Proposal: Introducing $LDO Staking

It seems a big inspiration for this proposal is stkAAVE but the other half of their system (stkABPT) never got mentioned. I think there’s a lot of benefits to taking a dual approach here and adopting both parts. For those who may not know what stkABPT is - as part of Aavenomics an 80/20 AAVE/WETH pool was created on Balancer v1 as an additional option for stakers beyond just staking AAVE.

Since the inception of that pool at the end of January 2021 it has facilitated $7.3B of swap volume and earned LP’s $7.3M. For much of that time it also received BAL incentives in addition to AAVE given to stakers.

The benefits of including 80/20 LDO/WETH as a second staking option are numerous and significant:

  • In addition to the earnings provided to stakers by Lido you gain two additional revenue streams: swap fees and BAL emissions. With a relatively high swap fee (0.5-1%) this would likely be mid-high 8 figures in additional annual revenue to stakers. Protocol/admin fees earned by Balancer on this pool would be used as voting incentives, thus securing significant BAL emissions “for free”.

  • It’s conceivable that this staking program leads to lower LDO market liquidity as a new massive sink is created. By including 80/20 as an option this program will instead deepen LDO on-chain liquidity significantly all for zero additional cost to Lido. The benefits of deeper liquidity speak for themselves, perhaps chief among them: a big stack of locked liquidity would dampen selling pressure if a slashing event were to be on the horizon.

  • Balancer has an 80/20 staking incentives program for projects who adopt this standard. It’s a near certainty Lido would hit all TVL & revenue milestones to get the full 250k BAL. This could be used as a strategic asset to direct additional emissions to the 80/20 or to staking product liquidity on Balancer.

We’re big believers in the future of LST’s to displace WETH as the dominant on-chain liquidity pairing. Balancer’s partnership with Lido is a critical part of seeing that future become a reality as we continue to proliferate the use of wstETH everywhere Balancer operates. It would be very exciting to see Lido follow in Aave and others’ footsteps with adopting 80/20 BPT staking.

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Below is my opinion as strategic advisor to Lido, and it does not represent those of the Lido team or other investors. I disagree with the proposal because of economics, priorities, and differentiation.

Economics

First, we’re projecting Lido DAO to make $30m in gross margin (at current eth price), spend $30m in cash, and spend $15m in token incentives, for around $45m in total expenses over the next twelve months. This comes down to a net P/L of -$15m.

Our treasury is $67.5m, so that’s around two years of runway. You suggest spending up to $15m from our treasury, not on growth or improving the product, but to pump the LDO token. This would bring our annual P/L to -$30m and our cash burn to $45m, cutting our runway to ~1 year.

Priorities

If we look at the current roadmap, two things stand out above all:

  1. shipping the staking router and bootstrapping a vibrant ecosystem around it
  2. shipping dual governance to derisk the protocol and align the interests of stETH holders and LDO holders

Both are necessary to further decentralize Lido Protocol, the former by expanding the NO set to include smaller operators and the latter by constraining failure modes that come from governance.

Removing the remaining trust assumptions in Lido is incredibly important to realize our mission of making a fully trustless staking middleware for Ethereum, allowing us to scale to a bigger market share safely. We must focus our scarce engineering resources on this single goal and not get distracted by other things before it is done.

Differentiation

Finally, you ask to bond existing Lido node operators (NO) with LDO token. Lido’s key differentiator has been having the lowest cost of attracting a quality NO set. Adding a bond would undermine Lido’s differentiation and raise the cost of attracting and retaining quality NOs, undermining our competitive position.

Bonding validators can make sense but only in the right context. Someone should create a staking module that allows untrusted NOs to join the operator set with a mix of DVT and posting bonds. These bonds can use ETH or LDO, that is for the market to determine.

Summary

In summary, the proposal is so poor and poorly timed that my first instinct would be that it can only come from a) a competitor to Lido or b) someone with an extremely short time horizon who is looking to pump the LDO token for a quick buck. The recent price action (pump → dump) validates that assumption.

The strength of Lido as a DAO and community has always been that we have a longer time horizon than anyone else and that we don’t sacrifice the long term to earn cookie points in the short term. We shouldn’t give up on that now.

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I fully agree with @Hasu regarding the timing of this proposal. It’s not a coincidence that a fund with a large Twitter following tweeted about it minutes after it was posted by @lidomaxi, an account created yesterday. This is not the time to distribute profits for LDO holders when the protocol itself is cash flow negative. As @monet-supply and @steakhouse, it’s important to grow the pie first and be cash flow positive.

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I was reluctant to share this, but I’m getting messages asking which account tweeted right after. I think it’s important for the community to be aware in case anyone is not convinced this proposal is ill-intentioned or, at the very least, suspicious. This was posted at 2:20 PM yesterday by @lidomaxi, an account also created yesterday. Four minutes later, Hal Press tweets about it - I don’t think anyone will believe for a second this is purely coincidental.

