Updated: Lido Kusama+Polkadot LS by Mixbytes()

Intro

Hi Lido DAO! As a part of the LEGO initiative, we, MixBytes(), propose a great expansion of the Lido liquid staking ecosystem to Polkadot and Kusama. We’ve spent months planning and preparing to deliver this expansion as soon as the blockchain infrastructure is implemented. Please read the proposal and vote on it at Snapshot, the voting period will start on the 18th of August and will end on the 25th of August.

About Kusama and Polkadot blockchains

Polkadot is one of the most anticipated projects in today’s crypto space. Polkadot’s design is aimed at overcoming all current blockchain limitations by connecting multiple specialized blockchains into one unified network. With more than 12bn USD staked, this project represents a high-value target for the Lido expansion. When we reach our KPIs Lido will more than double its current TVL. Currently, as most of you know, there are no smart contracts platform launched on Polkadot mainnet so if we move fast our project will have a possible first mover advantage in non-custodial liquid staking when the parachain auctions start.
In addition to TVL growth, simple napkin math with 10% as an overall Lido fee shows quite impressive estimated cash flows to the protocol.

% share of staking on Lido 2% 10% 20% 50%
Lido protocol fees, USD
Polkadot 3,493,383 17,466,913 34,933,825 87,334,563
Kusama 336,888 1,684,442 3,368,883 8,422,208

*at current prices

Proposed architecture

The general idea is the creation of stDOT and stKSM for Polkadot and Kusama accordingly, which will represent liquidly staked versions of DOTs and KSMs. The Proposed mechanism will allow users to stake their tokens and get continued reward and being liquid at same time, so users won’t need to wait such a long unstaking period (28 days for Polkadot and 7 days for Kusama).

For this system to be as stable as possible a set of node operators and other parameters such as fee will need to be controlled by Lido governance(LDO holders) on Ethereum blockchain however to speed things up the initial version will be managed via multisig of Lido stakeholders on particular chain(Polkadot for stDOT and Kusama for stKSM). After cross-chain bridges to Ethereum become available for the target chain the system will be upgraded to a full governance model.

Since Polkadot and Kusama are the multichain systems themselves(see architecture), the appropriate relay chains contain only low-level functionality and don’t provide the ability to host custom user’s code such as Smart Contract our system will be backed by a particular parachain and use XCM (cross-chain messaging protocol) to implement trustless and secure staking scheme across the relay chain and parachain.

Detailed technical specifications are located here. The specification includes details regarding stDOT minting/redeeming mechanics as well as a cross-chain staking scheme using XCM protocol. Please feel free to leave comments.

Timeline estimates

Kusama

Milestones:

  • 2021 June - Research finished
  • 2021 early July - Technical design is ready, started implementation
  • 2021 early September - implemented staking mechanism based on mocked XCM interactions
  • 2021 mid-September - switched to real XCM interactions and running on testnet
  • 2021 early October - ready to launch

Polkadot

Since Polkadot and Kusama have similar designs our solution is ready to launch on Polkadot with minimal changes, so the main stopper is the parachains support for Polkadot.

Milestones:

  • Polkadot released parachain support - open date

  • Parachain slot auctions finished - open date

  • Parachain partner launched(EVM and transfers enabled) - open date (approx. +1 month after slot allocation)

  • Lido for DOT ready to launch - up to 1 month after parachain launched

Moving forward

A lot of work is expected to be executed as a long-term strategy to grow the user base and make Polkadot/Kusama part of the Lido ecosystem more attractive to users.

