Proposal: DVT & DVV Incentive Allocation Changes

Proposals
1

Summary

This proposal introduces a variable incentive‑sharing mechanism for Distributed Validator Technology (DVT) incentives accrued to the Lido protocol that better reflects the real cost of operating DVT‑based validators under current market conditions for Node Operators in the Curated and Community Staking Modules.

Instead of a fixed incentive split, Node Operator (NO) and staker allocations would dynamically adjust based on the SSV Network Fee and total incentives accrued, while ensuring sustainable NO economics and a reasonable allocation to stakers.

SSV’s Network Fee & Incentivized Mainnet will be viewed as a proxy for the direct cost of running DVT based validators, and as such, the proposed share split of the incentives would be equally distributed for Node Operators utilizing Obol’s DVT technology. There would be no change to the Simple DVT Module allocations as DVT provider fees are covered via Node Operator validation rewards.

Background

In light of recent market conditions impacting DVT validator incentives as well as related community discussion, this post outlines a proposed change to the Mellow Distributed Validator Vault incentive structure.

The SSV DAO has passed a proposal [DIP-49] that sets a maximum ETH/SSV price ratio of 700 in the formula for determining the network fee, with the goal of aligning the network fee relative to the potential incentives. This potential change, along with the recent update to the Incentivized Mainnet Program (IMP) in [DIP-39] which introduces a 15% annual cap on the total incentives that may be allocated to the IMP, as well as the current total costs of operating DVs, requires an update to the initial Mellow DVV incentives structure.

Given these developments, a cost‑reflective, variable mechanism is proposed for both Curated and Community Staking Modules, with identical treatment across SSV‑ and Obol‑based Node Operators.

Proposed Incentive Mechanism

  • Under the DIP-49 SSV framework, DVT incentives should cover the direct cost of operating DVT validators.
  • No more than 50% of total incentives should flow to Node Operators, as 50% is the maximum share of fee to incentives undes the DIP-49 framework.
  • At least 50% of total incentives should flow to Mellow DVV stakers.
  • The same logic and percentages apply equally to SSV and Obol Node Operators.

Allocation Logic

  1. SSV Network Fee Coverage (as a proxy for the cost of running DVs)
  • Up to 50% of total incentives may be allocated to Node Operators to cover the SSV Network Fee.
  1. Surplus Incentives
  • Any incentives remaining after the Network Fee is covered are distributed as follows:
    • 90% to Mellow DVV stakers
    • 10% to Node Operators
  1. Bounding the Node Operator Share
  • Minimum NO share: 15% of total incentives
  • Maximum NO share: 50% of total incentives

This ensures that Node Operators are protected when incentives are low and operating costs are high, while stakers benefit disproportionately as incentives increase.

Under this structure, the incentive split is no longer fixed for the Curated and Community Staking Modules. Instead:

  • When DVT costs are high relative to incentives, the Node Operator share increases (up to 50%) to preserve sustainability.
  • When incentives increase or costs decrease, the Node Operator share declines, directing more value to stakers.

The result is a self‑adjusting mechanism that maintains long‑term viability across both DVT providers. The Node Operator incentive shares will be dynamically calculated at the same time that the SSV IM incentives distribution is calculated on a monthly basis, and the incentives rate will apply for participants of both DVT providers.

Illustrative scenarios

The table below shows indicative splits under a range of IMP and network fee rates scenarios:

Scenario Incentive Rate Network Fee Node Operator share Stakers share
1 1.50% 0.75% 50.00% 50.00%
2 1.80% 0.90% 50.00% 50.00%
3 2.00% 1.00% 50.00% 50.00%
4 3.00% 1.00% 40.00% 60.00%
5 5.00% 1.00% 28.00% 72.00%
6 6.00% 1.00% 25.00% 75.00%
7 9.00% 1.00% 20.00% 80.00%

Assuming SSV incentives return to approximately 6%, with an SSV token price around $10, this model results in:

  • A 25% Node Operator incentive share, representing a modest improvement over current Curated and Community Staking Module splits.

At the extremes:

  • Low incentive environments (≤2%): Node Operators may receive up to 50%, with no surplus beyond cost coverage.
  • High incentive environments (≈9%): Node Operator share approaches the 15% minimum, with the majority of value accruing to stakers.

Next Steps

It is suggested that the community and Node Operator utilizing the Lido protocol review this proposal and provide feedback over the next week. If it seems there is alignment, the proposal is suggested to be considered for inclusion within the next Snapshot vote window in mid January.

16 Likes
Proposal: Rebalance the DVT Rewards Split Between Node Operators and the Lido Vault
2

This appears overly complicated to me. Surely a retroactive monthly calculation can be done to reward Lido CSM operators that use private SSV clusters sufficient SSV to cover their costs of operation. Then send everything else to the DVV. That is the fairest approach.

3

This feels well balanced! DIP-49 caps costs, DIP-39 caps incentives and the variable split proposed here adapts between the two to protect NOs while pushing surplus value to DVV stakers.

1 Like
4

Strong support for this proposal.

Moving away from a fixed split to a dynamic function is the right call. The crypto market (and specifically SSV/ETH ratios) is too volatile for static constants to work long-term.

As a Node Operator, the “downside protection” here is the most critical piece. Capping the operator share at 50% specifically to cover network fees ensures that we aren’t underwater during high-fee/low-incentive periods, which was a real risk with the previous model.

The 15% floor is also a fair tradeoff for that safety net. It keeps the incentives aligned without over-subsidizing operators when conditions are easy.

4 Likes
5

We strongly support this proposal.
Using the SSV Network Fee as a proxy for costs removes the risk of staking at a loss during market volatility or unfavorable ETH/SSV price ratios.

1 Like
6

Could we simulate what it would mean for a CSM node operator as of today and what it was in early 2024?

7

In practice the proposal does what you suggest, while also allowing some room for upside to Node Operators when the SSV Incentive Rate improves. It is indeed more complicated than before given the DIP-49 dynamics, but a good rule of thumb is that the SSV Network fee will now never be more than 50% of the Incentive Rate, up to a 1% cap - i.e., Node Operators will have the SSV Network fee covered as part of these incentives in all Incentive Rate environments, with the potential for upside if the Network Fee is less than 50% of the Incentives (10% of the surplus incentives).

1 Like
8

OK. Can you work through a specific example under a couple of scenarios where, say, an operator is running 10 Lido CSM keys via a private SSV cluster vs. a simple solo setup?

1 Like
9

The proposal for a dynamic incentive mechanism for DVT/DVV seems solid and necessary. It more realistically reflects Node Operators’ costs and protects system sustainability.

As a Lido staker, I appreciate that the model ensures at least 50% of incentives for stakers while adjusting Node Operator shares according to costs. This maintains a balance between validator security and participant rewards, creating a self-adjusting system that appears fairer and more sustainable in the long term.

I believe this is a positive step toward aligning incentives between operators and stakers and will help foster stability in the DVT ecosystem on Lido.