Distribute StakeWise Protocol Fees to Holders of $SWISE

The community has long been discussing ways to encourage long-term ownership of the $SWISE token and the creation of a value accrual mechanism for it. The arguments we saw in @vladl’s proposal about $SWISE staking are illuminating as to what mechanisms our community believes can and cannot work, and serves as excellent feedback for follow-up proposals.

The core StakeWise team would like to present one of such follow-ups today, namely an idea to distribute StakeWise protocol fees to holders of $SWISE tokens. Below we describe the motivation for this proposal and outline the potential implementation as well as its possible cons.

Motivation

Since the beginning, the StakeWise protocol has been positioned as the most simple, secure, and profitable place to stake Ether. The core StakeWise team has done its utmost to extract every possible basis point of yield from users’ assets in staking and liquidity pools, to the extent where both offer the highest yield of all ETH2-based protocols in DeFi. We believe that we as a DAO can take one step further and ensure that holding $SWISE also becomes one of the most attractive opportunities among the so-called alt-coins.

As we approach the next stage in the protocol’s development, we believe that the StakeWise DAO could consider implementing a mechanism for tangible value accrual to the $SWISE token in order to increase awareness about the token and the protocol, decentralize the ownership of $SWISE, and encourage holding it long-term. The distribution of protocol fees among $SWISE holders is one such idea that we would like to explore.

There are several key advantages of this mechanism for $SWISE token holders:

  1. Raise awareness about $SWISE and StakeWise: very few assets in DeFi natively generate ETH yield. If $SWISE were to become such an asset, it could attract more interest to the StakeWise DAO, increase the distribution of token ownership.

  2. Natural impermanent loss hedge for LPs: whenever providing liquidity, $SWISE LPs would be protected against IL in case of a token sell-off, because higher token ownership would translate into receiving a higher proportion of the protocol fees.

  3. Encourage long-term ownership: for the majority of $SWISE holders, accrual of the protocol fees will be meaningful only if their holding period is long. This incentivizes long-term ownership of the token.

Specification

There are several ways that the protocol fee distribution among $SWISE holders can be implemented.

Simple method

The simplest way is to allocate the fees through a daily merkle distribution - rETH2 from holding $SWISE would be claimable from the Farms page together with any other farming rewards you received.

The disadvantage of this method is that traders and other short-term $SWISE holders, as well as those holding insignificant amounts of $SWISE, would also have rETH2 to collect, yet their rewards would be too minuscule to claim them assuming the current gas costs persist. It would mean that a portion of the protocol fees is effectively wasted. We could solve this via the clawback of allocated rETH2 if it has not been claimed for a certain period (e.g. 1 year), but this opens up its own box of corner cases, like people not willing to collect their rewards because of the tax events, or because of the gas costs etc.

The bottom line is that it’s perhaps better to keep it simple here and live with a portion of the rewards going nowhere. It is likely tolerable given that the majority of $SWISE holders would still be able to claim their rewards alright.

Involved method

A little more involved way is to allocate rETH2 through the same daily merkle distribution but only to those who have owned at least X $SWISE for at least Y days (e.g. at least 1,000 $SWISE for at least 5 days). This would encourage users to increase their position to a certain minimum threshold of participation, and not allocate any protocol fees to the short-term traders.

The downside is that setting a good threshold may be tough, and if $SWISE changed in price considerably, this floor would need to be adjusted. It is a more complex system than a simple hold-and-receive mechanism, which means that many DeFi folks may consider it too complicated to take part in. More fees for us then I guess?

Risks

The core StakeWise team sees several risks in this proposal, outlined below.

Potential negative price change

The token price may invite a negative dynamic whenever TVL growth * APY growth * ETH price growth < $SWISE supply growth. This is related to the likely establishment of an inverse relationship between the token price and yield from the protocol fees. Considering that the ETH price and staking yield are outside of the DAO’s control, this means constant pressure on the DAO to continue growing the TVL in order to sustain the $SWISE holding yield as the protocol distributes more tokens as farming incentives.

In other words, we as a DAO will be forced to become more selective about where $SWISE is going - its distribution will need to be strongly aligned with the growth of the protocol, which may prove to be a challenging task.

Alternative uses of the Treasury

if we think about StakeWise as a startup, then the distribution of protocol fees may be considered premature given these funds could be reinvested into the protocol’s growth. With ca 150 ETH in annual revenue at the current run rate, the protocol could spend up to $0.5m per year on alternative ways to raise awareness about its product, grow TVL and encourage long term token ownership. Things like hiring full-time personnel for the DAO, investing in influencer marketing, sponsoring hackathons & podcasts etc. are all within reach.

