Liquidity Incentives

Liquid Staking Experience
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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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22

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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25

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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That would be a fine first step, but I don’t think we can sacrifice all pDAO funds. Right now, we don’t have reserves for future dev. If the current dev team steps away, what will we do? Alternatively, should we expect the dev team to continue working without further compensation indefinitely?

Discussion around these other needs is in https://dao2.rocketpool.net/t/pdao-budget-definition/644/27.

I think it’d be great to increase our budget to add liquidity incentives. @knoshua’s suggestion of extra 1.5% from increased inflation, and moving .5% from oDAO seems an effective way to get these funds. I should note - it’s probably a lot easier to go back (eg, reduce inflation which rewards all RPL holders) given that RPL holders will be voting, so I’d rather be aggressive on the budget early on. I’m not even sure this actually is aggressive, but I do want to push back on the many posts that are asking for inflation changes to prioritize thrift.

Our committee that we appoint to use this budget need not spend it all immediately (ie, they can ramp up slowly to test things). If in the end they have too much money, giving it back to the pDAO to increase our reserves for future dev would be great. Heck - they could burn it if that’s preferred.

I believe we’re best served by choosing a committee of trusted people and making sure they are as well-resources as we can manage.

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Definitely, yes to liquidity incentives.

Having said that, I’m in the camp that is generally against RPL inflation. It doesn’t mean I’d vote against it, or that it doesn’t have a place at some point, but this early in the protocol’s life I don’t like it and the message it sends. This is why I also don’t really support NO cuts, even if they don’t amount to much right now. Take it off oDAO and maybe a little from pDAO just to test it out, then we can see if ramping up the amount is helpful.

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In general, I’m supportive of liquidity incentives because it seems clear that rETH adoption is the limiting factor for protocol growth, and this will likely remain the case for some time. We can always adjust incentives in the future if this changes.

That said, I’d like to point out that we are discussing oDAO budget changes without an agreed security model in place. We should view the oDAO as, in part, a security feature of the protocol, which means that reducing oDAO compensation is also a reduction in security. I think this is worth its own discussion, so I made a thread here to discuss: oDAO Security Model

I encourage everyone to consider a deliberate decision on oDAO compensation so that we can make informed budget changes overall.

Also, I’ll take another opportunity to promote my article on suggested RP tokenomics changes which discusses inflation heavily: Rocket Pool Tokenomics 2.0, Pt 4: - HackMD

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The above discussion seems to be in large consensus in regards to the need for liquidity incentives. The remaining discussion appears to be based around (1) sizing the liquidity incentives and (2) paying for the liquidity incentives.

As such, I suggest the following committee structure. After some deliberation, I will move this to its own post.

Summary

There is broad agreement on the need for liquidity incentives that @knoshua outlines in the Liquidity Incentives forum post. I would like to suggest an outline for an Incentives Committee based on the Lido DAO. I further propose that this committee be given access to the LM incentive size discussed in the Budget Definition thread. I will outline guiding principles, an accountability scheme, and some action items.

Guiding Principles

  1. The committee’s chief mission is to support low slippage exchange between ETH <> rETH on major platforms where this trading occurs.

  2. The committee will aim to minimize costs and prioritize long-term capital-efficient strategies to build liquidity.

  3. The committee will aim to expand access to rETH across major DeFi protocols to build a resilient price-feed oracle.

  4. The committee will aim to sustainably build rETH exchange volume.

  5. The committee will support the oDAO rETH:ETH ratio as the focal point in designing liquidity incentives except in such cases where the committee would be required to add incentives that would serve only to boost demand with marginal benefit from added liquidity.

  6. This committee will manage funds allocated to and/or rewarded to the pDAO for liquidity purposes in accordance with any conditions those funds were received upon and with the approval of the broader pDAO with equal accountability reporting.

  7. The committee will be sensitive to market actions and adjust emissions accordingly to reasonably maintain the aforementioned principles in adverse markets.

  8. The committee will respect the will of the broader DAO and respond to feedback from monthly reviews in earnest.

Governance

Initial whitelisted addresses will be approved through rough consensus from the core team and community. Thereafter, committee members will structure transactions and execute them from a multisig. All related addresses are to be included in the monthly report. New members are to be added over time to increase the security profile of distribution. A future debate may arise about compensation for these multisig signers for gas expenses.

Accountability

At the end of each month, the committee will publish a report on locations, amount, justification, and efficacy of incentives for each platform distributed. This report will also request a tentative budget for the following month in $RPL to be allocated as they see fit within that budget and with community feedback taken into consideration during each reporting period.

