Should Lido support Terra reboot?

This proposal aims to start a discussion on the possible launch of the Lido protocol on the new Terra network. As events are still unfolding, it should not be considered final and will be edited based on the DAO’s feedback, since the launch is scheduled to occur on the 27th of May.

UPD:
The Snapshot vote for this proposal is live. Because of the tight timeline the voting period is from May 22, 2022 to May 25, 2022.

:warning: The allocation of Terra’s new token to bLuna and stLuna holders is not contingent on the DAO’s decision. In other words, if the DAO decides not to support the reboot, bLuna and stLuna users at the time of the snapshots will still be able to claim their shares of the allocations.

About the reboot

On the 7th of May, UST started to deviate from its peg. Despite TFL and LFG’s efforts, the peg was never recovered, which led to a bank run on Terra: fleeing capital overwhelmed the redemption mechanism and trillions of Luna were minted. The death-spiral led to the exodus of foreign capital and the rapid degradation of the network’s economic security. Validators subsequently halted the network and disabled the market module, delegations and a few IBC channels, in an attempt to stabilize the network.

As these events unfolded, the Terra community expressed a strong desire for revival: hundreds of propositions were made on the agora, and multiple groups of developers, validators and community members spontaneously formed to try and organize a recovery. Eventually, Do Kwon published a Revival Plan for Terra, which has been updated twice since. It has the support of the Terra Builders Alliance but community alignment is unclear at this point.

Proposal on the Agora: https://agora.terra.money/t/terra-ecosystem-revival-plan-2-updated-and-final/18498

While it has not achieved consensus, it is so far the most likely outcome, as it is already garnering support via public announcements on Twitter, and being coordinated with TFL, Terra’s validators and ecosystem developers. Following this plan, the current network will be renamed into “Terra Classic” (legacy chain) and “Terra” (new chain) is going to be launched, and partially-vested equity issued and distributed at genesis among the various categories of stakeholders.

As an “essential dApp”, if it commits to building on the rebooted chain, Lido on Terra will be eligible to a share of the network’s equity. Allocations for developers will be finalized next week, which means the DAO must have decided whether or not to commit to the reboot by the 25th of May.

Token allocation

Essential app developers committing to launch on Terra will receive:

  1. Emergency allocation (0.5% of total supply): immediately after
    network launch.
  2. Developer Alignment Program (1.5% of total supply): Protocol teams
    that were live in Terra Classic divide this allocation weighted by the
    last 30 day TVL from Pre-attack snapshot - 1 year cliff, 3 year vesting
    thereafter
  3. Developer Mining Program (8% of total supply): Essential app
    developers earn a share of the mining program proceeds pro-rata to the
    amount of TVL every quarter for 4 years.

Once vested, these tokens can be used to finance the team’s operations, transferred to the DAO’s treasury, airdropped to Terra Classic users (e.g. Luna, stLuna and/or bLuna holders) or distributed in any other way the DAO deems suitable. The Lido on Terra team would like to suggest using these tokens, or a portion of them, to help make UST savers whole. We invite the DAO and the wider Terra community to ideate on how these tokens can be best used, and welcome all feedback.

About Lido on Terra

Lido on Terra was arguably a success. It amassed $10Bn in TVL before the crash, making it the most successful Lido implementation after Ethereum. Multiple integrations with other ecosystem protocols were underway, including the release of two innovative types of pools on Astroport and various partnerships with money markets and ETF protocols.

The team behind Lido on Terra is based in P2P and has deep understanding of Lido internal processes and strong relations with Lido’s core team.

Current developments would allow Lido on Terra v2.0 to launch with minimal technical overhead.

Competitors

Terra Classic had three other liquid staking providers at the time of the crash. It is unclear at this point which ones will deploy on the new chain.

Stader Labs

Stader Labs is a liquid staking protocol launched on Terra in November 2021, which rapidly expanded to Hedera Hasgraph, Fantom and Polygon. Stader Labs was built around degens and yield-maximization: the protocol recently released vaults where users could deposit their auto-compounding derivatives in exchange for a higher yield, sourced from other ecosystem protocols. Stader launched on Terra with three permissioned staking pools (high performance, community and airdrop plus), selected on three criteria (uptime > 99.85%, never slashed, commission ≤ 10%). Stader Labs’ total TVL went from roughly $1Bn, before the crash, to $53M now, mostly on Hedera, according to DefiLlama.

Prism Protocol

Prism is a multi-faceted protocol: it comprises a liquid staking solution, a “refraction” mechanism similar to bond stripping, a DEX, and was on the cusp of releasing isolated lending pools powered by Edge protocol. Prism selected its set based on three criteria (< 2% voting power, ≤ 5% commissions and community contributions), and 7 validators were onboarded in waves #1 and #2. Prism launched in February 2022 and reached a peak TVL of ~600M on the 6th of April, according to DefiLlama and the protocol’s dashboard.