The mitigating factor here is that increasing the token’s attractiveness via protocol fee distribution could significantly lower the cost of our farming programs. A higher token price can contribute to a lower acquisition cost per Ether (or per user), making $SWISE distribution a more effective method to achieve the protocol’s goals than using the Treasury for the same purpose. However, this once again highlights the importance of having direct links between $SWISE token distribution methods and TVL growth, which is a link that needs to be developed.

Discussion

This is an all-important proposal that requires input from as many $SWISE holders as possible, so please do not hesitate to share any of your thoughts. There are different variables to consider (e.g.with regards to implementation and the alternative usage of the Treasury), and we invite every one of you to share your thoughts below. Viva la StakeWise!

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Watching! :slight_smile: I’m interested in this - but would love to hear from the community on this!

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how do you address the feedback loop between providing $swise rewards for LPing and distributing reth rewards for holding $swise?

have you done any analysis on LP rewards impact on $swise? my sense is that it has dilutive for legacy $swise holders

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if this were to be implemented, I think a DAO vote would be reasonable before implementing it

I agree that this could be OK, but it’s also a little wasteful. “Burning” protocol fees is not equal to burning governance tokens. Even if the unclaimed amounts are not meaningful, the sum of all of them could represent a good amount of funding for a future proposal or protocol furthering grant or anything. I think the clawback should come as a subsequent proposal after implementing this one (if it ends up being implemented).

I think this would set the StakeWise DAO aside from others in terms of attention to detail and avoiding the waste of valuable resources.

We have the power of programming and mathematics, this yield could not only be adjusted through a DAO vote, but it could also be a dynamic number where a linear (or nonlinear) combination of these variables is considered from the very start. If a way to compute the yield is designed from the start as to give a variable yield instead of a constant one with the purpose of keeping the tokenomics of $SWISE healthy, which with this proposal should be our #1 goal or constraint, then holding $SWISE will be not only be nicely incentivized but also will help keeping $SWISE healthy.

How? i don’t really know, but we can come up with something rad for sure.

Perhaps here I should revive my proposal to flatten uniswap pool rewards and also suggest adjusting the amount of rewards given every month to liquidity providers either prior to this (future) proposal passing or right after it.

that monthly distribution may need to be adjusted in a dynamic manner as well, perhaps using the pool TVL instead of a monthly fixed SWISE amount.

IMO things to consider before this becoming a formal SWIP:

  • create a pool on uniswap v3 for SWISE vs ETH with 0.3% fee (to be consistent with the others) as well as pull StakeWise’s liquidity from 1inch. <-- IMO the most important 2 things.

  • rearrange monthly LP rewards in a dynamic manner (as opposed to a fixed amount of SWISE every month), or delay the continuation of the rewards until a DAO discussion on the rewards is held

  • reconsider flattening the pool rewards (i will follow up to my post, ever since i made it ive been monstruously busy to get hands on with it)

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

I think this should be a consideration ^

This is one of those proposals where im not sure if vested $SWISE should have a different treatment, but ill leave that discussion up for grabs \o/

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Technically speaking, I’m an advocate of KISS implementations, especially in smart contract world where bugs can be dramatic… But I’m also concerned by the protocol fees waste such a solution would imply.

The clawback of unclaimed rETH2 seems reasonable to me if the rules are fixed by the DAO.

We could also have a look on xAssetCLR from xToken that will allow to rebalance price range automatically.

I agree that once such a mechanism is implemented, DAO must be very careful with $SWISE emission.

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I am torn here. On the one hand, I see the absolute necessity to incentivize SWISE holding and making it more popular through rETH2 farming (love the idea, especially the more involved method), but on the other hand I also strongly believe that the DAO needs funding for important things like proper marketing, team staffing etc. - Especially the marketing part is of concern.

Not really sure what I would vote for at this stage. Hoping that a lively discussion here will bring more clarity.

Is it possible to divide the Stakewise revenue between both (e.g. “startup funding” and providing incentives for SWISE holding)?

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I like the simplicity of the proposal: hold SWISE – get part of protocol revenue. Turns SWISE into a governance and “shareholder” token. Sure can see it increasing the attractiveness of SWISE.

For cons … could it attract people not really interested in the project buying up large quantities of SWISE? And skewing future DAO votes? Or maybe all buying interest in SWISE is good. We still need to get the token out there a lot more I guess.

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I really like this observation, perhaps a combination of being an active participant, liquidity provider, or something that contributes to the protocol could entitle you to a specific APR or portion of the protocol fees, instead of simply holding SWISE.