Here are just some of the ideas:

  • Ethereum Bridge token mechanics implementation is planned ones parachain partner launches eth bridge
  • Storage Proofs for Lido oracles
  • Direct governance sync with current Lido DAO

Incentives - UPDATED! Please see edits

We understand that Polkadot/Kusama technology is quite “early” even by blockchain standards and it’s constantly changing. During the preparation phase for this project, we had to adapt and change the fundamental architecture several times due to changes in Substrate and XCM. Keeping this in mind we know that it is not going to be a short-haul project for us and our interest should be aligned as closely as possible with Lido in the long term so we propose our incentives divided into two blocks:

  • 1-year cliff and 1-year vesting KPI goals and rewards with TVL averaged for or 30 eras for DOT and 120 for KSM or 1 month to prohibit any sort of manipulation:
KSM DOT
Vested reward Vested reward
2% 5,000 25,000
5% 10,000 50,000
10% 35,000 175,000
15% 50,000 250,000
20% 100,000 1,000,000
  • Reward sharing is based on what value we bring to the Lido DAO aimed at both short terms, to improve and adapt to unforeseen circumstances, and to grow with Lido in the long term development. The proposed revenue share is to be as following:
Fee to staker 10% A
Validator’s Fee 3% B
Net Lido fee 7% C=A-B
Mixbytes fee 1.4% D=C*20%

About Mixbytes

MixBytes() is a team of engineers, auditors and analysts, experienced in decentralized systems and blockchain technology. We design and implement customized solutions based on well-known blockchains and frameworks: Ethereum\Polkadot\EOS.

We have extensive experience with Rust in general and Polkadot ecosystem in particular as we helped to develop a lot of Substrate-based projects like Robonomics, Sensorium, Evercity and DistributedSky, including cross-chain messaging (XCM) functionality and successfully delivered on grant funding from Web3 Foundation.

We are also known as a top smart contracts auditing firm with a stellar reputation, trusted by the clients like Aave, Yearn finance, Curve, 1inch, Lido etc.

14 Likes

Some thoughts:

Polkadot has super high USD amount staked, so seems like a good market where decent fee can be captured and I’m happy to see a proposal here.

Firstly, I am skeptical that 3x’ing the stakers’ fee is viable. This proposal suggests a 10% fee to staker, and I currently pay around a 3% fee (using p2p.org). How do you justify tripling the avg market fee? What is the incentive to use stDOT and pay 3x more for the liquidity for users?

Next, the LDO compensation seems extraordinarily high, particularly for the 2% milestone. I’m try to convert everything into USD terms, please correct any of my bad math:

  • The current proposal suggests that Polkadot earns $3.5m (I am assuming annually?) at current prices w/ 2% share and Kusama earns $330k w/ 2% share.
  • MixBytes share is 20% of Lido’s fee, so MixBytes earns $700k per year and $66k per year respectively on their revenue share.
  • MixBytes is requesting $6m in payment for this work.

In this scenario, MixBytes gets paid a lot of money for an outcome which I would describe as being close to failure – 2% market share for Lido would be a bad outcome IMO.

Beyond this, will MixBytes later propose LDO emission incentives for stakers? Since 2% seems extremely small and likely just on Lido brand alone, with LDO emission it becomes trivial since stDOT APY will be larger than other staking methods. It seems circular to pay out LDO for paying out LDO. At the same time, it seems like a good strategy to quickly capture marketshare and increase revenue, so it would be in the DAOs interest to do it. Will MixBytes later propose LDO emission incentives for stakers if targets are not met? If so, is this also paid from the DAO, or reduced from MixBytes payment?

As we reach the second milestone, which is a much more accurate representation of success:

  • MixBytes is requesting a further $6m for growth of marketshare from 2-20%
  • Lido will earn ~$38m annually if this is achieved
  • MixBytes will earn ~$7-8m per year

In this instance I support the LDO payment more here than the prior milestone, but now the revenue share for MixBytes seems extraordinarily high. From Lido’s POV, it’s 20% leaked revenue, almost 8 figures usd per year, in maintenance costs which seems inefficient.

I’m unsure if Lido should think about revenue share with co-building teams as maintenance cost or otherwise – what is the best example on the market that can be used as a reference? How did you come to this 20% of Lido’s revenue fee figure?

Does anybody agree that the compensation size seems large and miscalibrated?

I personally believe KPIs should not be a temporary market share, but instead be maintaining such a metric over a meaningful period – eg. 20% market share sustained for 1 year is meaningful if prices remain at a level such that 20% market share’s revenue is similar to the current projections from the proposal. 20% market share for 1 day is vanity and achievable using perverse incentives.

