We appreciate this thoughtful post and the valuable insights shared on the liquidity buffer to minimise withdrawal delays and the last-line backstop against slashing and operational risk in the context of Lido’s protocol. It’s crucial to have an open and constructive dialogue to improve the protocol’s functionality and safety.
1. Liquidity Buffer
We agree with the points raised by @Izzy and share the concerns about increased protocol complexity and buffer management. Here are some additional considerations:
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Managing the Buffer: It is essential for the community to have a clear plan for how the liquidity buffer would be topped up. Such a plan should address the DAO funds being exposed to additional risks.
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Risk of Penalties or Slashing: Addressing this risk is critical. Any additional ETH that is unstaked is exposed to slashing and penalty losses accounted for by the Lido oracle. If losses occur, the DAO should have a well-defined plan for addressing them.
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Sharing the Risk and Aligning Incentives: In this current version, this proposal requires LDO holders to potentially absorb penalties or slashing while stETH holders benefit from frontrunning ETH. It’s essential to strike a fair balance in risk-sharing, ensuring all stakeholders have aligned incentives.
2. Operational Risk Backstop
Your suggestions about having a risk reserve are thoughtful and worth considering. Here are some thoughts:
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Sharing the Risk: It would be interesting to explore ways to ensure the risk is shared across all stakeholders so that it is not 100% subsidized by the LDO holders. DAO funds in the Aragon agent are still available in case of large slashing events through normal governance discussion and decision-making.
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Protocol Fees: Leveraging protocol fees at a staking module level enables tailored mitigation measures that align with broader sustainability objectives. It allows the protocol to be prepared for unforeseen events without requiring immediate locking of funds.
We encourage further discussion and collaboration among community members and the Treasury Management Committee to brainstorm alternative solutions that strike the right balance between risk management and protocol simplicity.