Allow staking $SWISE as means of boosting the voting power of long-term token holders

Allow staking $SWISE as means of boosting the voting power of long-term token holders

The tokenomics can make or break a project’s adoption, and StakeWise is no different. While Kirill & Dmitri have previously published the idea about staking $SWISE for insurance purposes, the ETH2 insurance market landscape has since changed along with altcoin values. In light of new developments, I would like to propose another idea to the DAO related to $SWISE staking - one that utilizes the time-locking mechanism (similar to Curve) in order to boost the voting power of long-term holders.

Background

The supply and demand dynamics of governance tokens are volatile, often driven by the short-termism of farming campaign participants. They have various reasons for not holding the token for long, ranging from the disillusionment about their capacity to influence the DAO decisions to the simple considerations about profit. Nearly every community considers such actions undesirable for the health of the project, and thus DAOs have looked for ways to discourage them.

Apart from the fundamentally important effort to improve the public’s perception of the token value, one relatively effective way to encourage long-term token ownership is assigning more voting power and incentives to those who commit to hodling. Technically, this is done via staking the token in a contract on the specific terms offered by the DAO, whereby stakers receive the higher boosts to the voting power and incentives the longer the duration of their staking commitment. The redemption terms are also clarified upfront in order to give the token holders all the necessary information for choosing the optimal holding strategy.

Such arrangements are ubiquitous in DeFi, with 1inch, Curve, Sushi, and others offering different ways of staking the governance tokens to encourage their long-term ownership.

Motivation

Looking at the experience of other projects, I believe that the StakeWise DAO could implement its own measures to encourage holding $SWISE long-term. Whereas previously it considered that staking $SWISE as insurance would be the way forward, I think the recent collapse in altcoin values (relative to the price of ETH) suggests that it could not become an effective solution for insurance. In addition, the open market for ETH2 insurance products is likely to heat up considering the opportunity space, which means that the DAO could benefit from more effective and cheaper solutions than using $SWISE as the float.

Therefore, I suggest we consider other possible incentives for the long-term ownership of $SWISE. We can draw inspiration from the extraordinary activity of the DAO members with even the smallest stacks, pay attention to their concerns about the centralization of protocol ownership by the whales, and look for examples of successful staking implementations by other projects. In my opinion, the best approach to $SWISE staking is that it must:

  1. Give $SWISE holders a range of choices about the duration of staking their tokens
  2. Significantly amplify the voting power of those who commit to holding the tokens for longer
  3. Offer additional incentives on top of the voting power boost
  4. Penalize $SWISE stakers who renege on their chosen commitment and reward those who stick to their commitment

Hence, I want to propose a mechanism for the time-locking of $SWISE in the staking contract, where depending on the chosen staking duration, DAO members would:

  1. Receive up to 5x boost to the voting power possessed by their locked $SWISE balance
  2. Receive a portion of the ETH proceeds from the DAO Treasury, similarly boosted up to 5x depending on the chosen duration for staking
  3. Be subject to slashing of their staked $SWISE balance if they decide to unlock before the end of their staking commitment
  4. Be rewarded with additional $SWISE rewards if they continue staking when others renege on their commitment

I think that having such a mechanism will offer considerable value to the DAO, coming from the increased voting power earned by its more committed members and the additional engagement in governance discussions generated by the incentive to lock $SWISE. I have also spoken with Dmitri about the possibility of implementing such a structure and (surprise surprise) he confirmed the team could write it.

Specification

  1. The DAO would create the $SWISE staking contract and the interface
  2. The DAO would offer several options for the duration of staking it is willing to incentivize.
  3. Each duration would have its own boost to the voting power and ETH incentives, where longer duration = higher boost. I propose the following structure:
    a. 1 month - 1.03x boost
    b. 3 months - 1.10x boost
    c. 6 months - 1.30x boost
    d. 1 year - 2.00x boost
    e. 3 years - 5.00x boost
  4. Unlocking the tokens early would result in the slashing of staked $SWISE balance that is linearly proportional to the remaining duration e.g. locking for 3 years and unlocking after 1.5 years would result in 50% of the balance being slashed
  5. The slashing penalties in form of $SWISE would be distributed between those who continue keeping their $SWISE locked
  6. Both ETH and the $SWISE penalties collected from renegades accrue and can be claimed daily
  7. The size of the boost to incentives would be updated every time the rewards are claimed to reflect the remaining staking duration e.g. locking $SWISE for 12 months and claiming the incentives in 6 months would result in maintaining a 2.00x boost until the moment of claiming and 2.00x/2 until the next claim, and so forth
  8. Prolonging the lock duration would be possible whenever the rewards are claimed or more $SWISE is locked

Action points

The StakeWise DAO must discuss the parameters involved in the mechanism if it wants to implement it. This mainly involves the choice of duration options and the size of the boosts.

