Executive summary
In this proposal, the liquidity committee is asking for the StakeWise DAO approval to gradually replace SWISE liquidity incentives with osETH in order to minimize new SWISE token emissions. Our analysis suggests that as of today, the DAO would be able to cover 87% of the required incentives volume using ongoing revenue (i.e. 274 ETH per year at ~180,000 ETH worth of osETH outstanding), assuming additional initiatives like the migration to Balancer Boosted pools are implemented. We believe that halting SWISE emissions and effectively cutting the available supply of SWISE to ~755M (vs current 1,000M) is a good first step towards increasing the fundamental strength of SWISE amid the general market downturn.
Motivation
It has not been a good year to hold SWISE. Despite StakeWise going from ~30,000 osETH minted to ~175,000 osETH, and TVL increasing to over 272,000 ETH, the token declined 70% against ETH, and seemingly cannot catch a bid. While this situation is not unique to StakeWise - other DeFi tokens have been similarly battered across the board, especially those related to LSTs - we do need to find a way out of this downturn.
Despite SWISE recently receiving a new application within the protocol, more is needed to limit the selling pressure from farmers, and support token appreciation potential long-term. Amid the different ideas and possibilities, one stands out for being immediately applicable - cutting SWISE emissions.
We believe that cutting SWISE emissions from the DAO Treasury to 0 over time would be a good step towards supporting SWISE and its holders long-term. Right now, StakeWise DAO is emitting ca 7.4M SWISE - 0.74% of total supply - per month, which is rapidly depleting the protocol’s Treasury, and potentially exposing the token to further sell pressure. SWISE farmers haven’t been actively selling the token, but should if they were to do so, the relatively low amount of liquidity vs emitted amounts could significantly undermine SWISE. Further, the token losing value puts us in danger of losing the liquidity that we received in exchange for SWISE to date. Hence, action must be taken to support SWISE, and reducing emissions to 0 is one of the few options available.
Here’s what the numbers look like:
- Current annual DAO revenue run-rate is 274 ETH, which on its own would cover for max 64% of the currently issued incentives (~490 ETH per year)
- Among the ways to first lower the necessary emissions is a migration to Balancer Boosted pools for osETH-ETH pairs on both ETH Mainnet and Arbitrum. Boosted pools lend idle ETH liquidity on Aave to generate additional APY for LPs, in exchange for taking a 3% cut from the total native yield of the pool (i.e. from both Aave APY and osETH APY). This grants ca 172 ETH in extra incentives in form of ETH, allowing to substantially reduce the cost of liquidity incentivization in these pools.
- The switch to Boosted pools would bring the total incentives requirement to 318 ETH, a significant reduction. Current revenue run-rate is enough to cover 87% of this volume, allowing the DAO to switch to a mix of osETH and SWISE incentives already today (distributed in 75-25 weights, for example), and continue increasing the osETH weight in the mix as the osETH supply scales up.
- This would allow StakeWise to minimize further emissions of SWISE, which today are primarily driven by claims from the DAO vesting contract. With 235M tokens remaining in the DAO reserves, stopping the emissions would keep these tokens in the Treasury until better days, making it possible to revise the tokenomics in the future to establish a lower emissions curve, or burn them altogether to further solidify SWISE fundamentals.
You can find all of the data here: Emissions to 0.
The end result of this initiative ultimately depends on what the StakeWise DAO does with the remaining tokens. Should the DAO opt for burning this SWISE, the total supply could be reduced by ~24% (from 1BN tokens to 755M), effectively improving the value of the remaining tokens by 30%. An alternative would be to burn this remaining supply and introduce a new emissions curve, one that’s less steep than before, to make sure StakeWise has SWISE firepower in the Treasury for when it’s needed, without having a significant impact on the market. A curve like this could inflate the supply by 1-2% per year, leading to a rather negligible effect on the price provided StakeWise revenue grows by a larger % every year. Long story short, having these tokens on hand and not needing to spend them in large quantities every month would give the DAO more flexibility over its tokenomics, allowing it to explore different directions.
However, caution should be exercised with further initiatives. Our recommendation is for the StakeWise DAO to take some time before making decisions here - the success of any tokenomics revamp rests solely with the market, and more work needs to get done to put SWISE on people’s radars so that tokenomics changes could have a meaningful positive impact. Yet whatever the ultimate approach, we believe a reduction in the potential circulating supply is the required first step, and one that we could take already today.
Specification
The envisioned change is purely operational, not programmatic. Instead of requesting only SWISE every month, the Liquidity Committee would request both osETH and SWISE from the StakeWise Treasury, to use both carefully towards liquidity incentives. We hope that the continued success of Boost will soon allow the Committee to request just osETH, phasing out SWISE-based incentives completely thanks to the significantly improved DAO revenue.
Considerations
The biggest question around this initiative is whether StakeWise DAO is supportive of the idea to migrate the main osETH-ETH pool to a Balancer Boosted pool version.
The main risks here are:
- Liquidity crunch on Aave, which could temporarily decimate liquidity for osETH and keep LPs’ ETH assets locked up until some of the leverage in Aave is unwound. We consider the risk of this happening to be low, and its impact on StakeWise and LPs to be mildly negative to neutral. Why: on the one hand, during a liquidity crunch ETH interest rate on Aave would skyrocket to >50% APY, so LPs would be decently compensated for not being able to withdraw their ETH immediately. Assets on Aave are meaningfully overcollateralized, and we wouldn’t expect any bad debt to occur which would force LPs to lose money; they would most likely just experience a delay in withdrawing ETH from the Balancer Boosted pool. Meanwhile, StakeWise temporarily losing ETH liquidity would not have an effect on Boost or other strategies, but would put more strain on the osETH redemption mechanism. We can expect the numerous leveraged staking strategies run through Aave to be unwound in case of the crunch, which is almost guaranteed to increase the validator exit queue to above 10 days, forcing longer wait times for unstaking from osETH and StakeWise in general.
- Aave insolvency, which could lock up LPs ETH assets in the Aave lending market forever, forcing them to lose money. We consider this risk to be very low given Aave’s battle-tested code, attention paid to collateralization levels across different assets, and protocol’s consistent performance even during mass deleveraging events in the past.
- Balancer Boosted Pool exploit, which could see LPs’ assets stolen from the pool. We consider the risk of this happening to be very low given Balancer’s heightened attention to Boosted Pools code following a rocky start to their use.
Like with most DeFi strategies, there is little StakeWise DAO or LPs can do to mitigate these risks completely - it’s just a part of using products in a decentralized, permissionless finance world. However, these risks may be perceived differently by different participants, so we encourage current osETH LPs to voice their opinions on the proposed migration, and raise concerns if they have them.
Voting
Since the StakeWise DAO has never voted on things relating to usage of its revenue, it is important that this proposal is reviewed by as many StakeWise ecosystem participants as possible. As such, the duration of the vote has been set to 3 weeks to provide all DAO members with ample time for a healthy discussion.
Link to Snapshot: https://vote.stakewise.io/#/proposal/0x6ba244c94f3d4c7b32244e3fa7a89dbf912af89b7d732e51c4a0d33b3c820bc8