Finally, I feel the proposal is a little bit lacking in detail for such a large request. In general, I’d like to see a more established and rigorous plan in place when requesting a $12m payment rather than a bullet-point list of ideas and a 3-month rough technical roadmap.

7 Likes

Was going to write a proper reply but got busy with London last week. TL;DR: yes. It seems odd to me to have the same amount for both 2% market share and 20% market share. I understand that one of them pays for the “fixed costs” of setting this up, and the other for the “expansion”, but they still feel somewhat expensive.

I think it is worth considering “what” the DAO wants to pay for: basic support on another chain (in that case, perhaps lower the 20% reward), or “becoming a leading player on another chain” (in that case, perhaps lower the initial reward, and even consider adding more at, say, 30%, 40%, etc. market share).

Apologies for the brain-dump-style comment, but given the snapshot is already up, I figured something rough is better than nothing :slight_smile:

3 Likes

Overall question text is here:

https://research.lido.fi/t/lego-lido-kusama-polkadot-ls-by-mixbytes/877/2

First of all thank you for your interest in our proposal.

Q:Firstly, I am skeptical that 3x’ing the stakers’ fee is viable. This proposal suggests a 10% fee to staker, and I currently pay around a 3% fee (using p2p.org). How do you justify tripling the avg market fee? What is the incentive to use stDOT and pay 3x more for the liquidity for users?

A: Lido now takes 10% fee in eth. Sure you can stake eth with exchanges with zero fees but we think that Lido as is the case with eth will be the preferred option for stDot by offering direct integration into Defi and non-custodial mechanics.

Q: Next, the LDO compensation seems extraordinarily high, particularly for the 2% milestone. I’m try to convert everything into USD terms, please correct any of my bad math:

A: First milestone represents only a fact that we’ve managed to create a working partnership with a parachain that managed to acquire a slot and that the product developed is really working. We take on all the risks from the beginning and need good motivation to see these first steps through. The current price is only a somewhat guideline for this sort of proposal. We mostly deal in yearly averages or even ATLs, as it is 1-year vesting which is an eternity in blockchain years.

Q: Beyond this, will MixBytes later propose LDO emission incentives for stakers? Since 2% seems extremely small and likely just on Lido brand alone, with LDO emission it becomes trivial since stDOT APY will be larger than other staking methods. It seems circular to pay out LDO for paying out LDO. At the same time, it seems like a good strategy to quickly capture marketshare and increase revenue, so it would be in the DAOs interest to do it. Will MixBytes later propose LDO emission incentives for stakers if targets are not met? If so, is this also paid from the DAO, or reduced from MixBytes payment?

A: We are in discussion to incentivize defi pool by the means of our parachain partners. However, if it will be profitable for us to reach 20% by incentivizing with LDO out of our rev-share will definitely arrange that even without the voting. One of our main goals is for our LDO rewards to be worth something when they vest)

Q: In this instance I support the LDO payment more here than the prior milestone, but now the revenue share for MixBytes seems extraordinarily high. From Lido’s POV, it’s 20% leaked revenue, almost 8 figures usd per year, in maintenance costs which seems inefficient.

A: We think about rev share more in terms of the future development incentives. See our moving forward section. The goal for us here is to be sufficiently motivated after reaching 20% to go beyond without any additional proposals.

Q: Finally, I feel the proposal is a little bit lacking in detail for such a large request. In general, I’d like to see a more established and rigorous plan in place when requesting a $12m payment rather than a bullet-point list of ideas and a 3-month rough technical roadmap.

A: We’ve described an overall technical architecture here:

We, unfortunately, can’t go over more in detail on this at this stage because disclosure will decrease our chances to deliver stage 1 earlier and better than our other liquid staking competitors.

Q: I personally believe KPIs should not be a temporary market share, but instead be maintaining such a metric over a meaningful period – eg. 20% market share sustained for 1 year is meaningful if prices remain at a level such that 20% market share’s revenue is similar to the current projections from the proposal. 20% market share for 1 day is vanity and achievable using perverse incentives.

