Liquidity Incentives

The community has been discussing rETH liquidity incentives in discord going back to November of last year. The complexity of the issue hasn’t allowed for a clear consensus to be established, but I’m hopeful that the upcoming snapshot voting will change that.

Open Questions

This is my attempt to spark some discussion. I think these are the type of questions that might be suitable for a snapshot yes/no format down the line, but if the community takes this in another direction, that’s fine too.

  1. Is there support to budget for liquidity incentives at all?
  2. If yes, is there support for increasing the total annual inflation (currently 5%) to support this and/or reduce other allocations (oDAO or NO rewards) or should this exclusively come from the pDAO budget?
  3. Within the constraints defined in 2., what should the budget for incentives be?

The rocket pool smart contracts have both the total inflation value as well as the allocation to the different buckets (NO, oDAO and pDAO) as pDAO settings, so I think this is the correct scope for governance.

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My thoughts on the topic: Liquidity at the fair rate is fundamental to the value proposition of rETH. The protocol as is has no way to guarantee that. Arbitrage incentives are only going to come into play when there is a significant gap between market and protocol rate and will not ensure convergence. In my opinion, this means that incentivized liquidity is a core duty of the protocol and comparable to the need to properly reward node operators and pay for oracle services.

Demand for rETH seems to be the bottleneck for now. From the tetra incentives we have empirical evidence that incentives will drive rETH demand. We are currently spending on bankless ads and have not seen a comparable impact on rETH. We are also spending the majority of RPL inflation on node operators, which are abundand at the moment. To me, all this adds up to a severe misallocation of funds.

From conversations with Maker and other lending platforms, as well as Chainlink we know that liquidity and trading volume are key for integrations in general and things like debt caps in particular. So liquidity would be able to create more rETH demand downstream.

The community has expressed concerns about oDAO budget sizing in the past and I would be in favor of redistributing part of it to incentives.

The pDAO budget is supposed to be used for decentralized development. Between the bounty and grants program, uses for marketing (like the bankless ads) and the general need to build up emergency reserves to ensure the survival of the protocol, I don’t see much room here.

With all this in mind, I believe to get to an appropriate budget, it is necessary to increase total inflation. Alternatively, the NO allocation could be reduced, but that seems worse. My suggestion would be something like this:

3.5% for Node Operators
2% for rETH incentives
0.75% for other pDAO spending
0.25% for oDAO

6.5% total annual inflation

For reference, currently there is 5% total inflation:
3.5% Node Operators
0.75% pDAO
0.75% oDAO

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Thank you for bringing this up, definitely critical to drive rETH demand.
Under knoshua’s proposed plan we’ll get a ton more LP but also increased inflation will cause significant RPL sell pressure as pure speculators are encouraged to leave and LPs dump their rewards monthly (rETH LPs are not RPL aligned, unlike, say, NOs); you also will be diluting the RPL stake/rewards of the other groups, meaning a defacto cut.
If you are shaving the oDAO (which I like, but I’m not sure will be oDAO approved), just use that 0.5% haircut as LP incentive; you can also temporarily offer incentives from pDAO (probably a better use than ads). I think we can encourage liquidity for a lot less than a yearly expenditure of 2% of the RPL market cap, particularly if we are directing stakers to only a few platforms (pick one L1 and one or two L2 platforms, for example) so we can concentrate rewards.
Overall, I would be leery to change the inflation rate as it’s baked into a lot of players’ decisions about RPL value proposition. i think the best way to start is to direct the majority of pDAO inflows to LP incentives for a few months; if these are effective at driving demand then we can talk about writing it into the protocol with funds from oDAO, pDAO and/or NOs.

