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