Abstract
Part of the recent charter process has been the reconsideration of the current inflation schema. As a result of discussions, a majority of the oDAO’s inflation was deemed best sent to the pDAO instead. However, this conversation explicitly left out what the pDAO was to do with the newly acquired funding. Based on conversation generated on this post, I will propose two new RPIPs:
(1) the pDAO should raise the RPL/ETH incentive cap in the IMC charter from 10% to 50% while also moving at least 25% of these new funds towards the IMC (in proportion to the current share of pDAO inflation) for incentivizing dense full range RPL/ETH (and/or RPL/rETH) liquidity; and,
(2) the pDAO should move at least 25% of these new funds towards the IMC (in proportion to the current share of pDAO inflation) for proper funding of a cross-chain rETH liquidity expansion.
Together, these changes will enable the committee to tackle some of the remaining challenges Rocket Pool faces. I hope to demonstrate why RPL inflation spent on these two areas will each individually create huge tailwinds for the Rocket Pool protocol in terms of 1. rETH minted, 2. growth of the node operator set, and 3. sustainability of the Rocket Pool protocol.
Background
The IMC has been highly performant at meeting its existing charter goals. Slippage on rETH trades is incredibly low and new DeFi integrations are popping up consistently now. The IMC has also effectively served as the protocol’s incentivized business development arm as RPL rewards are a powerful bargaining tool.
Since the IMC began its liquidity program, we have seen the adoption of Aave e-mode, a large expansion in Maker CDPs, and a bevy of other protocols like Gravita, Raft, Morpho, and Hop. Hop especially is of note as it made rETH the first LST with fast bridging support between both L1<>L2 and L2<>L2.
This is to say that the IMC has been successful in managing its existing inflation and is deserving of a strong budget increase. At the same time, the IMC has strongly felt the restricting effects of the budget as we currently spend more than what we take in with the help of our reserves.
1. Full Range RPL/ETH Liquidity
There has never been a time when the illiquidity of RPL has been more pronounced than at the time of writing this post. The effects on the protocol are obvious. Without a reliable means of exiting a position, participating in the Rocket Pool ecosystem is greatly disincentivized which in turn greatly inhibits the growth and sustainability of the protocol. Historically, Rocket Pool has been blessed by benevolent whales who would provide large amounts of liquidity on Uniswap. Patricio (worthalter.eth) is most notable in this regard as he provided a bulk of the liquidity for years. Thomasg and Marceau are other prominent whales that have also contributed to providing liquidity. This was never a sustainable solution. The DAO cannot rely on random whales deciding it is in their own best interests to provide liquidity. The result is the current situation where having singular market participants leads to hard cliffs in liquidity.
There is currently a provision in the IMC charter to support full-range RPL liquidity, however, the vote for this was focused on making oracles safer to use. As a result, the expenditure was limited to 10% of the IMC spend. While this amount was appropriate to build protocol-owned liquidity and provide some oracle security, it is insufficient for incentivizing liquid RPL markets. With a sufficiently sized increase from the oDAO share, the IMC would be able to create dense liquidity pools. For reference, Lido incentivizes $21m worth of LDO/wstETH liquidity on Curve at 11% APR. Assuming a similar rate for RPL/rETH and having to pay for 9% of that APR (ignoring bribing calculations for simplicity) this is about $2m/yr in cost. The IMC currently has a budget of about $3m and so financing a comparable pool would be impossible currently. With the expanded budget, however, creating a similarly dense liquidity pool becomes completely feasible without hurting rETH liquidity to accomplish the goal. Currently, RPL only has $5m of active liquidity (much of the Uniswap v3 liquidity is single-sided RPL out of range) compared to >$30m in active liquidity for LDO.
Contingent on increasing the IMC’s budget, I propose increasing the cap on RPL liquidity incentives from 10% to 50%. Like the 10% previous limit, this number is somewhat arbitrary. It covers enough liquidity budget for a comparably deep pool to LDO. There likely is no perfect answer to what the cap should be, however, 50% ensures that at least half of our incentives remain focused on rETH liquidity. I encourage people to leave their opinions on what the cap should be if they disagree with 50%.