And if you think that, even if it was Press who created the proposal, he could be well-intentioned, he has explicitly said in the past: “IMO, LSD tokens should be used as trading tools to acquire more ETH. Buy them when there are obvious narratives and sell them once the narrative has saturated. We did this successfully twice, both with Merge and Shanghai. Issue now is that I don’t see what the next event is.” It seems he created the next event himself.

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I share the views of @monet-supply. Too early in the cycle to be talking profit sharing.

Keep the ideas coming but timing is essence. Do this in a bull market at least, common sense.

And pls no buybacks.

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Hello everyone. While it might seem to early to introduce profit sharing, I’d actually tend to believe the opposite. Lido just enabled withdrawals, and if it wishes to remain a market leader, it will have to additional moats.

Tokenomics is one of the biggest opportunities to reinforce the feedback loop.
However in the current state of the proposal, it is simply suggested that stakeholders provide insurance and be rewarded for it. I believe this is insufficient, and that if we want to draw the parralel with Aave, it is important to be reminded that Aave is currently revamping their safety module to link stakeholders closer to protocol usage.

Why not offer said revenue to stETH holders instead, but modulate it with a boost granted by staking your LDO in the module? This way of proceed has several advantages:

  1. stETH whales have an incentive in hoarding LDO;
  2. LDO holders are only rewarded if they use the protocol;
  3. Lido can be even more competitive on its organic APR;
  4. It’s creates a new layer of game-theory on top of LDO.

Looking forward to see the discussion evolve and happy to see the DAO open itself to discussions on LDO tokenomics.

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Hey Everyone – thanks for the thoughtful feedback and discussion.

After reviewing all constructive criticism (@monet-supply and @steakhouse) I’d like to propose the following changes to this proposal:

  1. Change the buyback asset from $LDO to vested stETH-ETH Curve LP tokens. The vesting period will remain at 6-months.
    a. This can result in an effective reduction in $LDO liquidity mining incentives (500k $LDO/month as per May 2023) if @steakhouse’s proposal re. implementing a PID controller to direct $LDO incentives to stETH-ETH pool is implemented.

  2. Increase the minimum threshold for insurance fund reserves.
    a. Fix this amt. at ~15k stETH. I believe this should eventually be a dynamic figure based on the total amount of Lido TVL, but that a fixed figure (~3x the current size) is sufficient for now.

  3. Fix DAO revenue share with $LDO stakers at 10% of future Lido DAO revenue
    a. I believe the idea of introducing $LDO staking and revenue sharing is an opportunity for Lido to be the first major market leader across DeFi to accrue value to its governance token. There are too many valueless governance tokens in existence today – this is Lido’s opportunity to prove it has the best alignment among all actors within its ecosystem.

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Specifically addressing the buyback proposal/tokenomics - you want to run the exact maker down only playbook? Buyback and distribute via the native token is not what you think it is, when those flows are offset by stakers needing to realise profits in the same token. Flows will also be telegraphed, and that translates to a smoothing effect by traders. The market has spoken already on this approach.

If lido captures revenue by steth, distribute directly to token holders via steth. That way holders can actually realise profits by means other than selling the ldo coin.

As steth is also a value-accruing/compounding token, there’s potentially novel/creative ways in which to offer claims that incentivise ldo holders to hold onto such rewards.

There’s so many better ways that can maximise protocol and token holder value. A buyback model isn’t one of them.

That said, agree with thoughts shared by @Hasu and @monet-supply said it best: “tl;dr: grow the pie before focusing on how to slice it up”.

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I agree that the community needs to start looking at better ways for value accrual for LDO or LDO has no value and market share will be lost over time. A governance token alone won’t help the ecosystem grow. As long as growth and development are well taken care of, LDO holders should be entitled to revenue share or escrowed rev share. Start small but start.

Would much rather see revenue distributed directly as ETH/stETH instead of the buyback and distribute model. Please change the proposal to include this.

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Hi Everyone,

Our key thoughts can be summarised as shown below:

  • Directly in favour of initiatives supportive of LDO utility

  • Strongly in favour of pursuing growth as the top priority

  • Strongly in favour of creating an ever stickier user base through deep ecosystem integrations

  • Strongly in favour of creating a deep analysis of Lido DAO Treasury, expenses & earnings

We think directionally providing utility to LDO holders is directly correct. However, we do not support revenue sharing models at such an early stage in the protocol’s development. Furthermore, Safety Module like concepts have not yet been tested in response to a major loss of funds event. Llama recently performed an analysis which can be found here, as well as an upgrade of the SM design.

It is highly likely, if the asset in the insurance fund is linked to the governance of the protocol, the asset will likely experience a rapid deterioration in value when the loss of funds event occurs. If LDO was backing Lido Protocol’s products, there is no incentive to purchase knowing there is a forced seller about to enter the market. Furthermore, with LDO listed on lending markets, it is reasonable to assume front running which will accelerate/exaggerate any perception of a future price drop. We do note the comparison to Aave’s Safety Module overlooks recent proposed improvements to increase diversification and efficiency, with the potential to move away from AAVE rewards in favour of GHO and other viable options. The first of a six part series can be found here.

