In response to the community’s concerns about the dilution of APY triggered by new deposits, the team would like to propose the tightening of criteria for entering the deposit queue in the Pool to deposits above 16 ETH (from the current 32 ETH) and 1% of activating deposits (currently 5%).
The tightening of these parameters would reduce the negative effect of TVL growth on the APY and help StakeWise maintain the highest yield in the ETH2 staking market.
Motivation
There is one metric that rules it all in staking: your yield. As the development team, we are wary of this and hence do our utmost to keep the StakeWise APY as high as possible. We have done more than most to protect our users’ yield by building what is known as the deposit queue for new deposits. Many of you have not experienced going through the queue, because it applies only to the deposits above 32 ETH and only in case the amount of activating deposits in the Pool exceeds 5%. It is there to protect the APY of existing stakers from dilution by the largest of deposits. (We are sure that large stakers themselves appreciate these APY protection measures). If you want to learn more about the deposit queue and its parameters, head to our Documentation page for details.
When the feature was being rolled out, the team had the liberty to decide on the initial parameters for entering the deposit queue. However, after the release of $SWISE and the DAO functionality, the power to choose the queue parameters has been passed to the DAO, and hence changing the parameters warrants a governance discussion.
With the Beacon Chain activation queue currently 9 days long, the recent influx of new deposits to StakeWise has led to a ca 5% dilution of APY for the existing stakers. Considering the negative feedback received from some in our community, it seems that the current parameters for entering the StakeWise deposit queue no longer offer enough insulation against the dilution of yield.
To rectify this, we propose tightening the parameters to apply to deposits exceeding 16 ETH (currently 32 ETH) and start putting all such deposits into the queue as soon as the share of activating deposits in the Pool hits 1% (currently 5%). This change would limit the theoretical dilution of APY to 1%.
The obvious pros of this change would be the positive impact on APY – StakeWise would be in a better position to preserve the #1 spot in terms of profitability among all the staking pools in DeFi, no matter the growth in TVL it experiences. It would also put more of a premium on sETH2 in the secondary market because the advantage of buying it directly from the liquidity pool (thus skipping the deposit queue) would be valued by more users.
The disadvantages of tightening the parameters lie in the increased gas cost of depositing into the Pool – users falling into the queue will need to pay ~20% more in gas cost compared to norm because of the additional transaction to claim the tokens once the queue is over. However, considering the size of deposits involved and the prevailing gas price in the recent weeks, we believe the boost to the APY from having a deposit queue will outweigh the extra gas cost to the large stakers.
Specification
Set the minActivatingDeposit to 16 and the pendingValidatorsLimit to 1%.
Risks
The effect of tightening the conditions for entering the deposit queue must be measured for evidence of a drop-off among those who want to start staking asap. This can and will be done using Google Analytics if this proposal passes. As a mitigation tactic, we consider adding a pop-up saying something like “want to stake faster? Buy sETH2 from the secondary market to skip the deposit queue.” to the deposit screen. As a side note, we are considering adding a similar pop-up in case sETH2 can be bought from the liquidity pool at a discount.
Discussion
So, what do you think, fellow DAO members? Is tightening of the parameters necessary at this stage, or is a 5% limit to the APY dilution bearable for you? What do you perceive as the additional risks/benefits of having a deposit queue with tighter conditions? Leave your thoughts in the comments!