Liquidity Incentives

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:

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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.

Thanks for drafting this and educating the community on the topic!

  1. Is there support to budget for liquidity incentives at all?

I support this in general. Liquidity is necessary for DeFi integrations and usability.

  1. 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?

I believe that we should bump up pDAO’s budget, and allocate incentives from pDAO. This is because the incentive program needs to remain agile to a changing market while setting fixed expectations on overall inflation, for token holders to be able to plan. Tokenomics changes at that level tend to incur political costs, and we don’t want to do this for each adjustment of incentives.

There are also multiple ways to spend this budget to create liquidity going forward:

  • Incentives to DEX LPs for staking their LP
  • Procuring protocol-owned liquidity over time
  • Incentives for minipools that volunteer to be exited by protocol in times of low DP
  1. Within the constraints defined in 2., what should the budget for incentives be?

The budget should be minimal to target a conservative TVL which grows as the protocol matures and risk is reduced. We should not blindly allocate a % of inflation and hope it works out well. There is a high chance of overpaying and encouragement of unwanted risk-taking. Too much growth can have a bad look on the protocol if we can’t let users unwind in a reasonable manner.

The exact mechanism/parameters can be discussed separately, but I can imagine it looking something like:

  • Increase inflation by 2%
    • all of this new RPL goes to pDAO treasury
    • This will decrease by 0.5% a year, such that the inflation becomes 6% after 2 years.
  • Target DEX TVL of 20,000 ETH
  • pDAO to start spend 0.5% (of supply) p.a towards L1 uniswap liquidity
  • Observe for a month and consider rebalancing and incentive proposals every quarter.

It’s also important to start collecting data on the effects of these incentives over time.

Side note:
Outside of incentives, there may be other liquidity mechanisms that we have not explored (I think?). eg. min-size in deposit pools. To support the liquid nature of the token, it may make sense to set a min-size to deposit pool after withdrawals are enabled. eg. When the balance falls below min-size of 100 ETH, the remaining ETH can no longer be used to match minipools - it can only be used for burning of rETH.

Right now, the min-size of 0 optimizes for protocol growth and minipool initialization. In the future, we should be fairer to rETH holders by favoring the market - we should not be matching more ETH for minipool staking when most rETH users want to exit.

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Thanks for getting the discussion started.

  1. Yes, 100% think we need liquidity incentives both to stay competitive as a product but also to enable stability and utility to rETH holders

  2. In general, I am supportive of increasing or adjusting inflation if needed, but I would also like to test out and explore how much we actually need in incentives before introducing significant changes.

  3. I think some analysis or live testing should be done before final incentive budgets can be properly determined.


My thoughts beyond these questions:

Liquidity incentives are incredibly important and I think we need to act in a timely manner. The merge will be one of the biggest opportunities for growth and we want to maximize RP’s appeal before then. I think this should be done by using some existing pDAO funds as soon as possible; this allows us to deploy something quickly and gives us real data to work with. To this end, I think we should break-down the liquidity problem into as simple parts as possible:

  1. Do we provide incentives? Yes - No (which is what this post is already starting)
  2. How much of the pDAO budget should be used as early incentives? (5%? 10%? …?)
  3. Which one protocol should we focus the first incentives on? (Balancer, Curve?)

While that happens, formal proposals and arguments for inflation changes and budgets can be discussed and revised since that is a much more complex situation.


As far as inflation is concerned, RP actually has a nice built-in signal for when rETH demand is lacking or in excess - the minipool queue and deposit pool. If we do separate out incentives as it’s own inflation category, I think it should be dependent on the state of those areas - ie, if the deposit pool is >50% full over the last period (on average), do not print incentive RPL, otherwise, do (the exact metric would have to be workshopped).

As we saw before the bear and with the Tetra incentives, rETH demand outpaced minipool demand leading to an always-full DP which makes excess inflation spending unnecessary and inefficient. It also has the downside of bringing rETH above peg, a negative situation for prospective holders.

I personally think incentives and inflation changes should be allocated to the pDAO with a voted in “incentives committee” to allow more agile deployment. This committee could then make it a “policy” to stop incentives if the deposit pool is healthy which allows for more discretion. If incentive spending is not needed, the excess inflation can then just be saved in the treasury for it’s other purposes instead of being wasted.


One final item, if we want to get to peg before withdrawals, we should distance ourselves from the Curve rETH/wstETH pool since that creates a sticking point for rETH around wstETH value, which as it stays depegged, will want to drag us down with it.

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I agree with both @Dondochaka and @DaserDog in that incentives and integrations are important but an increase in protocol inflation should not be taken lightly.

I am in favor of redirecting the oDAO budget and if protocol inflation is increased, it should either have an expiration date after which the pDAO should vote again whether to keep the increased emissions above 5%, with the part coming from the oDAO allocated to an “incentives committee” voted in by the pDAO as per @DaserDog 's proposal.

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I agree that maintaining the peg for rETH should be a protocol responsibility, but only after withdraws are enabled. I’m not sure liquidity bribes for rETH are a good long term solution.

Right now the market is pricing rETH at a discount solely as a consequence of this bear market, so maintaining peg would mean subsidizing rETH higher risk exposure artificially. While the long queue does hurt our growth, a good short term solution would be simply pointing our prospective NOs toward buying rETH at a discount for better APR and wait for our queue to clear before joining.

In my opinion the best long term solution would be incentivizing exits after withdraws are enabled. In the short term I’d like to see the effects of Maker and other protocols integrating rETH before committing to increasing inflation or altering budgets.

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thanks for your work knoshua.

as a NO i dont know how i feel about increasing RPL inflation to pay for liquidity incentives. Yes we currently have NO overhang but i can very well remember when we struggled to get node operators because the deposit pool was filled to the brim over months and NOs were coming too slow. Im not convinced the current situation isnt more a result of the heavy crash over the last months which probably affects interest of a target group like liquid stakers more than people passionate enough to spin up validators (just my opinion obviously)

i feel like we should be able to find a source to create liquidity incentives to raise rEth demand in a way that is not necessarily pushing down on the other part of the scale in form of disensentivizing Node Operators. having to take a stake in RPL is a hard sell for many, we have heard that again and again.

my response is a little watery, im just not sure what the right course is but i feel like further reducing RPL attractiveness might not be the way. I dont have a better proposal right now though.

my gut tells me id rather see budgets from oDao and pDao redirected. Maybe we need a honest discussion about what impact those budgets have so far and if those are not partly better suited for liquidity incentives before we get out the hammer and start pounding RPL.

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After a bit more discussion in #trading, I’d like to put forward the idea of not increasing inflation until we get a feel for the impact of spending towards incentives.

To this end and consistent with my original reply, let’s consider diverting pDAO RPL inflow on a quarterly-vote basis toward this first to assess the impact and then develop a more data-based ROI assessment on inflation increase.

Based on some quick math, the 0.75% pDAO inflation represents approximately 139k RPL, which breaks down into ~35k RPL per quarter. This is roughly equivalent to 400 ETH or 600k USD.

Is this enough to make a dent in the incentives problem? I haven’t done that math yet, but perhaps someone else has.

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