Discussion

I encourage everyone to weigh in on this proposal as it likely can affect every StakeWise user, so don’t be shy to share your thoughts.

21 Likes

I love everything about this proposal

even tempted to buy some more $SWISE just to vote on it when it becomes a SWIP

5 Likes

@vlad incredible proposition - the team has been working on enabling the staking of $SWISE for a while now, but didn’t get to the proposal stage. some attributes of this system are really bullish for $SWISE - like @dreth said, makes me wanna buy more as I read it :sweat_smile:

Provided we can add elements like punishment of the renegades to the system we have been working on, I would fully support this proposal. I think the choice of boosts is excellent too, so I really haven’t got anything to add :slight_smile:

2 Likes

I understand the boost for voting power while staking SWISE, but what type of ETH incentive from the DAO? How much Eth to incentivize staking? Can you pull your reward ETH while staking SWISE? I like the idea, but am interested in more details!

2 Likes

I think what @vlad meant here (and correct me if I am wrong) is the fees that the DAO collects from stakers would be allocated towards incentives to stake $SWISE, and the larger your chosen boost, the more you will collect in incentives relatively to those with smaller boosts. As for pulling the reward ETH while staking, I think Vlad proposes to make it possible but only on the condition that your boost goes down for the remainder of your chosen staking period, unless you re-commit to the same period again. @vlad is this the correct understanding?

2 Likes

Yes, that’s the idea. Because you commit to the specified period, the only way to collect all rewards (boost) is to stake full period. Think 401k in USA. If you withdraw before retirement age you get penalised. If you don’t you get pre tax money work for you in the meantime -> better returns.

3 Likes

I think it’s that’s a great proposition, giving huge value to SWISE. I would maybe advocate for a slightly smaller boost for 1/3 year periods because it would give huge power to early adopters/stakers (yes, I will be one of them :wink: ).

2 Likes

cool idea!

I presume that the revenue that will go to $SWISE stakers stems from the 10% fee charged to the staking pool

if yes, will the rewards be paid out in $ETH as well i.e stake $SWISE earn $ETH?

2 Likes

Sounds really interesting. But there needs to be clarity on the incentives. Sovryn just did something similar but the community started getting upset when the rewards were very thin and the community was locked in.

2 Likes

I’m in. Where do I sign?

3 Likes

Effective and interesting. As the value of $SWISE is coming from staking of ETH, this kind of rigit approach should be appropriate compared from other methods.

2 Likes

Amazing proposal! I have just shared an article about the topic of long-term alignment arguing in favor of mechanisms like this! https://twitter.com/felix_macht/status/1410667588405899268?s=20

I think the incentive design would be even stronger if we would also implement a boost on LP rewards by locking SWISE (more people would lock-up for longer and become also longer-term LPs imo -> read the article.^^).

As there is a valid counterargument of these boost making it harder for small and new community members to earn a significant portion of the tokens, these boosts could be implemented on a limited time-scale, potentially slowly fading out over time. But I think now it’s essential to create a fly-wheel of token-price and TVL by smart incentives, (content) marketing as well as culture/community building (with a focus on security and decentralization given recent exploits and the probably too heavy reliance on Lido)!

I sense we have a bright future ahead for Stakewise! :smiley:

5 Likes

This entire proposal is lightyears over my head I still haven’t even figured out how to stake $swise… however; this shit sounds smart af and I’m happy I’m here.

3 Likes

As far as I understand it this proposal does not increase overall profit for holding Swise, it just redistributes between long term stakers and non-stakers. It doesn’t make any sense for anyone to stake for any other period than the maximum, as staking less or not all simply means that you let your benefits go to others.

At this point (from a game theoretical perspective), there are only 2 options that make logical sense:

  1. Stake all your Swise for 3 years getting the maximum return.
  2. Sell your Swise.

For a buyer the same game theory leads to the following two choices:

  1. Buy and stake for 3 years.
  2. Don’t buy.

Now if everyone stakes for 3 years, there will be no gain for anyone as the total distribution of rewards does not change.

The only way to gain, is if a significant number of people are so stupid to hold or buy Swise and not stake for the maximum time. Exploiting other people’s stupidity is a business model that I generally frown upon.

For now I am going to assume there will be no stupid players, and everyone either stakes for 3 years or sells (or doesn’t buy).

In that case not only do we gain nothing extra, we just lost our freedom to do with our Swise as we please. We can’t use them in other DeFi projects, for instance as collateral, or provide liquidity in a pool.

Lower liquidity in pools, will make the price of Swise more volatile, and the long lock up periods, that are essentially required so as not to lose out, are going to make it a far less attractive investment.

Incedentelly history is littered with examples of countries trying to shore up the value of their currencies by restricting/punishing exchanging them to other currencies. The only result has ever been that people did not buy those currencies and instead tried to find ways to exchange as much of it into better currencies without restrictions.