A reporting period will be 3 days of community feedback followed by a vote only if feedback is contentious or changes outcomes.

Change Management

I propose an initial committee member review within the first 6 months pending proposal approval to discuss change management and/or areas for improvement. Prior to this review, existing members may vote to remove a member with a supermajority consensus. This period of time should also serve to establish a formal onboarding and offboarding procedure.

Initial Budget

In order to facilitate broader discussions around tokenomics, I propose based on the pDAO Budget Definition thread that up to 20% of the pDAO inflation be made available to this committee to distribute. This amounts to 27k RPL, or 312 ETH at market prices, annually. For an experimental run of approximately 2 months, this gives the committee ~50E or $78,000 USD to work with. This will amount to a trial run aimed toward understanding the level of incentives required to meet the aforementioned principles.

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I think this is a great idea. I broadly agree with the guiding principles.

On a practical note - I’m not sure how long you envisage the process of selecting members and establishing a committee might take, however if the OP proposal is successful, it would be useful if the committee mutlisig was established and able to receive the OP tokens and deploy them etc. I haven’t been able to see how quickly the OP grant would likely be paid out if successful. Of course, if this is not a feasible timeline, a temporary multisig could also be used/established with the team or prominent community members to handle this responsibility for now.

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edited to include externally received funds.

The OP tokens are actually why I’m pushing for this now. Not only will we need a team to handle those funds but we will also need to buoy L1 liquidity. Frankly, it’s now or never.

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Additionally, I think it is an important point to consider the impact on L1 liquidity that the OP incentives might have, and to consider whether it is beneficial to add some incentives to an L1 pool (I would suggest the rETH/wstETH one as this would be the most cost effective to incentivise due to the pairing of two LSD’s as the underlying assets) in conjunction with the OP incentives timeline. For example, will the maker integration, which has been very slow, be negatively impacted if L1 liquidity migrates to L2, and what level of incentives might be necessary to maintain an appropriate level of liquidity to protect the viability of this upcoming integration.

Maker (and other beneficial defi protocols), along with the industry as a whole, will be transitioning towards L2, so I believe expanding to this ecosystem before losing further market share to Lido (particuarly at no cost to the pDAO) is beneficial. However, I completely agree we need to protect the interests and goals for L1 liquidity and integrations.

I agree, establishing a committee like the one you outlined will be necessary to navigate these dynamics and achieve our goals for liquidity. The sooner we can establish this the better.

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What are the hypothesis that need testing? Data on LSD liquidity pools and even rETH specifically already exists. I would prefer to see us move quicker on this. Budget should be allocated as those decisions around inflation are made and we should aim to make them before the merge.

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I am suggesting that this budget be quickly pushed through and then the discussion about a broader finalized budget can begin. I agree with your sentiments that such a budget should be decided before the merge and that said budget would overrule this one. This budget is decidedly smaller than most suggested sizes and so we are not at risk of spending money we don’t have. Perhaps it would be better to change it to a 1-month period? I fear that waiting for a budget decision that may include potential tokenomics changes will be too slow to fix time-sensitive issues.

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Trying to summarize what I’m hearing:

  • There seems to be overwhelming support for liquidity incentives in general.
  • Reducing oDAO rewards seems to have wide support, but multiple people voiced concerns about the implications and some have asked for oDAO to be involved in this decision.
  • Increasing inflation appears to be a divisive issue. Many are opposed in general and multiple people said that they are unsure if it is necessary or they would prefer to start without, arguing for a “slow and measured” approach.
  • Multiple people have been asking for data on liquidity incentives and their impact.

Can we get guidance from the team (@maverick or @langers ) on how to incorporate snapshot voting into this topic and get to something actionable?

On the oDAO issue, I’ll just point out that concerns about their rewards have been raised in the past and these have been largely ignored by the oDAO. I certainly hope for oDAO input on this or any other governance topic, but I think at some point it’s fair to interpret their silence as indifference.

In my opinion, 2% allocation to liquidity incentives is quite conservative. It feels like the perspective on this might be a bit warped by the initial tokenomics completely ignoring it. We are talking about spending still almost 2x on node operator incentives vs. rETH incentives when rETH demand is currently the bottleneck. The suggestion of spending 20% of pDAO allocation on incentives would translate to a 23x discrepancy.