A: That’s why we have 1-year vesting and rev. share to think long-term. If we reach 20% for 1 day and everything goes belly up after that our 1-year vested tokens won’t be worth as much. 1 year from now eth 2.0 might not be yet launched and polka’s TVL might constitute 90% of Lido, who knows? We just have to do our best and help the project to grow.

In case the terms of our proposal meant to motivate us seem to be too harsh, I hope we’ll part as friends.

4 Likes

The way I look at this is:

  • getting separate strong teams to work in Lido is a growth and decentralization strategy at once. Without having multiple centers of power Lido won’t be fully decentralized, and it’s impossible to cover everything worth staking with just one team
  • Lido is in unique position where it can slice the work vertically (unlike, say, Maker) - we are blessed to afford well-defined, semi-autonomous teams working for common goal
  • the work to build a liquid staking protocol and get it sufficiently adopted is much more like a venture than a contractor job. The result of a successful venture is everyone getting well off, not just the funding side
  • therefore, teams should have ample incentives to build and grow and nurture the liquid staking protocol they are set upon building.

That doesn’t mean the direction in general, or concrete numbers of a deal shouldn’t be discussed or contested, but I think that if the broad result is “if the team wins, they get well rewarded” is one we should strive for.

3 Likes

I see the proposal has not passed. Is it possible to put this back on vote after addressing some of the concerns raised here? If the path forward isn’t clear, we can maybe get a call going?

Kusama + Polkadot is a crucial ecosystem to go after. It’ll be good to have a team like MixBytes() working on it.

2 Likes

Not sure if this is possible, but I agree this is something that would be good. Personally (although I’m nowhere near being able to sway the vote), I saw this as a decent proposal which needed additional tweaks or justification vs. something Lido “shouldn’t do at all”.

1 Like

Hello everyone! We’ve received a lot of community feedback for our initial proposal. As a result we have developed a new curve for the incentives with milestones aligned more with the DAOs interests and added a conditions that the milestones should be reached as an average for a time period of no less than a month to prohibit any sort of manipulations. New proposal will start August 18th and end 25th.
Thank you for all your support!

9 Likes

Appreciate the new terms and amendments based on feedback – looks much more reasonable to me now :slight_smile:

6 Likes

After speaking to the Mixbytes team about their proposed solution and reviewing the updated terms of the proposal, we at Chorus One believe this proposal is very benefical to the Lido DAO and we would be excited to bring the Mixbytes team on as developers.

The new Snapshot vote is live here (for anyone looking for it): Snapshot

4 Likes

I want to question the assumptions made here

Charging 10% for stDOT/stKSM
image
I think Lido has some of the cheapest fees for staking services for Ethereum. See the following screenshots from Coinbase and Kraken:


image

Coinbase takes 25% of staking rewards for ETH. Kraken charges 15%. So the stETH product is noncustodial, liquid, AND cheaper.

That would not be the case in the DOT ecosystem because p2p.org is cheaper. Do we believe that Lido can charge a premium in the DOT ecosystem even if Lido doesn’t for stETH? Is Lido’s DeFi integrations enough?

Incentivized stDOT/stKSM pools

For incentivizing stDOT/stKSM pools with Lido treasury:
image
Are we agreeing that Lido will not pay LDO tokens to incentivize stDOT/stKSM liquidity? And that Mixbytes will use their own resources to incentivize liquidity?

1 Like

Valid questions however, if I understood correctly, your logic goes like this:
Binance is arguably the biggest exchange in the world with the fee rate for eth staking of 0% so Lido with 10% should not exist.
Kraken’s fee on DOT staking is 0% so p2p with 3% should not exist.
But this is simply not the case.

We believe in the benefits that this product can deliver to its end users will justify the fee. All our incentives are created in a way that we are aligned with the success of Lido on Polkadot. If the growth will be slow we can vote on changing the overall lido fee or creating an additional stimulus.

7 Likes

Ah this new info does make the 10% fee more reasonable.

Thanks.

2 Likes