STEAK

Steak is Larry0x’s liquid staking protocol. It officially launched on the 6th of May, few hours before the crash. Steak was released without governance token, with the intention to be governed by Luna holders. Its validator set was selected on Twitter: validators nominated by community members were added to a shortlist at Larry0x’s discretion, then voted upon via Twitter polls.

Risks

Lack of adoption and downside risk

If the ecosystem splinters rather than migrate to the new chain, the new token and its allocations could turn out to be worth less than the cost of deploying Lido’s smart contract on the new chain.

Legal risk and Key Person Risk

Terra’s crash did not go unnoticed. It was mentioned by Janet Yellen in the US’ Senate Banking Committee, and, according to The Block, the SEC could be opening an investigation in the matter. In Korea, the FSC and FSS, reportedly requested information from domestic exchanges following the crash. It is thus prudent to assume the network is under the scrutiny of traditional financial institutions, and that litigations against founding members of Terra Classic could occur.

Brand risk

Whether it decides to support the reboot or not, there is a risk to Lido’s reputation.

Terra’s failure damaged individuals, protocols and institutions who participated in the network, which significantly tarnished the project’s reputation. The proposed revival plan was also criticized. Supporting the reboot could thus be a risk to Lido’s reputation.

On the contrary, if the Lido DAO was to reject the reboot and discontinue Lido on Terra, it could be seen as a sign that Lido lacks commitment to the ecosystems it operates on.

Compensation

For historical reasons, Lido on Terra was not financed by the Lido DAO and it never charged a fee for its liquid staking services. Lido on Terra was not meant to be gratuitous in perpetuity, which is why, if the reboot is recognized by the DAO, Lido on Terra’s liquid staking protocol will be relaunched with the 5% fee on yield-staking enabled.

The following calculations are based on assumptions and aimed at producing a rough assessment of what Lido’s revenue could be on the new network. Let’s assume Terra will reach a $1B marketcap. Based on our experience with Terra and Juno, we can estimate that, once the genesis stakes are unbounded and put into circulation, around 33% of the liquid tokens should be staked.

$1,000,000,000 * 0.33 = $330,000,000 staked

Assuming 20% of that Luna is staked with Lido:

$330,000,000 * 0.20 = $66,000,000 staked with Lido

Given the expected annualized staking APR of 7%, the rewards should amount to:

$66,000,000 * 0.07 = $4,620,000 annual staked rewards

At 5% fee, Lido’s annual revenue would be:

$4,620,000 * 0.05 = $231,000 annual Lido revenue

Given the annual revenue, we can calculate the monthly:

$231,000/12 = $19,250 monthly Lido revenue

Given this revenue assessment, potential motivations for launching Lido on the network would be (and/or):

  1. To demonstrate our alignment with the ecosystems we operate on,
  2. Because we assume the network will grow,
  3. Because we believe the reboot is a good solution to Terra’s current situation.

The Team thus proposes the following model of compensation:

  1. While revenue is below $20k/m, all revenue is forwarded to the team
  2. While revenue is between $20k and $100k per month, the team receives $20k and the remainder goes to Lido treasury
  3. While revenue is more than $100k/m, 20% of revenue is forwarded to the team and 80% goes to the treasury.

We will do our best to update this proposal with more reliable data as soon as it is available.

Conclusion

Given the tight timeline, and to facilitate the decision making process, we would like to propose 4 scenarios:

A) Do not support the reboot.
B) Support the reboot, do not accept tokens from the builder’s allocations.
C) Support the reboot, keep X tokens as compensation for redeploying the contracts and donate the rest to impacted UST savers.
D) Support the reboot, keep all tokens.

We welcome the community’s feedback and are open to updating the proposed scenarios before submitting them to a snapshot vote.

UPD:
Based on the discussion, only two options were proposed for Snapshot voting: A and C.

11 Likes

I’m in the A or C camp here.

6 Likes

Given the calculations of the possible profit from the staking and the potential repetitional risks it looks like we should only support relaunch if we have strong confidence in the Terra relaunch success. In this case option C looks reasonable. Otherwise it will be better to choose option A and reassign team resources to the other projects on the Cosmos ecosystem.

7 Likes

I suggest that Lido should support the Terra reboot at genesis. Liquid staking tokens were a key part of the Terra classic ecosystem, with large demand and usage throughout the ecosystem

If Lido Finance were to receive an allocation of tokens for committing to build on the rebooted chain, then a portion of those tokens could be used to provide additional incentives for staking with Lido Finance or to incentivise adoption of the new liquid staking tokens in the new ecosystem.

It may be worth waiting until a few weeks after the reboot (after the dust has settled) to see where the token allocation could be used most effectively

2 Likes

Supporting C as well. The Terra ecosystem with all its projects and developers is still very strong and innovative.

C) Support the reboot, keep X tokens as compensation for redeploying the contracts and donate the rest to impacted UST savers.

1 Like

I do not believe Lido should re-launch on the new Terra chain. Taking the incentives and distributing them to previous UST holders is noble and worthy, but not without significant challenges.

