I’m very excited about Rocket Pool and just started running my first minipool. But I’m not very convinced that the insurance system is solid and future-proof. I’ll lay out my concerns and propose a different solution. There are still some gaps in my knowledge about the protocol so please let me know if I missed or misunderstood anything.
It’s basic economics that insurance costs money. Rocket Pool has adopted a clever system that currently allows node operators to earn money on their insurance. The gist of my concern is that this only works as long as Rocket Pool is in its growth phase, when new entrants are effectively paying existing node operators.
It seems that the primary demand for RPL currently comes from the need for node operators to provide RPL as collateral to insure new minipools. The primary supply comes from a 5% yearly inflation. There is currently rising demand due to new entrants wishing to create minipools. Hence, there is strong upward pressure on the price of RPL that will continue as long as Rocket Pool is growing.
This growth phase will end at some point, at which the number of minipools that are created and destroyed is the same. At this point, market supply of RPL (5% inflation + minipool exits) should be expected to exceed demand (minipool entrants), so one would expect RPL to depreciate slightly against the value of ETH. At this point node operators lose money on their RPL collateral, so one would expect node operators to reduce their collateral to the minimum of 10% (currently the average collateralization is 53%), further increasing supply and reducing the value of RPL.
If node operators are smart, they will reduce their collateral to 10% before a “run on the RPL” occurs. Since you can continue to operate existing minipools below the 10% minimum this might allow people to run minipools with very limited insurance. They will miss out on RPL rewards, but at this stage, it could be more profitable to have (say) a 5% collateral without rewards and a greater portion of your capital staked (which yields the normal ETH staking rewards and minipool commission).
So, unless I have missed something, it seems a depreciating RPL will become a problem at some point in the future.
A better system
Now on to what I think could be a better insurance system. Instead of a complex tokenomics, we should have a token that is fully backed by rETH in a single pool. It gets minted when people deposit rETH as insurance for their minipool, and destroyed when people liquidate their minipools. This way, the value of minipool collateral with respect to ETH will stay close to the initial value and slightly increase over time (say, >1.6 ETH per minipool). The only costs that operators are incurring for insurance in this system is the difference between minipool operator rewards and rETH rewards. Most importantly, this system remains stable over time regardless of whether Rocket Pool is growing or shrinking. I also think it’s a nice idea that node operators are (indirect) rETH holders. Having a stake in the system as a whole might induce more responsible behavior with respect to DAO voting.
Please let me know what you think.