Updated SWISE Tokenomics via Dynamic Liquidity Provision (dLP) Staking

[Steel.Key]

@mcdutchy

I don’t fully agree with the concept of tokenomics having separate parts. Different components should reinforce each other. Revenu sharing, token emission; there should be an underlying philosophy.

I agree with you here and hope my attempt to break apart the different components for the ease the explanation doesn’t indicate that they are not connected. This emissions schedule incentives more osETH demand → which increases revenue → which increases potential rev share → which increases
SWISE value → which makes emissions schedule itself more effective. They are all interconnected.

@mcdutchy

Controlled emissions could benefit long-term users, both in terms of emissions and revenu sharing, providing a competitive advantage. The current proposal seems to focus on rewarding new power users who are willing to take on high risks, as minting lst adds risk. This emission proposal shouldn’t prioritize risk maximization above core values. I think.

I would strongly disagree here (respectfully of course) in that this emission schedule (1) only rewards power users and (2) those who are power users add more risk to the protocol in this mechanic. Anyone can mint dLP and get SWISE emissions based on providing value in the form of osETH minting. Not everyone has to be power users but for those who decide to - this requires them play by our rules/keeps them from hurting SWISE price (via a min dLP % requirement) and/or negatively impact vault health (the more they mint - the more dLP they are required to post as insurance to vaults)

Its hard arguing against an alternative that nobody has come up with yet but lets take for example the most likely alternative that we give 1-2% additional yield in SWISE to osETH minters in v3 to increase adoption. (We have to do something to improve the relative value vs stETH & rETH because the strong existing network effects they have which are growing stronger each day.)

Big heavy defi users (& in this case mercenary capital) is going to do what they anyways do regardless (given the way that v3 has been set up) and mint osETH, sell to ETH and repeat and now that 1-2% additional SWISE yield is 5-6% for them. The issue now though is they aren’t require to keep a min dLP % so they just dump SWISE rewards continually with no repercussions and SWISE price declines to point where the 1-2% is <0.02% and no longer incentives any additional osETH minters.

Further more - because they weren’t required to post dLP to vaults for insurance - they can simply reverse this looping action when done and leave SWISE v3 forever leaving a humongous mess in their wake.

@mcdutchy

I suggest exploring alternatieve reward structures, such as rewarding node and vault operators with SWISE in line with the future node/vault ranking system. Validator contributions to diversity and use of dvt for expl. should be considered for extra SWISE emissions. While the current proposal focuses exclusively on reward for minting and looping oseth -risk-. I believe there are other valuable aspects we can and should incentivize. The ‘ranking’, algorithm or committee, could play a role in SWISE emission to encourage desired behavior and reward new (power) users.

I definitely agree that we should explore other reward structures with the remaining SWISE in treasury for node operators/vault operators for quality scores, etc. but I think the best thing we can do for them - is give them a health supply of new vault depositors. Think they’d much rather have 300-500 ETH come in to their vault (potentially in perpetuity) then $100 in SWISE as a one-time kiss while they are sitting with odd lots of 31 or 60 ETH in their vaults.

We absolutely should continue to iterate on the dLP emissions schedule to achieve specific goals (potentially led by the “rankings” committee, etc.) with either higher emission weighting (or lower min dLP requirements) for things such as (1) improving vault operator diversity - with higher rates to osETH minted on vaults outside the top 10, or (2) vault operator quality - giving higher weighted emissions weights for vaults with higher scores/ranking or (3) even just say a Smaller Operator Profitability Push with a short term 2.0x boost to rewards for osETH minted that closes out the 32ETH required to launch validator.

This dLP is definitely not about rewarding power defi users but accepting them as reality and making them play by our rules to the benefit of the protocol as a whole.

“Show me the incentives and I’ll show you the outcome” - Charlie Munger

[Jstar]

Loving the active discussion here! I agree that we should be leveraging the SWISE treasury to bootstrap growth and ultimately do not oppose the dLP initiative. There are some ideas, however, that I wanted to share (purely personal views, not that of the team). In essence, it comes down to 4 areas:

1. Approach and rationale to SWISE emissions
2. The amount of the DAO treasury allocated to emissions
3. SWISE emissions alongside single-sided SWISE staking
4. Being smarter with emissions to help build a DAO treasury

Approach and rationale to SWISE emissions

It is undeniable that StakeWise V3 is a very strong product, but we all know that product-market fit alone is not enough to ensure StakeWise grows large enough to be around for decades to come. We must reach critical mass ASAP after V3 launch by obtaining a baseline level of TVL (500k-1M ETH staked). TVL builds trust and attracts capital (exhibit A: Lido).

