I want to be consistent with my feedback on proposals so I will evaluate this proposal as I did for Evan’s and the 1kx proposal using the product’s goals:
- Competition
- TVL
- Principles
- RPL Value
Competition
This proposal lowers the ETH bond from 8 to 4 ETH (and subsequently 1.5 ETH). Additionally, it enables ETH-only node staking by making RPL staking optional. The 14% commission paid by rETH holders is separated into, up to 3 streams: node operators, RPL node stakers, and RPL value capture.
The proposal enables competition with solo staking and Lido CSM by reducing the ETH bond and supporting ETH-only staking. The node operator commission rate would be key to competing on an ETH return basis. A node operator commission of 6.5% would be enough to compete with Lido CSM directly.
The proposal also supports adapting the commission rate to the competitive landscape or rETH demand over time. Although I have to admit to having strong concern over implementing short time window demand commission changes.
TVL
The proposal will certainly increase Rocket Pool’s TVL; by reducing the ETH bond we access further node operator supply - lowering the barrier-to-entry for more home stakers. Anecdotally RPL has been seen as a blocker for potential node operators. By having an ETH-only option the proposal widens the spectrum of potential node operators, encompassing operators that are adverse to holding RPL (a relatively volatile token).
Rocket Pool currently has an issue where if RPL’s price drops, node operator returns are adversely affected, particularly when under the 10% RPL bond requirement and RPL rewards stop. To maintain productive RPL a node operator may choose to withdraw their ETH, thus affecting TVL. The proposal removes this effect by having no minimum RPL bond requirement. Node operators can avoid RPL volatility by staking ETH-only or they can stake RPL and access higher commissions.
Principles
It has been raised that by not requiring RPL as a collateral, we are removing the disincentive for large corporations to use Rocket Pool and so our validator set will become more centralised. I do think this is a valid concern but RPL does not make us immune from this outcome. There will always be a power law of stake in Rocket Pool and Ethereum itself, what makes us decentralised is lowering the barrier to entry so that we are accessible to home stakers. A long tail of home stakers ensures that Ethereum stays open, permissionless and credibly neutral.
What is also important is governance capture. With a minimum RPL collateral requirement, a large node operator would, by default, capture governance. By decoupling RPL as a collateral we lessen the risk of governance capture.
RPL Value
This proposal completely removes the RPL collateral requirement from the protocol. The RPL requirement has been part of the tokenomics since launch and so this is a substantial risk. RPL remains a governance token.
Removing the RPL requirement without mitigating the risk would be extremely detrimental to RPL’s value proposition.
The proposal aims to mitigate this risk by:
- Replacing RPL rewards with ETH commission rewards
- Reducing RPL inflation from 5% to 1.5%
- Potentially introducing an RPL burn (deflation) or RPL LP (buy pressure) mechanism
The additional ETH commission you receive as a node operator, for staking RPL, depends on Rocket Pool’s TVL (more revenue from rETH holders) and how much RPL is staked overall (proportional share). As Rocket Pool’s TVL increases, due to reduced bond and ETH-only, it increases the carrying capacity for RPL staking, essentially it becomes lucrative to stake RPL compared to staking ETH. When Rocket Pool’s TVL inevitably flattens or reaches our self limit, it is likely that RPL stake will reach an equilibrium. This dynamic should ensure that the RPL value proposition is still aligned with Rocket Pool’s success.
Although this approach looks good in the long term, there is a short term risk to RPL value. To migrate to megapools node operators have to exit their ETH/RPL and reenter.
Currently we have 10mil RPL staked within the protocol. 6.5mil RPL is effectively staked (> 10% and < 150%). Around a 1/3 of our node operators are under the 10% collateral minimum. There is a substantial risk that node operators will withdraw their RPL and rebalance because RPL is no longer a mandatory collateral. The incentive to restake RPL needs to be high enough that we can retain as much RPL as possible. The sharp increase in megapool TVL due to the Saturn launch should provide enough carrying capacity to ensure an incentive to restake RPL but some loss of RPL stake is likely. I have conducted my own modelling on this but I feel it is an important aspect to get right to limit the short term risk to RPL value.
RPL burn is interesting because it may offset inflation and mean that liquidity providers are more profitable - leading to a more efficient market. RPL LP again leads to hopefully the same efficient market result as it provides steady buy pressure.
Conclusion
Overall I believe this proposal does a good job of hitting the product goals but the devil is in the detail. There are parameters and policies that will influence how effective the proposal is.