Protocol Funding in Saturn I and Beyond

Governance
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Motivation

This post addresses why we would want to and how we could go about increasing treasury funds and seeks more formal opinions on if we can do this in Saturn 1. It also serves as a precursor to necessary Saturn 2 discussion on what to do with surplus_share (part of the value capture in Saturn 2 that we are supposed to vote on before Saturn 1).

Increasing pDAO Treasury in the short term (Saturn 1)

After previous GMC/Core Team meetings, as well as the discord discussions here Protocol Funding Beyond RPL Inflation/Speculation and elsewhere, there appears to be alignment on at least looking into increases to protocol funding. Ultimately, this means diverting funds from Node Operators to the pDAO treasury.

Reducing rETH yield could technically also be considered, but we are saturated with NOs and will likely be for a long time.

The goal is to be able to fund larger marketing initiatives (including hiring external marketing agencies), incentives, bribes, integrations, etc. to drive rETH adoption. Improving rETH’s APR might help attract small buyers, but large-scale adoption requires deep liquidity, which means we need big buyers. The treasury should be equipped to fund initiatives that make rETH an attractive choice for those with significant capital.

As of this writing, the pDAO treasury (entirely denominated in RPL) is valued at $238k.

AlphaGrowth directly told us that, in their opinion, their efforts at increasing rETH adoption have been more hindered by lack of protocol funds than by rETH efficiency. I am understanding of how RP has handled itself in the past—avoiding a direct protocol fee (yes, I know inflation is effectively a fee), not paying for listings, etc.—but a new era is upon us.

Goal: Grow the treasury in Saturn 1

Reminder: In Saturn 1, RPL inflation will still be 5% with NOs getting 70%, oDAO 2.5%, and pDAO 27.5%. NO commission will be 5% base (no_share) and RPL stakers, who must be Node Operators, share from the 9% commission pool based on how much RPL they have staked (voter_share). Thus rETH still pays 14% commission.

Below is a more curated list of growth scenarios than appears in the discord thread. This is NOT meant to replace Saturn 2 surplus_share ideas; LP, buy and burn, etc., are good goals which add value to RPL, but they are not likely, imo, to give short term treasury boost.

Calculations in here are very rough and assume RPL = $5 USD and ETH = $2,000 USD.

1. Divert a portion of no_share or voter_share to the treasury

This would provide a direct ETH income stream.

Based on rough calculations, 1% of commission would generate approximately 18 ETH per rewards period—which may not be significant enough to make a meaningful impact on treasury funding, but it is not nothing, and it is ETH, not RPL. Note that a drop in commission is offset by more capital efficient 4 ETH pools.

Example: voter_share commission 9% → 8% ⇒ Increase per year of 235 ETH / $470K to treasury.

2. Increase RPL Inflation to the Treasury

This would provide a Saturn 1 “lump sum” of RPL to the treasury.

For example, adjusting the current pDAO 28.5% allocation to 48.5% while reducing the NO allocation from 70% to 50% would nearly double the pDAO’s RPL stream. This would still leave NOs with a portion of inflation while ensuring greater stability for the treasury. However, this would still be subject to RPL price fluctuations, meaning its effectiveness would depend on market sentiment and demand for RPL. Since this change would dilute RPL value for existing holders and stakers, the question is whether this level of dilution would be tolerable for the stakers. Note that after Saturn 1, NO inflation is going away completely anyway. This shift could happen immediately, after a certain time period, or in stages during Saturn 1.

Example: NO 70% → 50%, pDAO 28.5% → 48.5% ⇒ 195K RPL / $1M more per year to pDAO (would mean higher inflation after Saturn 1 than the expected 1.5%).

Difficulty to integrate these into Saturn 1

Langers has opined that neither option is necessarily difficult nor time consuming. Bringing ETH in as a funding stream should be relatively simple (though this is still being analyzed). It might take more time to be able to spend the ETH as treasury payments are currently RPL limited.

Questions:

How much do we need in the treasury?
It is difficult to answer when you’re use to not having money.

Would we have paid $1 million for ledger integration? I don’t know. In my opinion, though, marketing and BD could be greatly improved with more funds to spend. One thing on the GMC wish list, however, is being able to afford a professional marketing team to push rETH.

Issues:

At the beginning of Saturn 1, we want mass migrations of NOs. It is a valid argument that ANY reduction in NO benefits might dissuade migration. That must be weighed over whether we believe increasing treasury spending to grease the wheels of rETH adoption is suitably important and possible.