Once we hit critical mass, incentives become much less important. The protocol can grow more sustainably due to its trusted brand alone. Incentives/capital deployment from this point on should be more tactical to target key growth pathways and ensure market share is retained.

With this view, what doesn’t make sense to me is an emissions schedule based on time alone. No matter how much modeling/calculations you do to find an ‘optimal emissions schedule’, it is still going to be fairly arbitrary. Instead, we should try to tie emissions to the ultimate target - TVL (osETH TVL specifically).

My favorite approach is weaving in a soft commitment to not exceed critical market share (say 22% or 33%) to SWISE tokenomics. The emissions schedule can be analogous to the Ethereum staking yield calculation - emissions decrease non-linearly based on the amount of ETH staked/TVL. The initial high emissions phase specifically focuses on StakeWise reaching critical mass. Below is a rough example:

There is something really poetic about this approach in my opinion. Not only do the emissions directly target our goal (TVL), it leverages the solid monetary policy of the underlying Ethereum network whilst also linking in StakeWise’s core value of decentralization. It feels like the right tokenomics for a liquid staking protocol.

The idea certainly needs refining, for example, if we do not scale in terms of TVL then we’ll remain in a high emissions phase indefinitely. Protection would need to be put in place for such instances. But either way, I would be keen to hear people’s thoughts on this type of approach to emissions rather than setting a defined emissions schedule based on time.

The amount of the DAO treasury allocated to emissions

We should be very careful about committing the entirety of the remaining treasury to this emissions schedule as per the initial proposal. Without liquidity, StakeWise isn’t a liquid staking protocol. Without incentives, we do not have liquidity. Whilst I’ve spent a significant amount of time designing a more capital efficient liquidity strategy (more details to follow this week), we must have capital on hand to help bootstrap liquidity. Using 350M SWISE from the DAO treasury doesn’t leave enough room for liquidity incentives. We also hamstring ourselves when it comes to future funding rounds, something we are reliant on (especially if we start emitting protocol revenues). Maybe 100-150M SWISE should be committed to help bootstrap TVL, maximum.

Adding inflation to SWISE could be an option to help provide a greater runway to the bootstrapping campaign whilst not hamstringing the protocol financially.

SWISE emissions alongside single-sided SWISE staking

The proposed approach to tokenomics incentivises stakers rather than node operators, the opposite to other protocols. Rocket Pool, for example, needs to incentivise node operators as the protocol requires them to lock collateral as ‘insurance’ and the number of operators is the main bottleneck to TVL growth.

StakeWise V3, on the other hand, is much more flexible and should be able to attract large numbers of node operators without the need for extra incentives. A key target group being solo stakers that want to liquid stake on their own node and who will also benefit from the SWISE emissions for osETH minters.

That said, collateral in Vaults will be important to ensure operators (more so the smaller, anonymous operators) can attract delegations. This is where an efficient SWISE staking mechanism comes in. The previous discussions around SWISE staking have always involved the distribution of protocol revenues. I am hesitant to this approach for a couple of reasons:

1. The ability to fund the core team via protocol revenues alone would give the protocol much more flexibility in when and how it raises capital.
2. The APRs that can be achieved from protocol fees alone might not be meaningful enough to compensate SWISE stakers for the risk.
3. Distributing revenues could have legal implications when it comes to the status of SWISE.

Consequently, I would like us to explore whether SWISE emissions could instead be a better approach. At least in the initial phase of this SWISE staking program.

Another option could be StakeWise DAO lending out SWISE to node operators for insurance on their Vaults. For operators who stake and mint X amount of osETH, StakeWise DAO would single stake SWISE from the treasury into their Vault to act as insurance and help them attract public delegations. In this instance, the DAO takes on some risk but doesn’t need to offer anything extra in return. For the node operators, their capital is not just locked as it would be in Rocket Pool, but liquid in the form of osETH. For stakers, they get the protection of insurance from both the operator and StakeWise DAO. This would also be a strong us of the DAO’s treasury, helping push decentralisation and staking with smaller operators.

