Proposal: Initiative to airdrop LDO to stETH holders

Proposal: Initiative to airdrop LDO to stETH holders as a reward for the initially low Ethereum staking rate.

(In collaboration with Krasmussen)

This functions as a valuable reward feature for Lido allowing users to earn full staking rewards from the first day.

This proposal is an extension of the previous proposal: “Counteract currently low reward rate with LDO emissions”

Overview

The LDO reward should be distributed to stETH holders (who are not currently receiving yields from e.g. Curve) through a native Lido staking/deposit mechanism.

The reward rate should be the difference between the Lido stETH rate and that of the Ethereum rate (at time of writing, approximately 10%). As an example, when the stETH reward rate is 2% and the Ethereum reward rate is 10%, the LDO reward rate should be 8%.

This initiative should run for an initial period of 3 months after which it can be re-evaluated and re-configured.

Problem

The reward rate for users who hold stETH is currently low relative to staking Ethereum directly. This is due to the long waiting queue that Lido validators must go through before they can start accruing rewards.

Proposal

To counteract the low reward rate, stETH holders can be rewarded with LDO tokens to cover the difference between the stETH reward rate and the Ethereum reward rate.

The LDO reward should be distributed to stETH holders who are not currently receiving yields from e.g. Curve. This can be managed through a native Lido staking/deposit mechanism where users deposit their stETH into a Lido reward contract. Rewards are to be paid out on a biweekly basis.

This proposal only intends to counteract the low reward rate that currently exists until the ETH APY becomes relatively stable (once many Lido validators finish queue). Once the reward rate is relatively stable, this proposal should no longer take effect.

My suggestion is to run this initiative for 3 months, after which it can be re-evaluated, in addition to running a retrospective airdrop for all stETH holders who (a) did not receive initial airdrop and (b) did not participate in the Curve liquidity initiative.

Discussion

Points of interest:

  • How often should rewards be distributed?
  • Should rewards only be distributed to stETH holders not actively receiving yields from other DeFI protocols e.g. Curve?
  • How long should this initiative run for?
7 Likes

I dont understand why Curve Liquidity Providers should expluded by this airdrop, since they also do not receive the staking rewards from the Lido validators. The LDO rewards paid out to them are not to compensate for this, but for only having half the exposure to stETH and possible decoupling of the two assets.

I would support this proposal, if it would include Curve LP as well.
Best regards

7 Likes

To counteract the low reward rate, stETH holders can be rewarded with LDO tokens to cover the difference between the stETH reward rate and the Ethereum reward rate.

Symbolically, for the risks being taken by us supporting the project, I suggest offering a reward that covers a bit more than just that difference.

1 Like

I personally don’t like this proposal. First of all, there are no incentives for LDO liquidity providers, therefore the community can’t really understand how the market value LDO tokens as the entire liquidity provided in Pools belongs to the few whales who can pull it out at any given moment. Once we have LDO liquidity incentives we will better understand fair and objective LDO market price.

Secondly, I don’t understand why we should reimburse the rate difference. For example, right now there are some leveraged farming strategies that give up to 100% APY on ETH. Why don’t we reimburse the difference with those strategies then?

1 Like

FWIW, I am supportive of the general idea that the lions share of LDO farming yield should to go to stETH users. Agreeing with @Kmpec, I would favour an indiscriminate distribution model, firstly because giving LDO to one group that is not actively using stETH in the DeFi ecosystem runs, I think, counter to the ethos of Lido being a liquid staking solution; and secondly, increasing stETH liquidity, i.e. making sure that most incentives go to stETH-ETH Curve LPs (and future pools), should be prioritized until withdrawing becomes available.

Re: a possible 3 months period, I wonder if it makes sense to specify that the initiative could end earlier if the difference between Lido staking rewards and actual eth2 staking yield is less than a certain threshold percentage, say 5%.

If voted on, I think the proposal should not apply retroactively and, to keep it manageable, the below might perhaps be better suited in a separate proposal.

[…] in addition to running a retrospective airdrop for all stETH holders who (a) did not receive initial airdrop and (b) did not participate in the Curve liquidity initiative.

1 Like

Curve LPs are excluded from this for the sake of simplicity and to target a different segment of users.

Curve LPs are already being compensated with LDO at a current APY of 55% which is significantly more than this proposal would contribute on its own.

1 Like

I think it is a great idea to reward LDO liquidity providers. It can be a good proposal.

About the leveraged farming, I don’t think that this proposal is about it. You can also build leverage farming on top of existing curve pool.

In general I think we need to make this compensation as soon as possible!

Need to consider larger picture: currently ~80% of stETH are in the curve pool and it handles 20k withdrawals in one go pretty well - what would be the purpose of having more incentives for liquidity right now? It won’t tangibly change things in pools and if it does it won’t serve a real purpose until we have liquidations and the like.

Topping up people who just stake serves an important role of making people who just want to stake happy. Lido wants them as users too.

2 Likes

I concur the Curve pool is well-incentivized but I was equally concerned about potential implications of locking stETH for upcoming DeFi protocol integrations.

I think if there is a mechanism that would top-up stETH holders without locking them in / having to stake stETH that would be helpful. I am wondering that if top-ups continue and say Aave/Maker/another DeFi platform integrates stETH it might slow down adoption as users would need to decide between getting the full staking reward versus trying out a new DeFi protocol.

I might be overthinking this and it would certainly not be an issue if Lido staking rewards normalize around eth2 yield soon.

1 Like

I think it is an option to airdrop LDO tokens to users that use stETH as collateral in Aave/Maker/another DeFi platform. So we can start with plain airdrop and make more complex with adaptation of DeFi.