6 Likes

I have always seen Lido‘s presence on Terra as mistake and more of a „technical debt“ than an opportunity. If Terra becomes a regular smart contract chain without built-in ponzi we can and should evaluate it alongside all other opportunities, but today it does not deserve a special treatment. I have fairly strong feelings against a reboot at this time, for that reason.

12 Likes

I think aggregating all the information and putting this to a DAO vote was the right thing to do – ultimately Lido acts collectively and it behooves us to provide the Lido community with information and options so that they can make informed decisions.

My personal take is that we can always join the reboot at a later time if the chain proves to be useful and well-run and has grassroots support. At this time there are too many questions around the reboot and committing poses potentially high downsides with little upside.

I’m in the A camp.

6 Likes

Fully agree with this assessment. As it currently stands, I would lean towards option A and revisiting at a later point when there are better indications as to whether the Terra reboot has enough traction and might be able to grow and succeed in a sustainable way. We (Chorus One) will need to discuss this internally and will then vote on the Lido DAO proposal accordingly.

2 Likes

I wouldn’t support returning on Terra later if it finds its legs tbh. There’s an option of going away, and an option of helping the victims of the blow up by redistributing Lido’s potential portion of the distribution that look okay to me.

3 Likes

Strongly against supporting the new Terra chain, there’s better use of resources than supporting a ponzi VC chain.

3 Likes
  1. It is relatively quick and easy to support the reboot

  2. Waiting a few months is not really an option as other liquid staking protocols will likely have taken the bulk of the market share

  3. Lido Finance should be as impartial as possible and support all ecosystems where there is demand

1 Like

Options A and C seem reasonable, leaning slightly more towards A, though, for the reasons Izzy and Felix have already outlined.

2 Likes

Lido ought to try to be protocol agnostic, while also prioritizing the highest value projects to efficiently utilize our limited resources.

Time:
While I cannot claim to understand the technical workload here, If there are other higher priority projects that are going to be delayed because of this, then A makes perfect sense.

Economic cost:
I am curious what is the actual cost to deploy a smart contract and support liquidity? I presume the labor expense is quite minimal in comparison to supporting liquidity? That seems to be the primary expense across other protocols. In fact, it seems to be a rather significant expense even in well established protocols. This could be a financial sink hole if there is no adoption.

There is no proven demand but an asymmetric amount of reputational risk.

7 Likes

In agreement with Hasu here, I think it’s worth considering that supporting the new Terra chain carries substantial risk and should be evaluated far down the road once the protocol’s economics have been settled and there is certainty that it is actually worth supporting.

Agnosticism means taking account of the risks presenting themselves in this case. With this in mind, it is not an opinion that nothing is certain with the future of Terra and there is no reason to take action on supporting it. It should be evaluated as a new opportunity, far down the road, not right now based on the presumption that it will be well executed.

1 Like

“Lido can return if Terra reboot thrives” is not a realistic option. Community alignment is a very important thing in liquid staking. Abandoning what’s left of Terra in the darkest hour will not be forgotten, and there will be no successful comeback in the future.

It’s not an argument for deploying, mind you. I think the obly two ethical options here are either not deploying or using Lido’s position on reboot to reimburse UST holders in some way. Just saying “we’ll return later” is not going to work.

3 Likes

We just watched a Layer 1 blockchain fail because demand for its blockspace was not enough to support its primary use case (Stablecoins).

That revenue, when risk adjusted, is effectively negative.

I honestly would expect even if this passes, Lido’s general counsel will strongly interfere for brand reputation purpose.

The SEC will be watching everyone involved, including Lido, which already has a target on its back for its dominant market position in ETH PoS.

Terra does not have a fee market for pricing blockspace. It’s brand is dead in it’s primary market (Korea), the foundation owes $78M+ in taxes, the founder is under investigation, we still don’t have a clean easily read audit on how $2,000,000,000 of Bitcoin was used to protect the peg (as opposed to being used as exit liquidity for insiders).

Frankly, I’m surprised this proposal with a due date within 30 days of a $60B+ Ponzi collapse is even a conversation.

I mean, what’s the fear? That Lido will miss out on a few million dollars for a few months because they were cautious about jumping onto a hard fork 2 weeks after collapse?

That Lido will have to start from 0% market share?

Again, we just saw the market we’re worried about sharing:

1/ isn’t big
2/ doesn’t have sufficient demand for its primary use case
3/ has every regulatory body in the world watching it heavily.

I see virtually 0 positives of aping onto a hard fork proposal written in 2 weeks.

5 Likes

If consider this question only from a financial point of view, then I would vote for A ("Do not support the reboot), since I estimate the probability of a rapid growth of the new Terra as small due to the “pain” of many participants in the ecosystem (many want to get at least something and forget about this story for some time).

If this is seen as a deep partnership with the terra ecosystem, then I would vote for C (“Support the reboot, compensation for redeploying, rest to impacted UST savers”)
a) to be with the ecosystem not only in good times, but also in bad ones
b) to help somehow the affected participants and those who want to try to develop the ecosystem further
c) it most likely will not be unprofitable.

I agree with Hasu and would vote A.

2 Likes