I am definitely in support of reth incentives and shaving the odao budget but I wouldn’t want inflation to be increased I think that is a bad precedent for numerous reasons (I would have liked a greater inflation rate in the beginning but whats done is done). I want an allocation like this
3.5% NO
.5-1% Reth incentives (this is really directed to the pdao in practice we would just be voting to redirect it to liquidity incentives for now)
.25-75% Pdao
.25% odao

I think the amount we spend on incentives will be debated but few at this point will disagree that we shouldn’t do some because it is massively hampering our growth. We can set whatever amount now and get data and see what level of effect we get for the expense and if we ever get in another position where we have too many reth stakers again we can always remove the incentives and if its severe redirect more to node operators (this is really our strongest lever to balance supply and demand and we have never used it)

I’ve never understood why we talk so much more about commission personally we have way weaker evidence imo that it has any effect on node operators and reth stakers habits while the one time we had incentives we were flooded with reth stakers and they were stickier than most predicted.

https://etherscan.io/token/0xae78736cd615f374d3085123a210448e74fc6393?a=0x447Ddd4960d9fdBF6af9a790560d0AF76795CB08+#tokenAnalytics Of the peak value of roughly 25K reth roughly half has remained in spite of the mass market selloff that depegged steth which would encourage market actors to drain reth from this pool.

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Just to clarify, the oDAO has no formal say in this. Practically, the team controlled guardian is able to change pDAO settings. I think if this has wide community support, the guardian ought to implement it, since it’s supposed to be a stand in until on chain governance is implemented. This could become a first test case if community signaling through snapshot voting is working.

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I agree with your position on this. I am not supportive of increasing RPL inflation, as that cannot happen without dilution of RPL value in the long run. That said, I think we could give the oDAO a permanent 0.25-0.75% haircut and vote on a block of time during which additional pDAO funds can go toward rETH incentives as you and epineph suggest. Perhaps quarterly we can vote on this with something that looks like this:

How much of the pDAO RPL inflation inflow should be put toward rETH incentives this quarter?

  1. All pDAO RPL inflow
  2. 50% pDAO RPL inflow
  3. 25% pDAO RPL inflow
  4. No pDAO RPL inflow

Some minor context, I saw in a post that Lido spends 4.5M LDO per month on just rewards and incentives. That amounts to 11% of LDO’s market cap per year. RP is not Lido, and RPL is not LDO, but just bringing in something concrete to anchor with.


High level, I think we need a budget for this, and I think the numbers knoshua presents are a reasonable starting point. If it were a snapshot vote, I’d agree to it.

In terms of where funding comes from, I don’t super care if we make it via RPL inflation, oDAO shaving (though we can only shave so much), or splitting commission up into a protocol portion and an NO portion.

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Hey all, to me I think this is mostly about aligning incentives in the best possible way. Consider the parties in place and how a tokenomic/cryptoeconomic structure be designed using the tools available to reach it with the best alignment for all?

This to me seems like the most sustainable path for any token. I might add using on-chain credentials in the form of NFTs could be very powerful here - as a way of - rewarding loyalty and recognizing users - but also incentivizing the reason to hold vs. sell - if I know the longer I hold X token, the % APR I receive for staking it goes up; makes it an easy decision. Now $RPL doing well; $rETH can expand and more opportunity can be created.

Also really a big fan of $1INCH’s staking program - the way it is designed to reward small players and big players alike - and also the exponential increase in commitment to reach the next tier…all while keeping it so simple. Screencap below:

image

Cheers!

Weston

While I am generally supportive of liquidity incentives, I would suggest that we be mindful of:

  1. Macro crypto demand
  2. Staked ETH inflows
  3. rETH demand vs. overall LSD demand

If you look at overall staked ETH inflows as well as LSD deposits (including Lido), they have slowed significantly. With so much global uncertainty, the appetite for high-risk, illiquid assets is naturally low.

Taking that into consideration, would it be more productive to ramp incentives over time to better mirror market conditions? This would give us the opportunity to collect data on the degree to which every incentive dollar impacts liquidity flows within the LSD ecosystem. While this may be onerous from a management perspective, it would allow us to be more strategic and hold off on injecting too much liquidity into the system / overpaying for liquidity.

Taking a look at Lido’s rewards program gives us some interesting insights (all token prices taken on the date of the month’s budget proposal). I know that these prices aren’t reflective of the average price of LDO over a month period (the April price was literally the recent LDO price peak), but it does show that rewards programs can peak and trough quickly and be very costly to the protocol.

February: 5.5m LDO ($9,130,000 @ $1.66/LDO

March: 5.25m LDO ($10,185,000 @ $1.94/LDO)

April: 4.5m LDO ($21,870,000 @ 4.86/LDO)

May: 4.3m LDO ($11,825,000 @ $2.75/LDO)

June: 4.6m LDO ($4,875540 @ $1.0599/LDO)

July: 4.2m LDO ($1,905,120 @ $0.4536/LDO)

I guess what I’m suggesting is that we have a targeted ramping of incentives that is USD denominated vs. a flat number of tokens to better manage our treasury and hopefully reduce unnecessary inflation.

