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.

19 Likes
Proposal: Rebalance the DVT Rewards Split Between Node Operators and the Lido Vault
Nansen Delegate Thread
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.

Anthony Leuts - Delegate Thread
10

Hey @celticwarrior & @Yannick_Richaud!

I’ve put together a couple examples just for reference how this change would affect CSM node operators.

TL;DR
This proposal makes running DVT clusters within CSM not net-negative compared to non-DVT setup under current incentives conditions(SSV) and provides a better terms for CSM node operators for targeted levels of DVT incentives:

SSV incentives at 2.13% (current) SSV incentives at 6% (targeted)
Current Proposed Current Proposed
Incentives share 20% 50% 20% 25%
ICS: APR 6.20% 6.64% 6.73% 6.93%
ICS: Capital multiplier 2.22 2.37 2.40 2.48
Default: APR 4.38% 4.79% 4.87% 5.06%
Default: Capital multiplier 156% 171% 1.74 1.81

Assumptions:

  • 2.8% Nework APR
  • 10 validators for CSM Node operator
  • 2.13% | 6% of Network APR SSV incentives rate (current token price | targeted number)
  • 1% of rewards DVT fee

Default (non-DVT) case:
Identified Community Staker

  1. 13.2 stETH bonded amount (1.5 + 1.3x9)
  2. 0.87024 stETH yearly rewards (13.2 x 0.028 x 0.9 + 32x10x0.028x0.06): bond rebase + Node Operator rewards
  3. 6.59% Effective APR: yearly rewards / bonded amount
  4. 2.35 Capital multiplier: effective APR / network APR

Default operator

  1. 14.1 stETH bonded amount (2.4 + 1.3x9)
  2. 0.66892 stETH yearly rewards (14.1 x 0.028 x 0.9 + 32x10x0.028x0.035): bond rebase + Node Operator rewards
  3. 4.74% Effective APR: yearly rewards / bonded amount
  4. 1.69 Capital multiplier: effective APR / network APR

SSV DVT current distribution share case:
All the same as default case, but

Which (on top of previous calculations) brings:

  1. 0.0381696 ETH yearly rewards (10x32x0.028x0.0213x0.2)
  2. 0.0896 ETH yearly DVT fee (10x32x0.028x0.01)

Leading to decrease in total rewards:

  • 5.91% | 4.11% of Effective APR for ICS | Default node operators
  • 2.11 | 1.47 Capital multiplier for ICS | Default node operators

SSV DVT proposed distribution share case:
All the same as default case, but

  • 2.13% of Network APR SSV incentives rate
  • 50% CSM incentives share

Which (on top of previous calculations) brings:

  1. 0.095424 ETH yearly rewards (10x32x0.028x0.0213x0.5)
  2. 0.0896 ETH yearly DVT fee (10x32x0.028x0.01)

Leading to slight increase in total rewards (compared to non-DVT scenario):

  • 6.64% | 4.79% of Effective APR for ICS | Default node operators
  • 2.37 | 1.71 Capital multiplier for ICS | Default node operators

Targeted SSV incentives case:
Modifying assumption on SSV incentives rate to targeted 6% of Network APR, increases effective APR for current and proposed options over non-DVT option:

Current Proposed
Incentives share 20% 25%
ICS: APR 6.73% 6.93%
ICS: Capital multiplier 2.40 2.48
Default: APR 4.87% 5.06%
Default: Capital multiplier 1.74 1.81
6 Likes
11

so it will affect only who manage curated or csm using SDVT only right, remains nothing change?

12

These changes are only for the Curated Module and Community Staking Module. There are no proposed changes for Simple DVT as DVT provider fees are explicitly covered via validator rewards.

3 Likes
13

got it, thanks for clarification @KimonSh

14

How does this proposal get put up for a vote then?

16

You can read about the regular governance process followed here: Lido DAO Governance

17

Thank you to the team for doing the work to come up with a formula that helps protect the CSM users.

I think this is a big step in the right direction to help reduce the chance that running a CSM validator on DVT becomes a net negative to the CSM participant.

