rETH APR vs Node operator growth

Recently we have seen enormous demand for rETH and subsequent growth in the number of node operators and the creation of minipools. Clearly this is fantastic news but it has highlighted again an issue that was already present.

Due to the high demand for rETH and the issue raised in governance post: “Changing the Node Operator Commission Rate System”, the average minipool commission rate is climbing fast. To address this, we have proposed to fix and reduce the node commission rate to 15%. This will halt the commission advance and start to slowly bring it back down.

The result of a high commission rate is that rETH return suffers. The rETH return is trending below what we would like, for it to be not only the best decentralised liquid staking token as it is now, but take on other centralised liquid staking tokens. We have been aware of the issue but have been balancing the need for more node operators - we have to keep incentives high while we are in this critical growth phase. We proposed the 15% commission rate to start redressing the balance but we believe further action is urgently required to: a) bring rETH back to a competitive footing b) enable us to keep the new minipool commission at 15% for longer. Without further action we will have to reduce the minipool commission rapidly over the next couple of weeks/months and, in the meantime, rETH will look unfavourable compared to other liquid staking tokens.

There are probably a few solutions to this problem but most require significant contract change, making it infeasible in the short/medium term. What we are proposing is to use a percentage of pDAO funds to essentially top up rETH in small regular intervals over several months (up to a year).

  1. Withdraw pDAO RPL
  2. Swap for ETH
  3. Deposit into rETH contract, raising return

As we reduce the commission rate and the average comes down we can decay the top up amount or keep it high to drive rETH demand.

The exact allocation of pDAO funds to this activity is to be determined. We have performed initial analysis but we would like to work with the community to refine the analysis and assess the degree of effect (conservative vs aggressive).

We feel this solution keeps rETH highly competitive against centralised liquid staking tokens, while still enabling strong incentives for node operators to join and stake with Rocket Pool. It also requires no smart contract upgrades as an added benefit.

1 Like

Opposed.

  1. As others said, we have a superior product, so it feels justifiable to “charge” more in the form of commission. Coinbase has no trouble charging 25% and capturing 20% market share, with no liquidity or redemption. I feel very comfortable with our 15% average commission and 15% fixed commission rate given the rETH demand we currently have.
  2. I have a really hard time imagining this being the most effective use of pDAO funds. There is a long list of great ideas for pDAO beneficiaries – grants, marketing, incentives. How can we convincingly say this is better capital allocation than those?
  3. This almost feels like it’s breaking the economics a bit. We are spending $$ to force rETH into a certain return range. I totally understand the desire to return to a better APR but it feels more efficient to accomplish that by a) changing NO commission rate to 10% and b) incentivizing NOs with pDAO funds as needed to continue growth.
  4. Considering this directly affects RPL and the pDAO allocation, it would be a great candidate for a DAO vote. Perhaps we could get snapshot enabled and put up a few options for voting?
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I’m not keen on the idea because it potentially locks us into a constant drain on pDAO funds which in turn means that “one and done” projects which have a long term impact just don’t happen. The pDAO is only getting 10,000 or so RPL a month at present which is not a lot to pay for all the things that need doing.

Observing the entire ETH staking field as it is right now we are seeing massive amounts of ETH being staked before the merge. This is putting downward pressure on ETH staking yields for all stakers. People seem more keen to position themselves with safe crypto investments with some yield given the uncertain economic situation overall right now.

I’d prefer to see us highlighting how rETH is going to yield more after the merge with the smoothing pool and our other initiatives. Stakers are going to be impressed with the long term future of rETH and its tax and defi advantages rather than just a few tenths of a percentage point. Spend the precious pDAO funds on making these projects happen rather then just offering subsidies which will never be enough.

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I agree with Marceau.

I recognize the rETH APR problem here but there has to be more effective ways to utilize the pDAO treasury than to compete with genuine protocol users for rETH. As it currently stands, we’re already at near-max capacity for rETH deposits. The decreased node commission rate will only make this problem more difficult. If we’re going to play purely financial games with the pDAO treasury to directly grow the protocol, it should be directed towards incentivizing new node operators and minipools.

I want to make it clear that this isn’t me being consciously selfish as a node operator. I truly think that this is the best way forward for long-term protocol growth.

Of course, all of this should be purely theoretical until we get the actual pDAO governance online. In my opinion, getting this governance started should be a top priority amongst all of the stakeholders in the rocket pool protocol, as it will allow us to drive towards decentralization and growth.

Edit: I misunderstood this originally. Makes more sense after I re-read and saw that the pDAO isn’t buying it’s own rETH, but rather just boosting the APR of current rETH holders. I still think it’s not the best use of resources - rETH demand isn’t really the problem yet.

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So tell me if I understand this correctly. We had a big spree of people locking in 20% commission before the 15% lock went into place, and this tanked our average APR for rETH which is now advertised at 4.33% on the website. So we will basically use stashed RPL to buy in at 0% commission and swing the rETH APR average back.