So sorry to poor cold water on this idea, but I fail to see any benefits that it could bring to current Swise holders.

Let me add an example.

To make it easy let’s say we have 100 Swise “shares”. Each has 1 vote. So each sharee represents 1% of the total votes.

These “shareholders” can stake their Swise share for 3 years and receive 5x more votes it is said.

Now most make the wise choice, so 95 of the 100 shareholders stake their swise share and now have 5 votes per swise share. The other 5 are either dead or don’t pay attention.

We now have:

95 swise shares with 5 votes each. For a total of 475 votes.
5 swise shares with 1 vote each. For a total of 5 votes.

Bringing the grand total of votes to 480.

Each staked swise share now has 5 votes out of 480, representing 1.04% of the total (so a mere 4% more).
Each unstaked swise share now has 1 vote out of 480, representing 0.2% of the total (so an 80% loss).

What this show is that the proposed system is merely a redistribution of voting power with actually very little upside for those who do stake, compared to the current situation, but a huge downside for those who don’t. Not to mention the huge downside for those who do stake in terms of having their swise locked up for a very long time.

Thanks for your well-written criticism! We need people in our community challenging our assumptions in order to stress-test ideas and proposals!

I think though that different people have different time-preferences of liquidity and would therefore stake for different time-frames. They would not be “stupid” for staking for a shorter period of time if it fits their preferences better. E.g. consider two potential personas of Swise holders that could imo both be considered “rational” given their preferences and viewpoints.

Swise holder A might be willing to stake for a max. of 1 year, while at the same time being very bullish about the project and the token. He might base his buy & hold decision to a large extent on his view that the token is currently unvervalued, while seeing catalysts that will impact the price within the next year (while still wanting maximize rewards by staking for his preferred holding period of 1 year).

Swise holder B might be willing to stake for the full 3 years because his planning time horizon for early stage projects goes even beyond that time-frame (knowing that bootstrapping a successful platform and community takes time and comes with ups-and-downs he is willing to dive through).

Yes you are in deed correct that there is no additional total voting power or rewards available to the overall community and the proposal is “merely” a re-distribution.

However, the power specifically lies in this strategic re-distribution of voting power and rewards towards the most long-term aligned community members, which should steer Stakewise to optimize for becoming a leading player over the mid- to long-term as opposed to playing short-term games. I firmly believe that the credo “play long-term games with long-term people” ultimately leads to sustainable success.

1 Like

Generally, I highly agree with Felix’s idea of short-term and long-term oriented people. Also my strong belief is that early and loyal community members (which stakes SWISE) should be rewarded to grow ownership and bias towards long-termism as you’ll see in the points below.

When we’re talking about locking/buying/selling SWISE tokens I believe it’s good to summarize it’s value first. And as a disclaimer, the following summary is highly subjective, but definitely adds more color to the discussion.

Value and potential value for holding SWISE (ordered subjectively by perceived value)

  • SWISE price exposure (I think SWISE is highly undervalued)
  • Huge potential: Receiving proportional ETH fees from the 10% staking fee. Right now the 10% is going to the DAO treasury. You can think of it as staking dividends on top of your own staking rewards as long as you hold SWISE.
  • Potential: Staking SWISE to commit long-term (similar to joining a startup and having vested equity). Time is acting as a proxy for community involvement/incentive alignment here (choosing deliberately against other opportunities). I believe next to vote boosting, staked SWISE should allow higher staking dividend rewards.
  • Using SWISE as LP and gain farming rewards (subsidized by treasury)
  • Participate in governance (small token holder here), however I believe writing proposals and criticizing others is much more effective (holding a few tokens) than voting with tokens.

Please let me know what you think.

1 Like

If the objective is to make people hold more Swise for the long term, then there should be a minimum holding of say 1 million Swise (25k eur). That would motivate people to buy more Swise and really show who truly believes in the project. Such risk taking by making a real investment might be worth an extra reward at the expense of other token holders.

I still believe it would be counter productive and eventually detrimental to the price of Swise, as liquidity tends to be good for prices. However with a minimum investment requirement of 1m swise that damage may be limited.

Your statement rephrased: A minimum holding threshold for SWISE (e.g. 1 million SWISE) would incentivize people to hold SWISE long-term.

Let’s think that through: If I hold 1 million SWISE why would I stick holding it long-term other than the reasons of holding SWISE in the first place (without that constraint)?

In your argument you’re saying “such risk taking shows who truly believes in that project”. A counter example: I buy one million SWISE (the entry ticket) and dump it the next day. And another example why it’s a bad idea systemically: You’re pricing out the long-tail of investors forming a centralized governance comittee of whales ruling over anybody staking at Stakewise.

With drying up circulating supply and constant demand prices have to go up. Locking the token and in return receive a) boosting governance voting power, b) staking fee rewards on top of your own staking rewards are two good and logically sound reasons to hold SWISE long-term.

2 Likes