Holding SWISE seems too easy and lazy to get a portion of the protocol fees and doesnt necessarily contribute to the protocol.

Some ideas:

  • extend period of receiving rewards until the user stops being a liq. provider and adjust that APR depending on the amount of liquidity and the amount of SWISE the individual holds. Flatten those rewards depending on the size of the wallet similarly to what i proposed with uniswap rewards or maybe set a ceiling for rewards, where huge liq. providers which are also SWISE holders wont simply gobble up the whole rewards.

  • if the user is not a liq. provider, only reward the user if the user has previously engaged in a DAO vote, maybe with a smaller APR than those which are actively providing liquidity or providing contributions to the DAO

  • a list can be made for users which are active community participants or contributors to the protocol and their SWISE holdings can be rewarded if the user has contributed, sort of tying contributions to protocol fee distribution

theres many ways it can be done, but jonathan’s observation with my first bullet point could be a good way to avoid large token gobblers which are not actively contributing to the protocol just buying SWISE tokens for the rewards

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This sounds quite well balanced to me.

Regarding some of the questions, I would not do a clawback, if people want to wait a long time before claiming, even years, for whatever reason, I don’t see anything wrong with that.

I do think the minimum amount is the better mechanism to avoid micro amounts.

I like the idea of a minimum holding period too, as long as there’s no need to lock it in a contract, so that Swise can be used freely in LPs or maybe as collateral one day. I’d make it at least 1 week, maybe even a month.

Finally, the only concern I have, is that I think protocol fees, should first be used to pay for all running costs that there may be, and some for further development. So that the whole system is nicely self sufficient. What’s left I agree should be paid out to token holders.

As stated already regular payouts to token holders would probably increase the price of Swise, which would in turn help to reduce the amount of Swise needed for farming rewards. Which would be a good thing.

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As a SWISE holder, I love the idea of getting more rewards for it. But But I find @kiriyha’s last point, about increasing Stakewise marketing reach, even more convincing. Stakewise is the most positive, transparent, responsive, and user-focused staking solution I’ve seen in the ecosystem. And yet, TVL seems to be growing slowly and I don’t see a lot of talk about Stakewise outside of this Discord.

I’d rather see protocol money spent on trying to increase TVL (and thus the value of SWISE) than claiming an extra couple percent of yield. If we had Lido’s growth curve, SWISE would be more valuable and we’d all do much better in the long run.

It’s been incredible to see @kiriyha reply patiently to all questions from anybody at any time day or night; it gives me faith in this project. Let’s try to find four clones of him and @brianchilders and see if we can spread the word some more. I think that would be worth spending some fees on.

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I decided to crunch a few numbers to see how the Simple Method compares to the Involved Method for claiming the rETH2. To claim the rETH2 & SWISE rewards from the Uniswap LP requires 135,000 gas, which at a gas price of 40 GWei would cost 0.0054 ETH. There is probably around 50,000,000 SWISE currently in circulation and kiryha states that the DAO currently earns 150 ETH per year. From this you can calculate that you would need to hold 1800 SWISE just to get sufficient rETH2 to pay the gas fee for a withdrawal once a year. Thus for smaller holders, only the Involved Method is likely to make sense financially.

I am starting to lean towards the ETH being used by the DAO for other purposes.

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If the vote came down to either (i) distributing the protocol fee in it’s entirety towards incentivising SWISE holding or (ii) securing protocol growth I would prioritise the latter, at least for now.

If there’s a way of setting x amount aside for protocol advancement - ie marketing and DAO personnel - and distributing the rest among SWISE holders utilising the simple method outlined by @kiriyha, with a clawback approach clearly defined by the DAO, I think that could be the most beneficial way forward. I’m also very humble in the limit of my technical understanding and realise that this might not make sense from that side.

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Hmm I need to think about this a little more, this might be a little too early for the protocol. I think like mentioned in the risks section, it might be more important to focus funds on increasing TVL and awareness. With that being said $SWISE staking could bring more awareness.

If it is decided to implement this, I still think there should be some sort of locking vest system for $SWISE in order to earn protocol fees. Maybe something like veKP3R where you choose how long you lock it for and the longer you vest the higher percentage of your vest counts towards earning fees.

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Hi all,

I think that the proposal to incentivise SWISE is really good.

I think that SWISE incentives should support the Stakewise protocol growth and bring benefits to the protocol.
Stakewise protocol needs to grow its TVL and a good way to attract TVL on top of all the great work the team is doing by building DeFi integrations and support true decentalization.

Ensuring that SWISE token becomes a valueable token will bring attention and drive adoption to our protocol by differentiating us from competitors.

