$LDO has been used as LPs incentive token in the past year and a half. It has made a huge contribution to the wide adoption of $stETH and made stETH/WETH pool one of the biggest liquidity pools.
After year and a half practice, there are some vulnerabilities appearing for use $LDO as an incentive token:
$LDO value volatility causes it’s hard for LP to predict APR. Our LPs incentive based on the stETH/WETH pools. As the $LDO to $WETH exchange ratio is quite volatility during the year and a half, this made the APR from $LDO incentive part quite unstable.
We know that most LPs prefer long-term stable revenue. Too much volatility will restrain their willingness as an LP.
For many of the LPs, especially money management funds like Yearn, they have no willingness to hold $LDO as we wish. All they do is farm $LDO, sell for $ETH, and reinvest in stETH/WETH pool.
As the DAO treasury holds more than 20,000$ETH, we can use $WETH as LPs incentive token instead of $LDO.
This adjustment will bring the following benefits:
More stable LP APR expectation. Using $WETH as rewards token can make the LPs incentive rewards more stable, which can engage long-term LPs participate in our ecosystem.
Enable the reWARDS Committee to flexible adjust the incentive budget based on dynamic demands. The incentive budget should be adjusted based on the real demand. If our target is set to keep the LP value on a specific number, using $WETH will make it easier to set the budget number by cutting off the $LDO to $WETH exchange ratio variable.
It makes our LPs happy. For those money management funds like Yearn, other than selling $LDO and reinvest, they can just one step reinvest in the LP pool by $WETH rewards. Less action, less gas costs.
This somewhat aligns with one of the many proposals some of us in the community are discussing offline.
In general, Lido has a significant currency / exchange rate risk funding its operations in LDO. This naturally flows through to the rewards program and the benefactors of said programs.
There seems to be some agreement that we can find a better method to fund ops.
@adcv suggested funding in stETH to align with the primary source of revenue. I tend to agree with that assessment.
Funding in stETH sounds reasonable. A slight difference is that funding in WETH may help stETH/WETH pool more balance, because some funds like Yearn reinvest with their rewards. But, funding in stETH means we will somehow adjust the incentive budget based on “how much we earned”, which is also a good sign in my mind.
I was wondering the other day if we could swap the LDO token rewards in the referral program to stETH or WETH.
Maybe plowing our revenue earned with staking rewards accruing in the treasury could be scaled up over time. Start small at first.
At today’s prices 20,000 ETH is $24 mil. @jbeezy what is that? 8 months of runway, give or take?
Using stETH or WETH as the referral program rewards might one of your options, but I don’t think these two programs have the same business logic.
LPs rewards should be viewed as retention costs. It should be used as an equalizer while the liquidity utility is lower than LPs’ expectation. LPs are purely APR driven. They are more sensitive on the APR than referrals.
Referral rewards should be viewed as user acquisition costs. It’s a bonus for those who help us onboard new stakers. Referral is basically trust driven. To be honest, I don’t think that the current “X% of ETH staked” mechanism is healthy in the long run. This mechanism ties too much close with the rewards to the qualification of the stakers and makes the referral too much interests driven. Ok, that’s another topic.
I personally like the idea of using stETH as it creates an interesting feedback loop for LPs. There are a lot of operational/budget considerations that make it much more difficult than “just do it.”
Namely, we are going to be announcing a more comprehensive budget soon and this will put some of these conversations in a better perspective.