doing it this way. I think that most important now is under 1. to have that clear and then all the other stuff can be discussed and changed accordingly.
  4. This is actually an even better representation of the success of this implementation as revenue share will directly be impacted by the success of the Lido on Polygon, where LDO token price depends on multiple other factors outside Shard Labs’s team reach. That’s why a combination of both is proposed, so Shard can participate in the overall governance of the LIDO ecosystem without a need to sell LDO tokens to pay for the team and other expenses. 20% was taken from the Chrorus One proposal for Lido on Solana.

Definitely feel free to propose what in your terms would be the most balanced proposal to have both Lido and Shard sides aligned for the longevity of the project. And I will update comment with economics.

And just a note, anyone coming to ETHCC let me know. Maybe we can even organize a live session with discussion around this, my handle is here: https://twitter.com/edisinovcic

@arjunblj @josebaredes proposal has been updated with the tokenomics, new DAO has been removed (as there is no need for it) and lock and vesting periods have been updated.

Please take a look and give us feedback on the proposal itself.

2 Likes

Hi,
Wonderful proposal would love to see this in play. Given that MATIC staking is done on Ethereum and majority of the users actively interact on the Polygon POS side chain, it would be really awesome if you could support staking on the Polygon chain itself. So roughly

  • User interacts with the Lido contract on Polygon chain locking up MATIC
  • Contract issues stMatic to the user on Polygon, which can be used as you have detailed
  • Contract bridges the tokens to Ethereum at some batched interval
  • On Ethereum - stake the Matic tokens as normal with the validators.
  • charge fees additionally for the bridging, but it could be lower given the batching of funds.
  • withdrawal on Polygon would have a delay since it would require and unstake and bridge back
  • instant withdrawal could be facilitated via a stMatic-Matic liquidity pool

I think this would give more flexibility to users who are natively on the Polygon chain and shy away from the main chain for high txn costs. This will open up additional yield option natively on the Polygon chain. Additionally quick withdrawal LP’s also give additional revenue options.

1 Like

Apologies for being late to the party. I was wondering if you could provide an argument for why Lido shouldn’t model the incentive structure to match MixBytes incentive structure? As the grunge-rock musician said to MixBytes’s first proposal, MixBytes’ “[…]gets paid a lot of money for an outcome which I would describe as being close to failure – 2% market share for Lido would be a bad outcome IMO.”

After critiques MixBytes adjusted the vesting schedule so that 3/4 of the vesting rewards become unlocked once Lido captures 20% or more of Polkadot ecosystem. image

And Mixbytes is capturing 20% of Lido’s Net fee, not 20% of total fees. image

Im not against providing different vesting packages to different teams/products as long as there is good reason to do so.

1 Like

This is planned for the v2.

For now, we want to make the first production version live with later doing upgrades like this. This definitely aligns with our long-term plan. Tnx for the great feedback and keep it coming!

2 Likes

Yeah, I generally agree with this.

After a separate conversation with @frontalpha, we’ve decided to vote No on the snapshot in the hopes we can put a more generic process in place (see here) for these integrations in order to have better comparisons amongst them.

Edit: this is something we’re working on right now and expect to have at last a draft for in the next week.

3 Likes

That is the case for Shard Labs proposal as well though.

As the lead development partner of Lido on Polygon, we suggest that Shard Labs receives 20% of the fee going to the Lido treasury, while the treasury itself retains the rest.

I ask yall to provide some clarity to Shard Labs here.

We had a proposal open for comments for the week, but only provided some discussion after it was started. Now we’re not in undesirable position, where we can’t easily amend what’s being voted on.

Their options are to drop this vote and resubmit a new one, or continue as is, and what to do here depends on whether the opposition is strong compared to support, so highlight your position here please.

The worst outcome would be continue the vote as is and not have a meaningful discussion nor quorum at the end - let’s avoid this. Dragging this stuff on too much is also undesirable. The vote is half-blocking Shard from starting to actually work on the stuff or dropping it, and time to market is the key to victory in liquid staking.

1 Like

Yeah, that’s fair, and, to be clear, I’m weakly in favor of not having this proposal pass before we have a better process. I understand the team did a bunch of work prior to the idea of having a harmonized process coming out.

Personally, my main question is whether the fact that more incentives get paid out earlier here (vs. the Mixbytes proposal) is a significant factor to Lido. If everyone is fine with it, then it’s not a hill I will die on, but otherwise it’d be nice to see the rationale for the difference or otherwise see them harmonized.

3 Likes

Ok, let’s talk ROI here.

For the first milestone of 2.5% captured MATIC Lido will issue LDO tokens vested for 2 years in amount of 100000 LDO tokens. This means that due to above numbers in tokenomics Lido DAO gets this investment back in 17 days and considering that we have a window of 30 days where this has to be maintained then there is NO risk for Lido DAO. For all the rest there is even better tokenomics for Lido. Even if the token value doubles there is a marginal risk for Lido DAO.

Also we already have POC almost available for the Polygon on Lido (release probably next week) and it would make no sense to kill this proposal for the reason that “there has to be standardization”. There is a bunch of competition just waiting for us in Lido ecosystem to slow down so they can take the primacy. Time to market is crucial and we can’t waste our time here.

Also on the comparison of Polygon vs Polkadot/Kusama, first has thriving defi ecosystem that we can incorporate with and on the other we have a promising ecosystem (which in my opinion has great potential) but potential isn’t equal to the what already exists on Polygon.

Let me know your thoughts on this @timbeiko @frontalpha

2 Likes

Yeah, I think it is unwise to hold up this proposal in an effort to standardize a vesting package. Bias for action is more important right now and I think coming in here guns blazing was silly in hindsight.

If Tim and I want to create a standardized vesting concept we shouldn’t take it out on something that was already planned.

2 Likes

Ok, so do we have green light from you guys also to proceed?

I would prefer proposal to pass with all of us agreeing this is beneficial for all sides and not have a friction due to voting being split.

2 Likes

Im happy with this. I swapped my vote.

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Tnx for the support.

1 Like

Yeah, +1 to this. Also swapped my vote! Appreciate your engagement in this :+1:

2 Likes