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Yeah I think there definitely needs to be a gradual ramp up to incentives. I guess in my mind that’s just something that comes after agreeing that there is general support and after a budget has been defined and that is part of the decision making process of how to deploy the budget in detail. So for example a liquidity incentive committee could decide to only use 25% of the budget in the first 28 day period, then ramp up to 50%, 75% and so on. I think that’s a more agile and practical way to do it.

The only levers we have are a portion of RPL inflation that gets minted every 28 days. So something like that would require a settings change every 4 weeks.

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I’m 100% against increasing rpl inflation by any amount. Instead, I think we should just do a better job at promoting rETH or only if necessary rearrange inflation allocation slightly. I think providing incentives is a waste of money long term, as it’s difficult to say if the people who stayed in the pools would have been there regardless of extra incentives. Most people just farm incentives and run imo, hence just giving away free money at the cost of long term rpl price.

Yes, not capturing growth sucks but we will be better off long term without the increase in inflation. It’s a strong possibility that the demand for rETH will significantly increase post merge as people will likely see an increase in yield and want to get into staking quickly, hence we get right back on track.

Editing: If we need the incentives than my proposal is reallocating a percentage from oDao into pDao, adding an additional team spot to make up for their lost income, and maybe asking the team to supply any remaining amount that we determine to be necessary. Preferably, we would have some data backed evidence of the needed amount. Inflation would go unchanged.

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At the moment rETH is not a liquid staking token, to be described as such requires a reasonable expectation of liquidity.

It may be tempting to point to market action and sentiment to explain away this issue but it is better described as the result of a long term disregard for the importance of this key aspect of protocol health.

Aside from a few integrations spearheaded by exceptional effort from community members, rETH is completely absent from DEFI in any meaningful way and this is largely a self-inflicted problem.
I would contest that if long term the majority of rETH is simply being held in wallets then the protocol has failed to live up to a fraction of it’s promise & potential.

In my mind this is relatively straightforward:

We must have integrations for Rocketpool to be successful.
We can not achieve integrations without liquidity.
Trading volume alone is not sufficient to attract liquidity regardless of timeframe.
Liquidity incentives have proven to be extremely effective at attracting liquidity.
If we are willing to spend resources to increase demand for rETH and raise awareness for the protocol in general, incentives are the most cost effective way to do so.

Regarding the questions for discussion.
While I am in favour of reducing the oDAO allocation, discussion of their budget, whether to expand it or not, defined duties, penalties and timeline for potential sunsetting should be a separate topic so as not to create a direct link and conflate things.

I would support an increase in inflation if required to pay for an increase in growth of the protocol through incentives. That being said, If going that route, I would favour a general increase to the pDAO rather than earmarking for specific things, that should be decided downstream.

Considering such a change is likely to be contentious, I would suggest that it isn’t required for movement on this issue in the short term.
When it comes to incentives, going from 0 to 1 makes the largest amount of difference with steeply diminishing returns, so before committing to a change in distribution I would like to see the impact of using a relatively small amount of incentives from the pDAO and observing the outcome.

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I’m absolutely against increasing RPL inflation. In my opinion, RPL inflation is not a parameter that can be changed as needed. This will create a very bad precedent and possible demand for even higer inflation for the next idea that needs funding. There is already a group of people out there that refrains from staking with Rocketpool because they do not wand to hold RPL. A higher inflation will reinforce their opinion.

Besides that, it will dilute all existing RPL holders at a very marginal benefit.

It is also easy for non-oDAO-members to demand a haircut on oDAO rewards. While I agree that oDAO rewards are more than ample, I’m also reluctant to easily change these. There needs to be broad consensus amoung all oDAO-members for this change. We as node operators rely on the oDAO to operate reliably and securely.

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I’m supportive, and agree with @knoshua’s target allocation.

Something has to give. We need to spend something in order to get the rETH flywheel going. Compared to the obvious alternatives (reducing commission, do nothing, etc.) I agree that inflation is the right dial to turn for rETH demand.