Our preference is to focus on growth, adoption and encouraging deeper ecosystem integrations that lean in creating a very stickier user base. There are numerous teams emerging with competing products to stETH. Now is a good time to double down on growth initiatives and push for deeper integrations. The core focus should be on growth until the market is mature, which is some way off yet. The Staking Router is a leap in this direction and it will require bootstrapping which we expect to be funded from LDO held in the Treasury.

If yield on LDO is the something the market seeks, then there are numerous external integration possibilities which could provide this. However, these products are not core to Lido Protocol and are better suited for other teams to build out. Grants are potential means of encouraging other teams to build such offerings. Products that arbitrage price differentials across dApps and networks can be viewed as a yield source.

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Hello all! Thanks for this deeply informative discussion. This proposal is a good first attempt at adding more utility to the LDO token and aligning the interests of stakeholders. However, I agree with all who hold the sentiment that it’s still a bit too early to consider direct revenue sharing without giving adequate time for ongoing initiatives such as partnerships and integrations to begin impacting the protocol’s revenue and liquidity significantly thus increasing Lido’s competitive advantage, and for the DAO itself to mature by addressing current operational lapses.

Some points of particular interest to me:

  1. Node Operators and Insurance Buffer: The suggestion to increase the insurance buffer before distributing earnings is prudent given the very rapid TVL growth of Lido. It is equally important to consider the role of Node Operators in contributing to this insurance buffer considering their high-profit margins. However, requiring NOs to hold a significant amount of LDO or ETH as collateral might unintentionally create a high barrier to entry and lead to churn. A better approach might be to introduce a sliding scale system, where NOs contribute a fraction of their earnings to the insurance fund. This ensures they have skin in the game while still keeping the door open for smaller operators.
  2. Buybacks: I don’t think the model of LDO buybacks leads to any significant realized profit for holders so I agree with discarding this idea.
  3. Reputation Scoring System: The prospect of a reputation scoring system for NOs is pretty interesting. While I agree that reputation should not be bought, we could instead consider basing the scoring system on factors like performance history, uptime, and community engagement.
  4. Dual staking: I think the creation of an 80/20 LDO/WETH pool on Balancer as a second staking option is a great move for deepening liquidity
  5. Community Building around the Staking Router: The introduction of the staking router with Lido V2 is an exciting development, and building a diverse validator ecosystem around it is key. Looking forward to seeing the Lido Community Lifeguards initiative take flight to support this.

Keep the ideas and opinions coming! Excited to see the evolution of this discussion.

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I generally agree with the response provided and understand the importance of prioritizing the growth of the ecosystem around each underlying staking community before focusing on deriving revenue streams.

By allowing efforts around ecosystem growth to flourish, such as the Community Lifeguards initiative, we can establish a more robust ecosystem that represents not only Node Operators and stakers but also incentivizes collaboration among various staking providers, including potential competitors (as few have pointed out that an established moat = revenue-sharing).

Small pushback for discussion:
While the idea of a stETH-powered Layer 2 (L2) is intriguing, it’s crucial to carefully consider the potential risks associated with this approach. Without proper safeguards and mechanisms in place to isolate the relationship between stETH and the L2, there could be heightened vulnerabilities that may impact the overall stability of stETH.

I think there are interesting concepts for placing additional use cases around stETH, for example, the above-mentioned methods for collateral/bonding. In either case, I think those types of propositions should be even further down the roadmap following ecosystem growth → ideating around LDO staking → alternatives ecosystems for stETH holders.

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Given where Lido is in their overall trajectory and the overall state of the market, we tend to agree with @monet-supply and @steakhouse’s sentiment to focus on growth and product technical development versus token buyback mechanisms. As @hasu and others have mentioned, it also seems prudent to ship the staking router and deploy dual governance before focusing on other items.

That said, once those are complete, it’s probably worth exploring, or at a minimum conducting research, on LDO’s utility and economic dynamics - this is an open area of research that applies to many crypto projects. Priorities might look like: (1) staking router, (2) dual governance, (3) incentive alignment for node operators, (4) exploring token-based business models.

Some things we’re thinking about:

  • What types of work does Lido want to incentivize that could be rewarded through some form of LDO staking?
  • Does it have to be staking or are there other ways of utilizing LDO?
  • Are there options for the LDO token other than creating an insurance staking module?
  • What is the overall financial strategy moving ahead?
  • What should the size of an insurance pool be?
  • Could the insurance module be programmatically determined? More broadly, how can you automate the flow of finances (@steakhouse)?
  • Should node operators be incentivized to be LDO holders or not?
  • Should there be downside incentive alignment for node operators, as alluded to here by @0xplaystation?
  • What other stakeholders in the ecosystem should be incentivized to hold LDO? Any?

This list isn’t exhaustive, but highlights some considerations that could help frame the debate as it progresses.

Porter - a16z

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This should be revised and revisited.