My questions are,

  1. What APR are we competing with? I see 4.5% APR on ETH on Coinbase, but is that before or after fees?

  2. What is the new expected rETH APR for a deposit locked in at 15% commission, and if this is closer to a competitive rate, could we simply advertise expected APR to avoid playing games with averages?

  3. What is a sustainable commission rate that would produce a competitive rETH APR?

I’m not opposed to juicing the returns a bit, especially since APR is a key driver for growth, and the pDAO RPL is effectively just transferred to rETH and locked into a contract and not really “spent” but rather is staked. Would just like more details on the APR issue.

And dropping the commission to a sustainable rate also seems like a fair proposal, but I recognize that if we are still in a growth phase that this may stymie node operator growth and Rocketpool growth overall.

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The rETH return is trending below what we would like (…)

What is our target APR? How important is APR to RP’s narrative?

The way I see it, being decentralised and non-custodial is worth a premium for rETH holders. What hurts our potential stakers in the short/medium term is 1) they don’t know RP exists and 2) there is no space in the deposit pool (this might lead to a premium on rETH in the secondary market which is also bad UX).

While this proposal looks good as a public display of how rETH is the first class citizen of the protocol, lowering the commission % should be enough to fix APR in the long term and I’m not convinced we need a stop-gap solution right now.

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I also think the pDAO funds would be better spend on marketing and targeting potential new node operators. We should drive a hard marketing campaign for the next 4-6 months to reach as many people as possible who onboarding ethereum due to the merge hype.

Also i would like an option for node operators to give up on their commission. I think there would be enough node operators who would not care if they get commission or not, myself included.

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Strong agree with most of Marceau’s post, and Schneeball re: improving outreach to potential node operators. Returns are very attractive, and I think we wouldn’t have as much of a node shortfall if more people knew how attractive it is.

Also, dumping RPL to make up for a perceived shortfall in APY monetarily hurts most the stakers who committed hardest into RPL to overcollateralize their node. I’ve been burned to a degree by pool 2s diluting my investment, it’s not a great reward for loyalty/participation.

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I think there would be enough node operators who would not care if they get commission or not, myself included.

Why would they not care?

I think rocketpool already offers some advantages over a solo validator.

  1. Easier update management of your nodes.
  2. RPL Rewards
  3. Upcoming smoothing pool.

Especially the smoothing pool would be killer argument to be a rocket pool node operator instead of a solo validator.
And with this in mind i myself would gladly give up on some commission to support the protocol for this advantages.

2 Likes

Got it! Makes sense!

I’m afraid I have to disagree with the proposed solution. I don’t think we should spend money to make the rETH more attractive.
Despite the low competitiveness of our APR(and DeFi integration), we almost constantly have a deposit pool at or near 100%.

Let’s invest in attracting more NOs.
We can attract more NO by refunding a part of the gas costs spent in creating the minipools, or via a campaign with a hardware provider like Gnosis chain.

Another approach to reducing the impact of a 100% deposit pool is to use Lido.
We could use the liquidity of the wstETH to convert the ETH (or part of the ETH) deposited in the pool into wstETH and only convert them into ETH when a minipool wants to start.
This way, we will reduce the pressure on our APR and could even increase the capacity of the deposit pool, without spending any money.
You will not appreciate this solution, but it is still interesting to discuss.

This proposal assumes that the commission rate needs to be reduced in order for rETH to be competitive. I believe we should first discuss that premise, then talk about how to do that long term and maybe after that we can look at short term solutions.

My view on the premise: Of course everyone wants rETH to be competitive, but assets can be competitive without the need to achieve the same APR as others. Expected return is only one of the relevant variables. Risk is just as important. I believe we should focus on the latter with rETH, because decentralization and insurance are the strengths of Rocket Pool.

That might mean shoring up the insurance aspect and clearly communicating the risk advantages to the market. If the market views rETH as the less risky staked ETH, that would lead to other protocols choosing more advantageous protocol variables (lower min. collateral ratio and annual fee on Maker, better interest rate model on AAVE, …) for rETH. So that a lower base APR could be made up with better defi yields for example.

The other aspect to consider here is sustainability for node operators. Rocket Pool is a completely different model for NOs. Currently, RPL rewards are still a big part of the value proposition but long term that won’t be the case and commission will be crucial to maintain competitive rates. Lido on the other hand is an unbonded model and node operators would be able to operate at profit at pretty much any positive commission rate. So even if Rocket Pool can lower commission to 10% long term and that becomes a relevant factor in the market, Lido could easily lower their commission to 7.5% the month after. This is a race to the bottom that Rocket Pool can not win.

15 Likes

I think that the long term solution with a timeline that would require a smart contract upgrade would have to be part of this proposal. If that was flushed out at the same time then maybe more of the NOs would be on board with the short term fix.