Being smarter with emissions to help build a DAO treasury

One option to consider for SWISE incentives is a similar approach to Bunni’s LIT, where incentives are not simply given out for free but instead users are given the right to purchase tokens at a discounted price. This way the StakeWise DAO can build up a treasury and the SWISE emissions are a means of funding as well as bootstrapping.

For example, on Day 1 you mint osETH and lock the necessary amount of SWISE LP tokens to benefit from the SWISE boost. Each day, you then accrue SWISE tokens based on the emissions schedule. The SWISE received each day is instantly claimable, but only if you purchase them at a rate set by the DAO (say 20% discount to market). Each day the discount increases linearly, with the max amount of discount after a year being 80%, or even 100%. This would encourage minting osETH and keeping SWISE emissions locked for a longer term as stakers are incentivised to wait for a maximum discount before claiming the SWISE tokens. Any tokens claimed early benefit the DAO as it would receive ETH from the token sales.

Finishing Up

I’ve covered a whole range of different things here, and as you can see, some of these ideas are still quite rough. Before fleshing any of these ideas out further, I am keen to hear feedback from others. As mentioned at the start, I am not opposed to the dLP initiative and truly believe we should be doing something with the SWISE treasury to bootstrap growth. The above throws some other suggestions into the mix to hopefully help optimise dLP for StakeWise. Looking forward to hearing people’s thoughts!

[rdnaxela]

Impressive! Would this discusion and tokenomics adaptation apply to $GNO stakers? Kind regards

[sergei]

how will the profit generated by the DAO be invested in the swise token?

[Steel.Key]

Hey @jstar - really like the ideas/appreciate the feedback both critique & support in certain areas. Want to drive this to the best ultimate outcome. Was hoping someone else would come in after you with their commentary/feedback so I’m not monopolizing the dialogue here but such is life.

See below for a few of my thoughts on your points across the various categories as you laid them out.

I go into this a bit in my Final Comments but with v3 almost upon us - think we need to get to that place where “the rubber meet the road” and I personally trust you/the team to take our thoughts/comments from here and tell us what you think is best for initial go-to-market v3 tokenomics and what maybe should be put on the shelf for future iterative improvements.

• Approach and rationale to SWISE emissions

  • I think your example of an emissions schedule tied to TVL is interesting & agree it’s a bit poetic to have it tied to a core value of maintaining decentralized ETH staking. The main comment/worry I have is – if emissions decline as TVL goes up, respective yields are going to ratchet down even faster as declining amount of SWISE is split over a larger TVL base. Not against it but we have to really be sure that we are right on
    (1) our critical mass assumption amount
    (2) that we in fact get there and don’t sit in a high inflation state to the left (and run through all SWISE we have in the interim) and
    (3) that SWISE price appreciation remains consistent as we approach critical mass to offset declines in emission rate (which I’m optimistic on but is in no way guaranteed) – it just adds a lot of variables.
  • Time based is the just the simplest/easiest way to structure emissions that we can 100% bucket ahead of time with no risks to “running out” (set aside X amount of SWISE to be emitted in 2024, y amount for 2025 - done)
  • I am in total agreement that once TVL gets to critical size – emissions become less important as natural scale benefits start to take effect.
  • On the emissions timeframe critique – I’m not stuck in thinking we absolutely need 6-7 year emissions schedule. The rationale was this gives us ~5 years without having to think about an upcoming “cliff” which hopefully we are well past that critical momentum where the implications after that are just is less important. We could do something shorter like 3 years emissions sprint and definitely would need to reaccess/act quickly ~6mo before expiration to avoid any notable emission cliff if we are still below critical momentum/escape velocity
  • I get that we are going to make the decisions to slow down at 33% market share of ETH deposits but we are not anywhere close to that and we should be heads down on getting to 5% share/become durable long term before worrying about that too much no? Maybe we save this type of TVL based emissions taper “SWISE endgame” after a 3 year emission spirt?

• The amount of the DAO treasury allocated to emissions

  • The initial example of 350M SWISE was illustrative when we didn’t have information on all the remaining SWISE in treasury. I’m fine with 150M – all I’ll say is the more you commit to the emissions schedule – obviously the more incentive it will provide for the actions we want (growing osETH) & thus the higher chance of us achieving our desired outcome of getting to critical momentum/escape velocity .
  • Definitively should consider an inflation rate down the road to fund the dLP initiative/operations in perpetuity – perhaps after this initial 2-3 year sprint we attack that though?

