Simple way to reduce sell pressure, protect treasury, and increase LIDO price

Proposals
1

Current LIDO emissions are unsustainable.

Lido’s value proposition is stETH liquidity. This won’t change. Liquidity in DeFi is becoming more expensive, not less. This won’t change either.

The problem is that stETH liquidity is paid for with LIDO tokens. LIDO tokens are not a sustainable way to finance stETH liquidity.

Sustainable companies don’t pay for things with their equity.

The hallmark of a sustainable company is that it does not rely on issuing equity to cover recurring expenses. Today, Lido is issuing equity to pay for stETH liquidity.

Issuing LIDO tokens to pay for liquidity leads to sell pressure.

Lido currently spends ~4.5MM LIDO / month on liquidity. Below is the expected MONTHLY price slippage associated with that much sell pressure (from 1inch).

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Sustainable companies match revenue with costs.

Being sustainable means using revenue to pay for expenses. It also means raising cash using future cash flow, not equity. Lido generates enough fee revenue to do both.

Lido should issue redeemable IOU tokens.

IOU tokens are programmed to receive DAO revenue. The IOU token can be an ERC-20 and can replace the governance token in all active liquidity reward emission schedules.

IOU token illustrative mechanics

  • Each IOU token is redeemable for $1.03 after 90 days

  • IOU tokens would have a Uni v3 liquidity pool with a maximum price of $1.03 in case some holders want liquidity before 90 days

  • The DAO commits to setting aside x% of fee revenue every week.

  • This revenue goes to repurchasing IOUs from the Uni v3 liquidity pool OR begins accumulating in the “Redemption Wallet”

  • Holders that did not sell into the LP can sell their IOU tokens into the “Redemption Wallet” for $1.03 after 90 days

IOU token advantages

  1. stETH liquidity is paid for with revenue

  2. The DAO Treasury stops getting depleted to cover operating expenses

  3. The DAO can stop issuing equity

  4. No more sell pressure on the LIDO token → higher LIDO price

  5. No more dilution for LIDO holders → higher LIDO price

  6. Improved capital allocation → higher LIDO price (IOUs represent a cheaper cost of capital)

IOU tokens do not replace LIDO tokens

LIDO tokens represent a perpetual claim on the treasury of the protocol. LIDO tokens should continue to be issued to entities and stakeholders that contribute to the long-term success of the protocol.

The idea of an IOU token is simply to create reward mechanism to pay for liquidity so that long-term LIDO holders token don’t get diluted and the LIDO token doesn’t get dumped in the open market.

Next steps

Please let me know what you think and feel free to ask any questions.

If the community likes the idea and wants to learn more I will follow up with a formal proposal that includes implementation details.

1 Like
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Heya! Short comment is, new token mechanics (like revenue share) bring bunch of second-order consequences to protocol governance dynamics. For instance, Lido DAO is in discussion around Dual Governance, which would get even harder to reason about have there been another layer of incentive for actors.

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That proposal requires a level of treasury management that we don’t do at this time. It’s pretty hard to balance future debt with future income; moreover, as far as I understand, it’s pretty murky territory legal-wise. I think the better way (and what Lido is doing right now) is just to reduce incentives overall.

4

Thanks @kadmil and @vsh for reading this post thoughtfully and providing your feedback.

Points taken about a second token being overly complicated and risky.

Do you guys agree with the premise that liquidity incentives should be paid using revenue instead of LIDO tokens given the resulting dilution + sell pressure that harms LIDO holders?

Couldn’t the DAO simply program that [20]% of fee revenue goes directly to DEX liquidity providers? All it would take is a ‘fee_splitter’ type contract with hardcoded wallet destinations.

It’s a simple capital allocation decision that results in clear benefits for the DAO:

  1. Maintain stETH liquidity incentives (this is primary value proposition of Lido)
  2. stETH liquidity is paid for using revenue which makes it sustainable
  3. LIDO token emissions can be reduced correspondingly, thus reducing sell pressure and dilution
5

Don’t think that would work: reWARDS distributes ~4m LDO per November, and overall amount of fees going to treasury is ~1k stETH — numbers won’t match. Tying those up would make ops way harder, and as current situation would be shifting and changing on the move towards withdrawals and, after that, smart contract-triggerable withdrawals, don’t think that DAO should connect those two things as of now.
On a separate note, I won’t say that liquidity incentives are value prop for Lido protocol or Lido DAO =)

2 Likes
6

In the future definitely. Until withdrawals are enabled on Ethereum renting liquidity in exchange for LDO is fully rational IMO.

2 Likes
7

Is the only value to owning LDO token is voting? Perhaps using a model like GMX and esGMX would be favorable for value accrual and to token holders.