Hey guys,
I’ve been around for quite a while (prelaunch) and I am an rEth holder but do not operate any nodes. I thought I’d chuck my two cents in here because I’m seeing a lot of NO opinions but not much from the other side of the protocol.

The current dilemma of NOs waiting until they can claim 20% commission is the logical outcome to a flaw in the protocol. The NOs taking these commissions are in no rush, they have plenty of capital and they can achieve a 20% commission so why would they take any less?

The proposal to solve this issue with a locked 15% commission is the first capitulation to the interests of a wealthy minority of users. We’re moving from aiming for a 10% commission to guaranteeing 15% because we’ve been scared by the number of people locking in at 20%. This looks like a knee jerk reaction to a minor flaw in the protocol and clearly has bigger ramifications than envisaged. If the outcomes could be foreseen, this thread wouldn’t exist.

My proposal is simple; stand up to the noisy, self-interested minority and lock in a 10% commission rate as the protocol was designed. Don’t put any band-aids on by paying out rEth holders from the pDAO, simply reduce the massive incentives for NOs by a small margin and make the protocol operate as designed.

The rewards for running a node are so good that if you’ve got the cash, you’ll take whatever commission rate you can get.

6 Likes

I lean more towards beeing opposed to the suggested solution.

  1. i think directly propping up rEth APR by means of external funding sends a message that the protocol is not able to become competitive on its own.

  2. As a Node operator, if it is necessary to achieve long term competitiveness for the protocol id rather bite the bullet and live with a significantly reduced commission rate as long as i know that the protocol parameters are now tuned in a way that it can achieve said competitiveness by itself.

  3. instead of such a aggressive way to use pDAO funds to prop up APR (which could lead to negative publicity imo e.g. Rocketpool cant be competitive without introducing external funds), i would prefer to see the pDao funds used to incentivice new Node Operators or reward existing Node Operators. This just has a better message of giving back to the NOs while reducing commission to a sustainable level.

cheers

1 Like

I’m a NO who joined over a month ago. So far my ROI is negative (the value of my holdings is lower than what I put in). I consider running a Rocketpool node a charitable endeavor. So decreasing NO incentives doesn’t seem like a good idea, especially given that ppl like myself are considering this vs putting their eth into stETH and levering 3x on Aave for a much higher yield and no lockup.

1 Like

I think there are better ways to support the protocol and APR. The ETH pool waiting to stake has been at 75%+ for much of the last few months and nearly 100% for the last few weeks, based on the data I’m seeing. This doesn’t tell me that we need to increase demand for rETH, but rather that we need more node operators.

Using pDAO funds directly seems inefficient, without leveraging the power of the pDAO and community to leverage that investment. Rather than using the money directly to buy rETH, if it was used on marketing and incentives, it could get many more people to come in and contribute to the Rocketpool ecosystem and grow much more than a direct asset purchase. In the end, capital will go where it thinks it can be most productive, so we should try to influence the market rather than fight directly against it, that’s a fight that will only need ever-increasing funds and is likely a long-term losing battle.

We should find a target for where the protocol can be self-sustaining, whether it’s the 15% target we’re moving to or the 10% that was originally proposed, and find a way to move towards this target in a self-sustaining way. If short-term incentives are needed, we should evaluate those, but the data seems to point toward needing to incentivize the node operators. With more node operators, the protocol will grow, the ETH staking pool can shrink down to 50%, and the additional “supply” of node operators will work against the demand for higher yields.

1 Like

Agree with pretty much all that has been said here.

This seems like an ad-hoc solution that may set a precedent on how pDAO funds are expected to be spent, whereas the market may simply be willing to pay a premium for rETH currently.

In my view, the real long term issue is that because of locked-in minipool commissions, any adjustments to rETH APR will be slower and slower the bigger RP grows. And so the protocol will have difficulty adapting to changing circumstances that would require an APR change for competitiveness.
But long term problems require long term solutions - as @knoshua said, this should start with a well-explained analysis of what rETH APR Rocket Pool is targeting and why.

Do we need to do something right now ? in my view, only if there’s uncertainty about being able to design a better long term solution later to more flexibly / retroactively adjust average commission. In that case, this proposal could be used as a one-off risk reducing strategy. But I don’t agree it should become something recurring. The pDAO funds are relatively quite limited, and imo we have barely started exploring how these could be best used to grow the protocol.

If we do need immediate action, gradually winding down NO commission towards 10% would seem preferrable to me, being a more ‘pure’ temporary solution, rather than artificially propping up rETH.

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Lots of good points have been raised already. My inclination is to be opposed at this point. Funds should be used to attract more node operators. With gas being low and commission locked at 20% for quite some time, my sense is we don’t have a lot of NO waiting at this point. We need to create more demand to be a NO to bring the commission rate down and satisfy the demand for rETH.

2 Likes