My opinion:

I would like to see both options above pursued. A “one time” Saturn 1 lump sum transfer of RPL to the treasury at the expense of NOs (which we are swimming in currently) and a direct ETH funding stream into the treasury because I do not believe we should rely solely on RPL inflation along with speculative token value.

I am sympathetic to the argument that maybe it should wait until after Saturn I has had time to allow migration of minipools to megapools, however.

For the reader, consider:
  1. Do you think Saturn 1 should build in a way to take ETH as direct income to the treasury (whether it is used immediately or not)?
  2. Do you think in Saturn 1 RP should take some amount of NO or Voter share as ETH income to the treasury?
  3. Do you think in Saturn 1 RP should divert some fraction of NO RPL rewards to the treasury? Keep in mind that RPL stakers will still get ETH rewards, this is just RPL rewards.
  4. Do you think RP should do 3 and/or 4 immediately in Saturn 1 or wait in order to persuade NOs to migrate from minipools to megapools?

Saturn 2 - UARS

When Saturn II arrives, we will further need to decide what happens with “surplus_share”. This is a percentage taken from voter_share (RPL stakers’ ETH revenue) that can be used for other purposes (but usually meant to increase value to RPL via buy and burn, LP, etc.) and can be tuned based on what the protocol needs. See RPIP-46.

This part of this post is a reminder we need to vote on this issue before Saturn 1 and to remind people that the treasury building above is not trying to replace the work done for UARS and Saturn 2, it is a separate step. At most it tries to move some functionality up to Saturn 1 (in the form of diverting some voter_share and/or no_share to the protocol).

Issues to consider with Saturn 2 and surplus_share relate to how and if some percentage of RPL stakers commission should be diverted to benefit the protocol or RPL as a whole, rather than just the stakers.

The details of that discussion should probably take place in another forum post, but there might be some overlap in here.

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I don’t see how “smoothing” transition to the final Saturn state helps anything (it’ll actually add more noise to a system), so I’m in favor of:

  • setting voter_share to its target Saturn 2 value, while directing the remaining revenue to the treasury;
  • setting NOs portion of inflation to 0 and lowering inflation (say to 2.5%) while temporarily (until ≲ S2) setting pDAO share to a higher value (+20%). It is important that this excess RPL revenue is not intended for spending but stashed for use in LP at Saturn 2 stage.
Cached thoughts on migration issue

While I acknowledge the issue I think that the main constraint for migration is availability of user ETH. Without it (like how we have no rETH demand now) it’s impossible for a NO to migrate to megapool without losing in yield (and this loss may vary ~30-36% depending on voter_share). On the other hand less poor pDAO can do at least something and be flexible.

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Lots of this is reiterated from discord, so sorry to those getting me on repeat :stuck_out_tongue:

In general, I think going ETH makes most sense if we think RPL’s going to trend down. RPL trending down mostly makes sense if we plan on bleeding TVL. Essentially, I see going ETH (or partly ETH) as a move to make at/near maturity for greater stability – it’s a “don’t lose” move and not a “win” move. I don’t think that’s where we are in our trajectory – I sure hope this isn’t mature size, and I don’t think it makes sense to act as if it is (can steer towards self-fulfilling). So: insofar as we want to up the treasury, I’d prefer that to be using RPL.

To answer the first 3 direct questions, I’d say: shrug, no, likely.
The 4th one is tricky: I suspect we’d have a long period of being rETH-bottlenecked, even if we set RPL rewards to zero. It might cause secondary effects like making RPL less short/medium-term attractive. I’d probably say that if it was a modest change, it’d be fine immediately in Saturn 1 (eg, 5% of inflation).

You seem to be discussing something entirely different from drdoofus here. His proposal talks about “larger marketing initiatives (including hiring external marketing agencies), incentives, bribes, integrations , etc. to drive rETH adoption .”

From my PoV, working on rETH demand is quite a lot more important than stashing for a future LP.

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Augmenting the treasury with ETH income makes perfect sense to me. I’m highly optimistic about the RPL/ETH ratio, and the tokenomics improvements should help stabilise its market fluctuations, however, RPL will always remain more volatile than ETH. There seems to be little debate about the treasury diversifying its holdings. At the very least, holding ETH helps the DAO minimize its impact on sell pressure.

Additionally, there are key use cases—especially for growth—where the direct nature of ETH revenue is beneficial. For instance, having ETH income directly proportional to TVL is incredibly useful for referral payments to partners, growth partners, and marketing partners.

I use “augmenting” because I believe RPL should remain the primary income source. My reasoning is that rETH commission is limited, and we ultimately have to balance competitiveness with CSM, node operator demand, and the RPL value proposition.