When markets are suitably liquid, DeFi activity for RPL will pick up. For example, a Chainlink oracle sponsored by the pDAO/IMC would cost only a tiny fraction of the inflation while providing a large amount of utility. Marc Zeller of Aave is a large proponent of enabling RPL as a borrowable asset once said oracle goes live to create novel staking strategies such as borrowing ETH and RPL against rETH to run minipools. The primary benefit of full-range RPL/ETH liquidity is enabling node operators to enter and exit more fluidly, however, it must be acknowledged that liquid markets will also enable some degree of leverage. It will be the IMC’s duty to enable liquid markets but not to encourage excessive leverage by over-incentivizing liquidity pools. Further, this proposal is not a prescription for an ideal liquidity strategy, rather it is a temperature check on directional support - the IMC may find that a combination of concentrated and full range liquidity is best.
As I mentioned earlier, increasing the liquidity for RPL is a win-win scenario for rETH holders and node operators alike. If funding comes from new inflation redirected from the oDAO, then rETH liquidity will not decrease. The increased ease of moving in and out of RPL will attract new node operators and allow the rETH supply to increase dramatically as larger bonds can be bought and sold on the open market. Lastly, having the pDAO take control of the RPL token’s liquidity will bring agency back to the DAO and provide independence from the whales who have historically enabled RPL trading. Ensuring liquid RPL markets is key to ensuring the survival of the protocol. It is in the protocol’s interest to incentivize staking, however, to mitigate sudden large capital losses for node operators, it is also crucial that the protocol incentivize liquidity provision.
2. Cross Chain Expansion of rETH
In many ways, it is a great time to be rETH. Protocols on every network are in my personal DMs looking to integrate rETH - from Optimistic rollups, to competing L1s, to zkEVMs. This is awesome! The entire multichain universe is appreciating the unique value set that rETH provides. At the same time, the IMC has a very limited budget and cannot afford to create liquid rETH markets on every chain – especially as the OP tokens run out and the fact that we did not receive an ARB drop.
Given the current budget restraints, the IMC is faced with the task of prioritizing certain L2s over others. There simply is not enough money right now to create deep liquidity pools on many chains. Currently, the IMC supports pools on Arbitrum and Optimism with a strong proposal from Polygon zkEVM and a plethora of further chains to consider. In an ideal world, the IMC is able to finance pools on each of these chains such that they could independently warrant Chainlink oracles and become center points for interdependent ecosystems. Such a future would increase the utility of the Hop integration that allows near-instant cross-chain arbitrage.
It is crucial to establish rETH on major L2s early. The future of Ethereum is looking more and more L2-focused and so to meet the most user demand, rETH must adapt to this rollup-centric future. There have been days when Arbitrum did more volume than Ethereum L1. Ensuring the long-term relevance of rETH will be predicated on establishing rETH as an L2 staple now. If rETH can become a regular for retail users, then the overall demand for rETH will skyrocket and provide a long-term slice of the staking market share.
Conclusion
The IMC has successfully met its charter-defined obligations of creating liquid rETH/ETH markets centered around the oracle value while also expanding DeFi access to rETH. I believe it is time for the IMC to take two steps further. The viability of these two goals will ultimately come down to what share of the oDAO inflation ends up with the IMC. With a 50% share of the oDAO inflation (or a doubling of the IMC budget) the IMC would be able to over double the current active RPL liquidity and also provide a massive boost to the cross-chain rETH ecosystem. If the pDAO decides that the IMC ought to receive more than 50%, then we would also be able to meet the prior two goals but also expand L1 rETH liquidity. Ultimately, the IMC will make effective use of every RPL that it receives. I encourage the pDAO to provide as much funding as possible so that the IMC can kick the Rocket Pool protocol into a new gear of growth while also solving painful issues that have represented existential issues for the sustainability of the protocol.
Based on the reception of this post I will create an RPIP that bundles an inflation change as well as IMC charter change on RPL/ETH liquidity