Transparent & predictable emission schedule

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Transparent & predictable emission schedule

I believe that it is important to determine a predictable and transparent emission schedule that awards governance rights to users and supporters of Lido in a fair and calculable way.

It’s my opinion that the lack of a predictable schedule causes anxiety, confusion and causes an unreasonable burden on a user to investigate how to claim their LDO governance voting power. The DAO issuing piece-meal governance airdrops can cause information asymmetry between users – it is difficult for a user to easily learn about LDO distribution and their voting rights as a users.

It should, of course, be possible for this emission schedule to be changed, broken or deferred from by the DAO but these occasions should only be extreme situations, such as an emergency.

Please note that I am not a lawyer and I don’t know the legal/compliance implications of these thoughts – it is possible parts of this post may include ideas that could cause increased regulation and compliance risk for Lido. The DAO should review any actions it takes with proper counsel. This is document intended only as my unfiltered thoughts.

When should LDO be issued?

It would make sense to me that governance voting power is given to:

  1. Users that stake ETH with Lido - users that use Lido should be given a say in the governance of the protocol
  2. Users that support the Lido ecosystem - users that support the Lido ecosystem through, for example, helping maintain the stETH to ETH peg.
  3. Developers building for Lido - anyone can build for Lido and community members have already built extensions or integrations. It should be possible for developers that participate in building the ecosystem to become DAO members with voting rights.

Users staking with Lido

Given ETH 2’s current implementation, users that stake with Lido are locking their ETH with Lido until transactions are enabled on ETH 2. This is a long-term commitment and carries some risks.

These users should have a say in the governance of the protocol. For example, they should have a voice if there were ever a vote to increase fees on Lido.

I think it’s important that these governance votes are truly for users of Lido rather than some quick farming option for ETH holders. It’s possible that a bad actor could stake ETH, sell their ETH for stETH and stake ETH again in order to farm a large governance position to vote maliciously while damaging the ETH/stETH liquidity pool.

I think the DAO should explore options for vesting these governance votes and distributing them to stETH holders, rather than to new-stakers. After all, stETH holders are the people that are truly using Lido to stake their Ethereum.

A straw-man on how this might look – please note, any quoted numbers are intended only for simplicity of the example:

  • An stETH holder that holds 1 stETH receives 1 ‘vested Lido governance token’ every day that they hold this stETH.
  • This vested Lido governance token is non-transferable and unlocks after one year.

Users that support the Lido ecosystem

While Ethereum 2 is in early phases, with no transactions enabled, and no ability to unstake or move ETH on the beacon chain I believe Lido’s most important service is the ability to easily move back and forth between ETH1 and ETH2 without losing %s of your ETH.

Other liquid staking protocols with tokenised staked ethereum are already suffering with their ETH to ETH2 peg. Both Cream and Ankr’s tokenised ETH2 are trading 10% and 15% below the price of ETH respectively, whereas Lido’s tokenised ETH2 has maintained the peg despite ETH market itself taking a -30% hit.

This is due to the large amount of liquidity in ETH and stakedETH in the Curve pool. Until it is possible to unstake ETH, I believe maintaining this liquidity (and therefore a “two way door” for ETH staking) is very important for Lido users.

While the exact methods of ecosystem support may not remain constant over the coming year, I believe it’s important to have a predictable emission schedule for this category as a whole.

Perhaps the entire allocation of this category it used to incentivise the Curve pool until transactions are enabled on ETH 2 – or perhaps used in more ad-hoc ways, such as “topping up” the ETH2 rewards with LDO emission until all ETH2 validators are online and the ETH staking APY is achieved.

An example emission may be:

  • The Lido DAO will give away 20,000 Lido Governance tokens in 2021 to support the Lido ecosystem, to be distributed linearly throughout the year.

Developers building for Lido

The best developer ecosystems create the best protocols.

I am hugely in favour of a well-populated Gitcoin (or otherwise) scheme to allow open source developers that want to build a core piece of Defi to own governance rights to that protocol.

There are many strong crypto ecosystems and a lot of very strong developers. We should make it easy for crypto developers that want to contribute to decide to help build Lido.

Again, I don’t think it’s possible to identify the minutia at this time, but a predictable and transparent allocation I believe is important to the ecosystem’s development.

An example emission may be:

  • The Lido DAO will give away 50,000 Lido Governance tokens in 2021 to developers building for Lido. 50% will be distributed via gitcoin grants.

Predictable, transparent emission

Overall, I believe the DAO should settle on something that looks a little like this – please note, once again the numbers are placeholders and I have do no math to suggest these are correct, and the specific suggestions of usage should be decided by the DAO also:

  1. The Lido DAO will give 40,000 LDO to stETH holders throughout 2021.

  2. The Lido DAO will give 60,000 LDO to ecosystem support. Initially, this will be provided to the Curve pool for the next 6 months, for example. The DAO will reevaluate at 6 months.

  3. The Lido DAO will allocated 100,000 LDO to gitcoin grants throughout 2021.

  4. The Lido DAO will target a similar emission schedule throughout 2022, pending review and governance voting.

The final result being LDO voting power in circulation is predictable and transparent.