Seeing how the Mellow vault will receive more incentive rewards when more CSM participants choose to use DVT, I want to highlight that we should try to make the DVT option as attractive as feasible, and so raise the number of participants who use it.

To that end, I would encourage the proposal to be a bit more generous in the share allocated to the CSM node operators.

Note that most of the Node Operator Share in the chart is actually just going to cover the DVT network costs, and is not truly going to the node operator’s profit.

  • At 50% share, all that fee is being spent on DVT network costs.
  • Of the 40% share, the operator keeps just 6.67% of the incentive, while 33.33% goes to network fees
  • Of the 20% share – the best case – the operator keeps 8.89% of the incentive, with 11.11% going to network fees.

Furthermore, remember that the CSM node operator has to pay the entire month’s network fees up front, and is paid back in arrears 30-60 days later when the incentives are distributed. So the operator is actually operating at a loss for virtually the entire time they run the node – with upfront fees equal to many months of their personal DVT incentive share – and only see a profit after many months or after they close the node and get reimbursed.

And to add to the costs, the node operator has to either:

  1. Pay other node operators to run some or all of the DVT operators, which incurs additional fees
  2. Run 4 separate DVT operators of their own. While this does not incur any DVT fees, it does represent a substantial investment in staking servers.
  3. Organize an operator collective with 3 other DVT operators, who agree to run each others DVT validators for free. No additional costs beyond running 1 DVT operator, but does have organizational overhead and effort.

The goal should be to make it a no-brainer to run on DVT, so that the CSM program generates the maximum number of DVT rewards, and in turn the Mellow vault can maximize its rewards.

Obviously if the node operator share is TOO big, then there will be diminishing rewards for the vault. But I think the current proposal does not make it REWARDING ENOUGH for the node operator to ensure that they make the extra effort to set up their node on DVT.

I would suggest thinking of it as a 3-way split:

  • Share A covers the DVT network fee
  • Share B is reward for the node operator
  • Share C goes to the Mellow vault

Share A is determined by the network costs.

Whatever is left over – if anything – should be split 20% / 80% between Share B and Share C respectively.

That way the node operator gets a large enough reward for their work, and a strong incentive to elect to use the DVT program.

The alternative is that they take the path of least resistance and run their CSM validator as a solo staker, in which case nobody gets any incentive rewards at all, and that would be the truly tragic scenario.

2 Likes
18

Is the goal of this incentive model to maximize short-term DVT adoption, or to converge toward a long-term economically neutral equilibrium for node operators?

19

Overall, it fixes a key pain point making DVT uneconomical in CSM without killing incentives for decentralization. Happy to see the balanced approach — thumbs up from me!

1 Like
20

Thank you for the feedback and detailed response - very much appreciate your input on the proposal and original post on the topic.

From the feedback I’ve received on this post and in discussions with various Node Operators, it feels like we’ve struck a good balance in terms of Node Operator share for at least the near-term. Most Node Operators I’ve spoken with have suggested that their number one concern is that the direct DVT provider cost is their biggest barrier to running DVT via Lido, and this proposal solves that barrier while also providing some incentive when provider rewards are closer to their “normal” rate.

Personally, I think that Node Operators should be running DVT to improve their infrastructure resilience (and more preferably, decentralization in multi-operator clusters). The priority should not be to maximize Node Operator rewards, it should be to provide a sustainable framework for Node Operators to utilize DVT that also benefits the Lido protocol’s resilience. At the end of the day, stakers are providing 90%+ of the capital required for CSM validators to operate, and therefore should also receive the lions share of incentives.

Given the current market reality, a more variable framework that at least covers Node Operators DVT provider costs makes sense despite this taking a larger portion of the incentives. However I think that further increases to Node Operator profitability should come from an improvement in the DVT incentives (in terms of price) vs. pushing more of them to Node Operators at this point.

As such, I would suggest we move the proposal forward as is, and we’ll have time to assess over the coming months in terms of the impact on the number of DVs operating within the protocol.

2 Likes
21

More so the latter. Incentivizing Node Operators to run a solo DVT cluster provides very little benefit to the protocol’s resilience as compared to multi-operator DVT. We should have something exciting to share in that regard in the coming weeks.

2 Likes