The current proposal have great benefits which will encourage partecipation and drive interest into the protocol.

Earning rewards in reth is a great benefit as generating passive income in eth is a great value I am sure a lot of community members in the eth space will appriciate.
SWISE holders will be incentivized to stake reth using the compound funtion or provide liquidity to earn potentially more SWISE.
Non having to lock, spend gas to stake or act as LP providers to earn rewards will attract a lot of new people which will be attracted initially by the eth rewards but will eventally look into the protocol and potentially increase user base and protocol adoption.
I read a lot of comments regarding using eth fees for DAO, I think that is quite missleading because investing in adding the value to SWISE will most probably increase SWISE price (consider that SWISE market cap is currently very low compared to its TVL) and that means the protocol could give out less rewards, as SWISE will become more valuable and can also allocate directly SWISE as an asset to invest in the protocol growth increaing treasury value.

Having SWISE generating ETH by just holding might incentivise and bring the interest of other DeFi protocols to integrate SWISE, steth and reth which will againg be a boost for protocol adoption and TVL increase.

Enabling rewards for SWISE holders will provide following dynamic where I can stake eth-> get steth and reth-> provide LP for steth and reth-> gain SWISE ->get more reth which i can restake. The more TVL increase the more reth rewards SWISE holders will get which will enable probably SWISE market buy pressure and value increase.

The only risks I see are the following:

Lack of SWISE distribution, as this is currently very concentrated to few LP providers and a couple of whales who took the risk to buy on inch and a high slipagge, but i think this is fine as early adopters should be rewarded but future SWISE distribution should be allocated in a way to ensure a fair distribution to avoid a farm and dump situation or manipulation by large holders in the long term.
Lack of liquidity, currently there is no place to buy SWISE with a reasonalble slippage and SWISE holders might not be willing to provide liquidity if they can earn rewards by just holding without facing the risks of IL, probably a way to reward SWISE LPs should be discussed to at least mitigate IL risks and encourage liquidity providers (probably allocating SWISE to LPs being careful to not create a farm & dump effect)

Said that, I am in favor of the proposal and looking forward to see what other community member think.

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This is true: we are still a super young startup. Six months or one year is nothing for a project like Stakewise.
This is why I think, at this stage, we desperately need to raise more awareness about the protocol. We should focus on growth by boosting (1) our presence on social media and (2) launching promotional campaigns designed to attract new users.

TLDR: this proposal have a potential to help Stakewise grow, if associated with a good marketing campaign designed to bring new users to the protocol.
I personally see little impact for the protocol if the goal of this is just reward current holders (disclosure: I’m within top 100 $SWISE holders on ethercan) without attracting new users. <--------- I could be wrong about this.

I 100% agree with this. IMO, only users/addresses that (1) hold $SWISE + sETH2 and/or (2) hold $SWISE + provide Liquidity should qualify.

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I see a lot of comments around using fees for funding the protocol and that we should make rewards allocation not too passive, as just holding is not good enough.

I understand where these points are comming from but I think they are a bit generic and do not fully considering what are stakewise priorities.

I think the main priority is to increase TVL, look at the TVL of other competitors like LIDO and you will see that they have a big advantage and that the gap is growing over time very fast. Competitors had a first mover advantage and more visibility and integrations in DeFi community and this gap needs to be covered and allocating ETH to get youtubers talk about stakewise will not help that much as what we want is for some ETH to move from other protocols not only attract new stakers

The team is doing a great job and will likely get some defi integrations soon using steth and reth and also our protocol have the unique 2 token mode that offeres compounding that also differenciate us and give us an advantage from rewards apy.

What will drive TVL increase, in my opinion, will be bigger earning for stakers.
If a staker knows that he/she will get SWISE and that this will easily earn him more ETH he will be willing to stake with us either that other protocols. locking SWISE or forcing LPing to get rewards will maybe lower sell pressure (not really sure about that) but will for sure discurage new people to look into the protocol and that is what we need, allocating SWISE holders with ETH is a smart way to increase rewards and coomiting people to the protocol

Also, there are not a lot of passive income streams paying in ETH and that only will attract a lot of people to maybe just buy SWISE which as a conseguence might increase in value (also considering its low market cap) and the SWISE value increase can support treasury to allocate better rewards for LPs and also support better programs like SWAT where we can build a community and get people rewarded that activlely do something to grow the protocol and address all needs regarding activities to promote the protocol.
Investing in SWISE value increase is the best thing the protocol can do to attract people and increase TVL.