Each allocation/area will need a concrete proposal that has been rigorously discussed – these things should not be tested in prod, but carefully thought through.

My aim here is to begin a discussion about how we can best build and support the ecosystem for users that want to stake with Lido, and simultaneously provide the best possible liquid staking protocol for Ethereum.

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This is a really great starting point for a discussion and I agree with a lot of it. I think we should come to something concrete and have the DAO to vote on it in the next three weeks so that we have time to implement the next leg before current staking period ends.

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Agree, I believe the point of the distribution of LDO is to give governance powers to users that interact with Lido. The point of LDO is to allow users who participate within the protocol to have a democratic say on their deposits.

In light of yearn’s stance towards developer incentives, I think it is also a great idea to allow those that develop and upgrade Lido to also be rewarded for their contributions.

  • Introduce contributor retention program, with vesting YFI rewards to create long term skin-in-the-game for existing and new contributors.
    – Future possibilities

If I am not mistaken, only 1% of the total supply of DAO tokens (36.32%) are circulating right now. So we have 35.32% LDO tokens (from the DAO treasury) to distribute to the broader community (353,200,000).

In your example (only placeholders), you favoured a 20/30/50% ratio (this is assuming that this distribution will result in all LDO tokens from the DAO treasury to be distributed and assuming that the DAO fully agrees and sticks to this ratio).

Perhaps the best method to distribute LDO/governance power to users who (have) interact(ed) with Lido is to have them locked and vested over one year, similar to the other founding members. I would support something like this.

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My ratio was just random numbers so that I could show an example – literally zero maths went into the ratio and I can think of tons of arguments why the one I wrote is not good :wink:

I think the best course of action is to pick an emission schedule and ratio for the next 2-3 years (until tx enabled on eth2 perhaps) and reevaluate periodically.

Requirements and needs will change!

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I think what is interesting though is that if the rest of the tokens in the treasury DAO are distributed via a vesting after lock (1 yr) mechanism, only 1% of LDO will be circulating within the first year.

That must mean that those who want the LDO token, for whatever reason (speculating, governance rights, etc), must pay a premium to access it (supply and demand).

Either that, OR the user must actively participate in the Lido ecosystem (your mentioned post) to receive it! Super interesting!

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I still need to process some of these numbers set forth, but I wanted to highlight a key stakeholder group that is not included in this post. Validator runners are critical contributors to the stability of Lido. There have been, and currently are, many attempts to bring tokenized staked coins to Ethereum. However, the vast majority of them do very little consideration on how to bootstrap the actual infrastructure runners.

One of the key reasons we support Lido is because there are respected peers (P2P, Staking Facilities, Certus One and Chorus One are top tier validators) involved. We should consider setting aside a small pot to ensure any additional validators that end up joining the Lido ecosystem have a voice in governance as well.

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Just to re-iterate – these are entirely fictional numbers with the intention of creating a structure and pushing a discussion towards having a transparent & predictable emission schedule in place, rather than advocating for any specifics.

One of the key reasons we support Lido is because there are respected peers (P2P, Staking Facilities, Certus One and Chorus One are top tier validators) involved. We should consider setting aside a small pot to ensure any additional validators that end up joining the Lido ecosystem have a voice in governance as well.

Great point, should be included.

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Great points @cobie.

I agree with the need for a predictable emission schedule. I also think it’s important to balance the predictability with flexibility. As market conditions change, the DAO may need to reevaluate the emission. Perhaps, every quarter or 6 months the emission schedule is revisited - some areas may need a higher/lower allocation. The quarterly/semi-annual discussion provides some clarity for the ecosystem (vs. ad hoc changes).

A few thoughts on the distribution:

  1. Building the most liquid pool through Curve: This starts to build a moat around stETH compared to other liquid staking protocols. While the Curve pool has grown, there’s still room to increase liquidity. I could see a case to increase the distribution here by 1.5x to 2x.
  2. Incentivizing new integrations: Outside of Curve, the DAO could provide LDO rewards to Uniswap/SushiSwap LPs or Compound/Aave LPs (when added). This increases the utility of stETH and removes Lido’s reliance on one protocol. A portion of the ecosystem allocation could be used for this purpose.

I see value in locking up rewards for stETH holders (3-6 months) but giving stETH LPs more flexibility since they are providing more value to the ecosystem.

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While liquidity can and should be deeper in absolute numbers, I think we’ve reached saturation in relatives. 85% of stETH is in pool, because there’s not much to do with stETH atm. Not sure that increased distribution will do much good here, I think there’re going to be diminishing returns on it.

Setting additional incentivization for using stETH in Maker etc is a great move. I think we, ideally, want something like “20% of stETH in liquidity, 50% in money protocols, 30% fallow”.

In addition to the groups mentioned above, I would absolutely love to have ETH/ETH2 core developers in the ecosystem. They’re all smart, hardworking, and absolutely crucial for Lido’s continued operations. They should have a say in governance if they want it. I think we should set aside some portion of DAO funds for them too.

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@cobie did this ever go anywhere?
Seems it’s still a monthly variable emission schedule for e.g. Curve, that went from 5M over 30days to 3.7M this period.