• SWISE emissions alongside single-sided SWISE staking

  • Agree that putting the distribution of revenue on pause for now is a good idea – initially we had to create an incentive for SWISE stakers to post collateral to vaults but dLP emissions sort of solve that issue.
  • On your later point on lending out SWISE – I think that’s interesting concept and defer to team on if you think this would be critical to getting vault operators to post collateral. Vault operators staked ETH positions would be the collateral to borrow SWISE from the treasury? Will go into this next section but oLIT type emissions might be effective here as well. Regardless - you guys do what you think is best – I can say that this is something I’m fine with you guys just running with/taking to fruition without needing our input or an RFC on the forums, etc.

• Being smarter with emissions to help build a DAO treasury

  • I really really like the idea of leveraging incentives by essentially selling in the money options that simultaneously build DAO treasury like Bunny oLIT or Tapioca DAO.
  • That said – we have to admit its definitely complicated and objectively, it doesn’t seem like oLIT has propelled Bunni to critical momentum (some of that may be product market fit as well)
  • I’ve read a bit from the ReveloIntel Report – and going to dig in a bit more but my initial view is a certain LP base just doesn’t want to participate in something like this. If we did it in regard to dLP emission – maybe it’s something that’s a hybrid approach with regular way SWISE and oSWISE rewards as an additional sweetener. Or as mentioned earlier oSWISE could be an incentive structure on the vault depositor side for better quality scores, etc. or any action we would like to see more of from them (& they can sell their ETH rewards for increasingly discounted SWISE over time?)

Other Comments

Is there an update on if its viable to have SWISE & osETH be built out as Layer Zero OFTs (or alternatively be plugged in to Chainlink’s CCIP though I’m less familiar with that recent mechanism myself)– I think any dLP emission program would be more effective/inclusive if run on a Layer 2 (or multiple Layer 2s simultaneously in the future?) Would obviously save on gas fees so that deposits of all sizes can effectively participate and are not price out at certain times of the week when gas costs are high, etc. Also, I think have an automatic top up “ZAP” feature for dLP stakers (optional of course) to maintain min % would be really helpful to the entire system while allowing dLP stakers to not have to worry about day to day price movements.

Know we’ve been iterating on the initial dLP proposal I threw out as a temperature check but I would like to formally say I think we change the min dLP % to 10% of total osETH minted (vs 5% in initial discussions) This sets a higher relative floor price/ratio for SWISE/ETH based on total osETH & (similar to RPL min collateral at 10%) Let me know what you all think.

Final Comments

While I know we don’t want to “rush” anything – I will say on my end I do feel we should have some urgency as (1) v3 is coming up quick and (2) we are already a bit behind the 8ball vs a year ago & incumbents have only gotten stronger (ex. Mantle defaulting to Lido on treasury assets). We need an structure in place to incentivize stakers to post collateral as insurance to vaults in v3 at least.

While tokenomics is a big decision – I think where we are is more of a decision on direction (towards a dLP type solution or not) than on a long term landing spot. I’m certain and hopeful that the tokenomics will continue to evolve and be iteratively improved in the future with ideas such as (1) adding in oSWISE emission (like oLIT) to grow protocol owned liquidity “POL” (2) adjusting emissions (or conversely min dLP %) to say improve vault diversity (3) a “SWISE emissions endgame” once we get to critical momentum, among others.

Does the team want to start a thread with a more formal proposal with recent changes/comments incorporated and exactly what they want they want/think is feasible and we can get the ball rolling on a initial vote to at least start committing developer resources to this?

@here

[Steel.Key]

@here - I also wanted to throw out a potential suggestion to the team as well. if its not too technically difficult - would be great to run a quasi-testnet for the v3 tokenomics as well ideally on top of the vault testnet we have going on currently. Could have accelerated timeframes in regards to SWISE emissions schedule (4 hours testnet is 1mo real time maybe?) , an example Balancer pool to mint dLP to and perform swaps, etc. Would be useful to work out kicks, understand various user actions and test out edge case depositor strategies, etc.