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I would be in favor of an inflation increase that has an expiration date. We won’t always be in bootstrapping mode. To the extent that rETH incentives can grow the protocol, inflation makes sense to pay for it. Assuming that liquidity and demand return to LSDs, the merge is going to be a land grab.

While diluting holders (myself included) should not be taken lightly by any means, it makes sense to me that it is worthwhile to fund incentives in this way for the same reasons that it made sense to pay a premium to Bankless despite the small pDAO treasury (in particular, the timing of staking coming into prominence).

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Hey everyone - I’m from Balancer where we recently passed a proposal which included bribing for our rETH/weth pool on Ethereum using the protocol fees (swap + yield) earned by that pool.

The first bribe was deployed last week - 5,136 USDC spread between Aura & Balancer Hidden Hand markets. The result was a gain in emissions to the pool from 0.21% to 0.64% of the 145k BAL printed per week. Depending on the price of BAL you use this was around a 2x ROI as this covers two weeks of emissions. The pool’s TVL has also more than doubled so you can expect even larger bribes to come in the future!

All this to say that allocating some liquidity incentives can certainly drive rETH demand and Balancer wants that rETH to find a home with us. Balancer applies the protocol fee to rETH’s staking yield so any pool containing rETH (with a rate provider) is a valuable pool for us. Together we could grow rETH’s usage on Balancer much faster than we can do it ourselves. Additional pools can also be explored like rETH/RPL or rETH/stables to drive additional trading activity.

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Great to see some more discussion around this.

I believe we agree that rETH should be liquid and integrated and used widely in defi protocols. We cannot (and have not) achieved those goals to date, and I think that incentives will achieve greater liquidity, facilitating further integrations, and increasing rETH demand. Additionally, the fastest growth for rETH that we have seen was during a period of incentives on the curve pool, and that liquidity has been relatively sticky (albeit an effect which may be more prominent due to the pairing with wstETH, rather than rETH/ETH).

For the sake of discussion:

Option 1: If we were to increase inflation, I wonder if a more palatable amendment would be 5.5% annual inflation, with modest changes for each allocation, other than oDAO which is currently being overpaid:
3% for Node Operators
1.5% for rETH incentives
0.75% for other pDAO spending (which could be used to bolster incentives for a certain period of time if deemed beneficial)
0.25% for oDAO

These changes are:
-0.5% from oDAO
-0.5% from Node Operators
+0.5% total inflation

Option 2:

Alternatively, if there was not support to increase total inflation, then the rETH incentives allocation could be reduced to 1% in the above example, with pDAO consideration of a temporary supplementing of incentives to first observe for results (e.g. for one quarter), before committing to further changes. I also think there is merit to starting smaller, and observing the effect of the incentives - and this option may allow for that.

3% for Node Operators
1% for rETH incentives
0.75% for other pDAO spending (which could be used to bolster incentives for a certain period of time if deemed beneficial)
0.25% for oDAO

These changes are:
-0.5% from oDAO
-0.5% from Node Operators

I would be interested to see if anyone has an estimate of what our RPL incentives budget would need to be to achieve our desired amount of liquidity.

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I think both slightly higher inflation and cutting oDAO rewards make sense, but conditional on convincing buy-in from each group of stakeholders.

So, probably a snapshot vote for NOs once that’s a thing, and oDAO is small enough that I’d be happy with any sort of headcount, on-chain or no.

And I would be very cautious about forging ahead on thin majorities. Something as fundamental as inflation rate and oDAO rewards should take some form of supermajority to change imo.

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We definitely need liquidity incentives, however, depending on the oDAO target size, reducing ODAO allocation might not be ideal.

In general. i think, ODAO should be paid in ETH, as their main expense (sending transactions) is also in ETH. This can be funded by transitioning ODAO into a relay operator/block builder job, which would incentivize ODAO to build the most profitable block (as they get a x% cut per block), thus increase RP minipool profitability.

Arguably, paying in ETH would also decrease RPL sell pressure because ODAO does not need to cover tx fee expenses.

I understand that this would be a more complex change, but it seems the most sustainable model to me.

Disclaimer: I am an ODAO member

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I fully agree with Knoshua’s proposal, originally I was against Liquidity incentives and raising inflation, but I now do believe that this RPL dilution will greatly benefit the protocol and in turn RPL.