Sunset Lido on Polygon

[Marin]

Hi @kentie,

It is always a pleasure to see community members coming forward with proposals. I really love the insights you gave in terms of funding, but there are a few key points that have to be surfaced for discussion.

@kentie

In short, I propose to sunset Lido on Polygon to become a native ETH liquid staking provider and avoid assuming risks from smaller pockets of TVL.

The thing that stands out from the proposal itself is “to become a native ETH liquid staking provider.”

The majority of LoX protocols suffered because of DAO’s dedication to Ethereum, and from day one, it was always Ethereum aligned and prioritizing it in day-to-day contributions.
Maybe slightly misplaced but feels right to put some open questions here.

If Lido on Ethereum protocol is to be stuck under 35% of the total stake and there is uncertainty about the future due to the tremendous social pressure and attacks. Why would it be expected from the DAO contributors not to seek other potential deployments that would ensure the ability to use cross-protocol fees to fund development/upgrades, maintenance, and general operation?
Now it’s LoE protocol powering LoX, but it might be the other way around in the future.

This is just some food for thought before we dive deeper into the general proposal. Opinion across the post is my own.

@kentie

Lacklustre Revenue
The current TVL for Lido on Polygon is ~151,000,000 MATIC ($86M). The current fees Lido DAO makes on Polygon per year is
151,000,000 (TVL) * 4.17% (current staking rate) * 5% (DAO fee) = 314,835 MATIC = $166,863

Lido DAO has awarded 450,000 LDO tokens in the past 12 months to Shard Labs as compensation for reaching the 3% staking market goal. Another 150,000 LDO tokens will soon be doled out to Shard Labs to meet the 4% staking market goal. The incentives Lido has spent on Polygon for the past year (from Oct 22 to May 23) were 1,538,500 LDO.
I have deliberately discounted the rewards since June 23 (some stETH were distributed) and rewards before Oct 22(north of another 1.5M LDO). With those numbers, this ROI would look even worse.

Over the last 12 months, Lido has spent at least 2,138,000 LDO ($3,421,600) to get to a state of making $166,683 a year. I am not an active DAO member, but simply a bag holder, and this ROI is a sheer waste of LDO/stETH incentives.

From top-level observations, there is no disputing of the logic itself behind your calculations.
However, mixing milestones and incentives would be unfair as those two are not related.

To address the incentives part:

It’s probably unclear that historic incentivization in LDO was one of the means to distribute the token across the community while increasing the utilization of stAssets through 3rd party permissionless protocols. It made steps towards more secure protocols, fairer distribution, and a higher number of governance participants. As of September '23, incentives are actually in stETH/wstETH with very strategic approach and clear purpose (forum post)

To address milestones:

@kentie

Expensive Compensation Structure
The yearly revenue that each 1% of staked matic gets to LDO is $41991. The one-time compensation that Shardlabs makes is 150K LDO is $240,000. This is poor ROI, especially under the current market conditions. The Shard Labs team proposed a newer compensation structure under different macroeconomic conditions, which now seems expensive and impractical.
You can find the revised compensation structure here - (Improving the incentive structure for the Lido on Polygon team - #21 by zuzu_eeka ).

Milestones also relate to the compensation structure you mentioned, so I’m taking the liberty to play a bit with the reply shape to address “more with less” for efficiency.

Completely agree that the structure is expensive and poorly shaped (every LoX proposal to this day). Yet, it’s important to highlight that proposals were created in different markets and with expectations that every Lido branded deployment would have instant success and monstrous capture rate.
The result:
Development costs of Lido on Polygon protocol and team compensations being exclusively handled by ShardLabs.
80:20 split of fees with only 20% going to ShardLabs
Milestones as “success” rewards and drivers

With this in mind, it would be unfair to penalize ShardLabs for being successful in achieving the milestones and would require finding different types of solutions, which take a lot of time and resources to reach consensus and would drive contributors focus in the wrong direction.

@kentie

Brand Risk
Over the past few months, Lido on Polygon underwent a technical upgrade that seems to have introduced a bug that stopped withdrawals for 25 days. While we were fortunate to have no FUD around this period, this seems to pose a reputational risk to a protocol with $15B in assets.

It’s always unfortunate when an upgrade creates a hard-to-detect issue. It actually passed all the external audits and multiple internal reviews. Would label it as a nightmare for every engineer writing the code. Again while it slightly affected the withdrawals, there was the ability to sell on secondary markets that mitigated the FUD scenario and enabled the contributors to de-bug and fix the issue with no pressure. This should not be a sunset reason in any case for any LoX deployment. No stakers were impacted in the process and service resumed after the code was audited again.

With 2 million USD Immunefi bounty and intensive audits, DAO contributors remain dedicated to security and rigorous QA processes that drastically improved with valuable lessons learned.

@kentie

Polygon Roadmap Uncertainty
Polygon has unveiled its future roadmap that intends the chain to become a restaking layer and a base layer for newer app chains. While this has always been the perception of Polygon, there is increased competition with Eigenlayer building primitives (& seeing great traction) to cater to the same market. There is broader uncertainty with Polygon migrating to a newer token and is undertaking a multi-year long technical architecture overhaul. As a significant LST provider, Lido on Polygon will have to undertake significant changes and bear the costs for Audits. This might also introduce brand risks (see “Brand Risk” above).
Overall, Polygon has struggled to retain DeFi TVL compared to other L2s. Both Solana and Polygon TVLs follow a strikingly similar pattern since Oct 2022.

Dao contributors constantly communicate with Polygon teams on all levels, collaborating daily. Every blockchain is ever-evolving, so some changes along the way are expected to happen. (It is the same on Ethereum). Future problems are in fact, future problems so there is time to maturity for deeper understanding and research.

Another important clarification is that total value locked is a wrong metric here. It shows the USD value instead of Matic value. Lido on Polygon protocol is near its all time hight in terms of the staked amount of Matic, while USD value decreased due to the market conditions.

@kentie

Learnings from Competiton (or the lack of)
Barring Stader Labs, another LST provider, there have been no other liquid staking providers on Polygon. This starkly contrasts Ethereum, which is widely assumed to be a growing market, and hence the proliferation of staking services. The competition is dead or unassuming, pointing to a lack of interest in capitalizing on this market on Polygon.
Stader Labs has cut their already conservative incentives on Polygon by 75%, indicating the stasis of a blockchain that Polygon has become.

Regardless of what competition does, the goal was never to compete but to help decentralize Polygon POS, distribute the stake across multiple operators in the set as evenly as possible, and provide staking rewards to Polygon POS users while maintaining the basic utility of MATIC token. Even though the bear market took its toll on DeFi ecosystems industry-wide, it did not affect the relationship of Polygon, ShardLabs and Lido DAO contributors.

Concluding this response with more food for thought.

If LDO holders would vote to sunset Lido on Polygon protocol it would be a really bad signal to anybody who wants to collaborate with the DAO as trust would be highly impacted. It removes the weight from voted-in proposals and drives to grant-driven collaborations and different type of environment.

P.S.

I’m hoping to see a proposal in the future that would have long-term sustainability factors, a clearer division of responsibilities, fairer fee distribution and lower dependency on milestones to maintain operational stability.