I do, but I feel it should be a small percentage: 1-2% max, to limit the trade offs.

Currently, during Saturn 1, both legacy and megapool staked RPL will receive RPL rewards. Obviously, megapool staked RPL will also receive ETH rewards from the revenue split.

When Saturn 2 is launched, all node operator RPL rewards will stop. Consequently, legacy staked RPL has an incentive to migrate.

It would make sense to make it a step-wise process, culminating with 0 RPL rewards issued. The RPL rewards could be directed to the treasury. The downside is that it does put slightly more pressure on migration within Saturn 1.

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I think increasing the demand for rETH should be an absolute priority. The market share of rETH is slowly but surely declining. Investing as much as possible in marketing and business development is the only way to reverse this trend.

As both a node operator and RPL staker, I am totally FOR decreasing the NOs and voter share to allocate ETH to the treasury. Seeing Rocket Pool as a business, the best strategy for now is to allocate the maximum amount of revenue to expand and gain market share.

Regarding allocating some of the NOs RPL rewards to the treasury, I am not sure I fully understand the proposal. Why taking some RPL rewards from NOs to send them to the treasury would increase inflation (“would mean higher inflation after Saturn 1 than the expected 1.5%”)?
I would be FOR simultaneously transferring some of NOs RPL rewards to the treasury and progressively decreasing the inflation.

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Regarding allocating some of the NOs RPL rewards to the treasury, I am not sure I fully understand the proposal. Why taking some RPL rewards from NOs to send them to the treasury would increase inflation (“would mean higher inflation after Saturn 1 than the expected 1.5%”)?

Just diverting the inflation. In Saturn 1, inflation is still 5% of RPL supply. Of that, 70% will go to NOs and 27.5% to pDAO (like now). But NOs will also get ETH rewards if they stake RPL. In Saturn 2, that NO part of the inflation goes away and overall inflation goes to 1.5%. I’m saying, in Saturn 1, we can give some of the NO inflation to the pDAO… so maybe 40% to NOs rather than 70% and 57.5% to pDAO rather than 27.5%.

In addition, it’s not out of the question (in my mind) in Saturn 2 to not lower inflation as much and keep giving extra to pDAO. So rather than go to 1.5%, go to 2.5% and give the extra to pDAO. That’s a completely down the road issue, though.

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Originally when defining the specs we had a variable for commission to pDAO Treasury. This was scrapped both for simplicity, and because budget discussions felt orthogonal to tokenomics rework at the time (see more context: Discord)

I think the more important thing for the treasury is actually spending it on rETH incentives instead of the funds sitting idle. The more the funds sit idle the more it matters what it is denominated in, but if they are spent immediately on incentives the currency it is denominated in is less relevant. If the DAO is concerned about concentration of funds in RPL, then payments in to the treasury could be immediately swapped for ETH/rETH/USD/etc - and this gets back to the fact that treasury management is a little bit orthogonal to the income source.

Overall I would say the main benefit of the Saturn upgrades is we have optionality. With UARS we can look at where the protocol needs are and adjust the variables accordingly. I agree long term we should consider diverting a share of commission toward the treasury, but I think that makes more sense at a larger TVL (and after most of the supply has migrated to megapools). When looking at current protocol needs I think Saturn0 helped reveal that rETH is our bottleneck (instead of NO ETH). I would expect this to be even more true once bond requirements are lowered from 8 to 4 in Saturn 1, and then to 1.5 in Saturn 2.

I think turning the knobs we already have would look something like:

  • Option A) Increase voter_share, decrease no_share
  • Option B) Increase RPL issuance to DAO treasury (and spend on rETH incentives)
  • Option C) Decrease no_share (decrease total rETH commission)

I ranked those in order of preference, and I think a combo of A and B are likely the best options imo, since:

  • Option A) The value of RPL is critical for protocol security/broader sentiment, and the majority of pDAO/GMC/IMC funds are currently denominated in RPL. I agree with Val that shifting away from RPL and focusing on ETH for revenue streams feels a bit like abandoning RPL and could further accelerate the idea and trend that RPL isn’t valuable for anything. With RPL we have more control over it as a protocol with the ability to issue it, with ETH we are choosing a separate reserve asset we have no control over but are deciding to invest in (since it is better correlated with rETH, etc).
  • Option B) - rETH incentive spending may boost demand more than a small overall bump in yield that will come from doing Option C

The one place we seem to have a surplus right now (and after bond reductions) is node operator ETH, so I think that is the main place we should consider diverting away commission to alternatives (rETH and RPL)…

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