Curve stETH-WETH LP incentive plan started on Jan. 2021. It’s the most important stETH liquidity incentive action and took a great role in the success of Lido protocol. In the past year and a half, 63.5M $LDO has been distributed to the Curve LP incentive plan, which is about 80% of total lp incentive cost on Ethereum.
No incentive plan can be long-live. Everything has a beginning, it has an end. The question is: When is the time to do so? Maybe someone will say: When the merge happens and withdraw enabled. My answer is: When a protocol is wildly adopted and trusted by users.
Yes, we have just experienced a hard time in the past couple of months. With the crackdown of the whole crypto market and a bunch of institutions collapsed because of over leveraged and lack of risk management, stETH faced huge selling pressure. The maximum stETH exchange to ETH discount went to 6.4% during this period of time. The TVL of Curve stETH-WETH pool also dropped from $5.5bn in early April to the current $570M.
In the past half a year, Curve lp APR has run in quite a stable trend. The contribution of $LDO incentive reward is about 25~30%. The share is in a significant decline compared to the early stage.
As the stETH selling pressure has been significantly released and the TVL goes stable, I propose to pause Curve LP incentive rewards for two months as a stress-testing. If the TVL(measured by the amount of WETH plus stETH) keeps stable and stETH to ETH discount in a decreasing trend, that will show the confidence of LP providers and no further demand for continue $LDO rewards. If the result goes in the opposite direction, we can restart the incentive plan based on the testing data.
Without LDO incentives holding ETH liquidity in stETH/ETH pools is strictly worse than holding stETH, and that ETH liquidity is highly desired to be present – it’s required for the price feeds to have stable enough data, as well as for possible liquidations on money markets stETH is listed on.
That being said, reWARDS committee is looking for decreasing incentive amounts spent on that pool – though are really mindful of sudden / significant moves.
This comparison is based on LPs transferring all their ETH to stETH. If so, that will help rebalance the pool and reduce the stETH to ETH discount. Isn’t that a healthier pool than it is now?
I think LPs choose to provide liquidity other than transferring all ETH to stETH is not only for $LDO reward, but also because they prefer keep amount of ETH to manage the risk exposure.
as well as for possible liquidations on money markets stETH is listed on
Aave is the most important money market for stETH, which holds about 30% of the total supply as collateral. Looking over the liquidation data in the past two months, the highest daily liquidation is about 2,200 stETH. The Curve pool holds about 117k ETH and 504k stETH, which is more than enough to handle these liquidation demands.
The above chart listed the top 100 most rewarded addresses in the Curve incentive plan overtime. The blue column represents the total $LDO rewards they got from the Gauge Vault, the gray column represents the $LDO balance in their wallet, and the red line represents the amount of $LDO they have sold.
It’s quite clear that the most rewarded are quite concentrated distributed to a small group of LPs, who have little interest in holding $LDO in their bags and participate in our governance, which is what $LDO should be utilized by its definition. We know who there are:
They definitely sold their rewards ASAP because of the code in their gene. Who pays for this? Mostly the mediocre $LDO holders. Sounds familiar? Just like poor people paying more tax than the rich.
Incentive need a strategy adjustment in the foreseeing future. We have already past the boost phase and need to evolve. In the next phase, we need to focus on encouraging more mediocre stakers and LPs involved.
Lido had commited to incentivize liquidity until withdrawals are available. That’s why stETH got listed with good parameters to many defi protocols. That utility is that’s what drives stETH adoption. Skimping a dime on that will inevitably lead to losing the position of the most usable liquid staking token we hold today.
I can see us seeking other way to incentivize the liquidity for stETH that are more favortable to price discovery (otoh current liquidity working much better than I feared for that so far) - e.g. wide pools on Univ3, Curve v2, etc. What I don’t see is a) making any sudden moves in current market conditions - everyone’s got a hair trigger right now, we can’t be sudden b) making moves that will make stETH lose the position of the most liquid staking token out there.
I appreciate your reply. To be more clear, I’m not against liquidity incentives that can make stETH widely adopted. The key points are:
Incentive plans should be flexible and adjusted based on the data and outstanding conditions. For example, Celsius is one of the largest LPs on Curve, which has used overleverage fund and triggered massive market coias in the past couple of weeks, which also brings huge pressure on the whole community. The pause on incentive is a test to figure out whether such overleverage risks still exist.
Pause the incentive plan on Curve does not represent there are no other options. We have quite an important and well structured stETH pool on Balancer. After pausing the Curve incentive, we could put more resources on Balancer. Based on our own research, Balancer has better fund efficiency and mediocre friendly UX/UI, IMO.
Our TVL has been somehow wild pumping for a year. It is time to take a rest and focus on quality of growth, other than just speed.
The leverage risk on stETH is almost fully transparent (it’s mostly leveraged in DeFi), we don’t need to do experiments to see them. If there were massive invisible risks (I maintain there are not - almost everything is fully visible now), draining the liquidity market relies on to see what happens is deeply irresponsible.