On the data questions, I’ll point to the Curve rETH/wstETH and the Balancer rETH/ETH pools, as well as numerous other incentivized LSD pools. This is my mental model: It appears that incentives can attract capital up to a point where pool APR hits a market rate. The APR of the included LSD can be seen as a floor for that market rate, with LPs generally demanding a premium that fluctuates over time, probably depending on alternative investment opportunities and the perceived riskiness of the pool. Mechanisms like the “ve” model might be able to offer some efficiency gains, but these are variable and might only be temporary.
For example, at the moment the market rate appears to be ~7%. That means for a pool that is 50% rETH, about 5% would come from incentives. So spending 1 ETH/year on incentives would translate to 20 ETH TVL. Applying that estimate to 2% on incentives would suggest that we could generate ~80k ETH TVL. Between the immediate markobarko and patricio demand and the potential from LEBs in the medium term (even 8 ETH LEBs can support a 3x on rETH supply), I think that’s a reasonable value.

There are many variables that would change that math over time, for example:

  • underlying LSD yield
  • premium for the pool
  • efficiency of “ve” systems
  • RPL ratio

I’m not sure what kind of data people are looking for and how an experimental phase would be different than the curve and balancer incentives we have seen in the past.

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Agree. Also we must negotiate with L2s to allocate some tokens as incentives.

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When snapshot voting is deployed we will work with the community to raise votes on each issue in turn based on some community co-developed priority. Running multiple votes at the same time may be noisy so a couple at a time makes sense - with enough time for votes to come in. ideas on voting period? Snapshot voting is essential to ratify the decision - this is to ensure that it is broadly accepted rather than an active minority.

The community have control of the pDAO treasury, if they decide to spend it on liquidity incentives so be it. All the core team ask is that the community agree on a budget first so that other goals are not sacrificed. We would also suggest that the community nominate a treasury accountant to track/report spend. Rocket Pool is a DAO and as such, the core team will not do everything. The core team have opinions on some/most proposals and will voice them.

How do we make it actionable? This depends on each proposal. In this case, there are some operational aspects that need to accounted for. A liquidity committee is a good solution and the OP liquidity plan is a good testing ground for how that will work.

It has been raised and we have said before that we intend to expand the ODAO and so the payments to each member will decrease over time. It is not indifference but we haven’t had much time to engage in the conversation recently for obvious reasons. When we get the new list of ODAO members out, it might be a good opportunity to to setup a townhall, where we can talk about all things ODAO.

Much of which is caused by market conditions which may improve at any moment and we are back talking about node operator supply.

To me, it makes sense to experiment with either time or scale to see if it works and have criteria for evaluating that successful. Any liquidity incentive program must be clear on what it is trying to achieve (rETH deposits, low slippage, defi integrations) and be mindful of negative impacts (RPL sell pressure, constantly increasing budget, any brand impacts).

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Yeah, definitely a good idea to standardize procedure. I’m thinking maybe one or two weeks for discussion and allowing people to form an opinion, followed by one week for voting? We should also think about how we want to inform people about an upcoming vote: Discord announcement? Part of bi-weekly update?

I was referring to oDAO members in general. I have seen Superphiz and Butta address it as well as the team. I have not heard from Lighthouse, Nimbus, Etherscan, Consensys Codefi, Blockdaemon, Blockchain Capital, Bankless, Fire Eyes or Yorrick.
I certainly would be interested to hear what the oDAO (not just the team) intends to do about adding oDAO members and we can have a discussion if an increased oDAO size is desirable and justifies the budget allocation from the perspective of the pDAO.

Back in February you said this in Discord when talking about liquidity incentives:

Totally agree with @Marceau :desert_island: 4+2.8 that our bottleneck is node operators. Consequently our initial focus is going to be on node operators, not rETH. There is plenty of rETH demand at this stage. More rETH demand does very little to help with throughput. Our main issue is NO capacity - we need to get very good at attracting and onboarding node operators. This is exactly what we are working on.
Obviously as the situation changes, we can reevaluate there maybe a time when we need to switch focus. As @Marceau :desert_island: 4+2.8 said, integrations are a key driver for rETH demand.

I believe you followed through on focusing on node operators. Between the RPL reward system improvements, SaaS and potentially LEB there are multiple improvements for that side coming in the future.
Obviously market conditions will change again at some point. I’m simply suggesting that now might be a time to switch focus.

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I support this timeline. Would it make sense to aggregate votes into official blocks? A la MakerDAO where anyone can do a signal vote asynchronously but then executive votes happen at fixed intervals (perhaps biweekly to match updates). As for informing people - a fixed interval is easier to manage through discord announcements. Perhaps an additional role tag like ‘node operator’ for ‘governance enjoyooooor’

I strongly echo this sentiment. The rETH half of the protocol is due its fair share of attention.

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