The only thing that have to be done carefully is the SWISE distribution for that I suggest, after fee rewards will be triggered, to have maybe a protion of SWISE distributed under a vesting period where they cannot be sold but where you still get your ETH fees portion, but allowing all SWISE holders to get ETH for just holding and making sure SWISE is distributed fairly and do not become a farm and dumb process.
in my opinion this will help the protocol grow very fast as people will be very willing to get SWISE which in a way or the other will end up boosting protocol growth.

Also making SWISE holders getting ETH ‘easily’ could drive SWISE integration into other DeFi protocols, as the passive income it generates might allow defi investing startegies,along with steth and reth.

My main point here is that I think we should focus on SWISE value increase and all points made regarding ensuring funds for DAO should be addressed protecting SWISE value by addressing SWISE distribution and not ETH fees distribution, therfore I think that it is fine to give to all SWISE holders for just holding.

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I personally understand your point @mbaneca1 , but I still fail to see how simply holding SWISE contributes to the protocol in a meaningful way and should be entitled to the protocol’s apparently only source of income from stakers.

Distributing the entirety of the fees to SWISE holders seems shortsighted to me (and apparently most people in this thread as well). The protocol’s income should be used to further the protocol’s development, not just benefit token holders.

If a portion of the protocol’s fees were to be destined to benefit token holders with passive income by holding them, then we must be very careful not to over-allocate funds to these rewards and to make sure that we’re allocating the rewards in a way that benefits the protocol itself.

As I’ve said in other comments, and as @cryptochrome also stated, the idea in its current form sounds really cool from an income perspective, but most people here fail to see how it benefits the protocol instead of just the token holders.

IF the proposal was simply “hold swise get all protocol fees” I would vote no right away and would happily buy more SWISE to vote no.

IF the proposal benefits the protocol itself in a meaningful way and doesn’t seem exploitable by random third parties that could just gobble up the token for easy cash then it’ll be a lot easier to vote yes.

Let’s not be greedy, it’s the DAO’s protocol, our protocol, let’s make it better.

Also full disclosure, I’m also probably a top 100 holder \o/

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@dreth, ETH fees are driven by adoption and what the DAO should aim is to maximize the value of the protocol token SWISE which will allow the DAO to have bigger spending power.
If our TVL do not increase or decrease the ETH fees will lower overtime.

I do not think that most of the people agree that eth fees should be used directly to incentive the DAO treasury but who think that is probably mixing up the fact that we have a DAO token that needs to be valued and a source of income that is related to our capability to grow and compete with other similar protocols.

The richest DAOs and protocols generate a lot of income but the mail asset of thier treasury is thier native token (see some dex for example)

Other staking protocols like rocket pool will launch soon and they are well knowed by the community and if we do not find a good way to attract stakers or users or just increase interest in the protocol by differentiating our self we will have no income we need to build value for SWISE for it to be the main monetary source for the DAO in the future.

Potentially DAO could hold a portion of SWISE lock it and earn eth on it to be used for initiatives, but I would rather go with the SWAT approach and incentive the community to build and support for SWISE rewards than just spending ETH to have the same done.

SWISE have very few liquidity and still have to be proper distributed and we have the chance to allow SWISE to be very valuable to people which will be willing to support protocol growth just to earn it.

Other protocols can avoid that now as for example they have 20x TVL lots of integration and thier tokens are liquid and valuable just for the huge TVL they control so governance part already brings a lot of value (see LIDO)

Voting no to the proposal would be a big opportunity lost in my opinion that we will regret in the future

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Does it have to be an “either or” decision/vote? I see both points being made by @dreth and @mbaneca1 as valid. Could we find a way to serve both aspects? Maybe by not distributing all fees to SWISE holder but only a portion, and spend the other portion on other important stuff like marketing?

As I mentioned earlier, marketing at this point has become a huge concern for me. We see all the talk about Lido and Rocket, and they will be running away if we don’t get up to par with their marketing. We need to do much more here in order to stay relevant (or dare I say, even become relevant, at this point). Marketing is expensive. But it’s also imperative. And it needs funding.

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One key aspect of this for me is that this protocol is already the most attractive tokenised staking protocol on paper, having higher APR and the compound feature as USPs. For me, that should indicate the issue being protocol/token recognition as opposed to lack of economic incentives to use it.

I think accelerating growth of users/holders, making the tokens recognised on more platforms (be it portfolio trackers, hardware wallets or what have you), would propel a growth circle, and I think that needs more of a push than adding extra layers.

Keep it simple and focus on what is already making StakeWise stand out from the competition. Solidifying the general recognition of the protocol feels like the most sound foundation to build further on.

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