20 May 2023 11:44, UTC
Reading time: ~3 m
Decrypting DeFi is Decrypt’s DeFi email newsletter. (art: Grant Kempster)
Liquid staking giant Lido Finance is finally looking to shake up its tokenomics.
Specifically, as alluded to in a new proposal, members of the community are looking to add a staking feature to LDO.
Remember: In order to stake directly to the mainnet, users need 32 ETH or nearly $60,000 at today’s prices. Given the high barrier to entry, liquid staking services like Lido have emerged, letting users deposit any amount of ETH and begin earning.
Watching this proposal develop will be a top priority for many in the space. Lido is, after all, the largest DeFi project with a whopping TVL of nearly $12 billion.
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The proposal is still in its very early stages, but here’s the pitch in a nutshell:
LDO holders would be able to stake those tokens and begin earning rewards drawn from the protocol’s revenue. Lido currently generates revenue by charging users a 10% fee on those rewards. Half of that goes to the project’s DAO and the other half goes to various node operators that execute the actual mainnet staking.
This new proposal specifies that, if passed, stakers would earn between 20% and 50% of the Lido DAOs revenue. Basically, up to half of that 5% service fee. And this would be executed via buybacks, in which generated revenue would be used to buy more LDO tokens (and distributed).
But it’s not free money. For that extra bit of yield, LDO stakers also become the “insurance providers of last resort,” the proposal reads.
Should the project’s insurance fund get drained due to a hypothetical mass-slashing event, up to 30% of LDO stakers’ funds would be next on the chopping block.
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Slashing refers to the penalty that Ethereum validators would face should they suffer any downtime or begin validating fraudulent transactions on the network. Remember the 32 ETH needed to deposit to join the network? Slashing takes some of that deposit from the validator.
Lido has, however, made assurances that such an event is “unlikely to happen given the quality of the Lido validator set and its proven track record.” Still, it’s a risk.
As to how the proposal is being received by token holders, it’s a bit of a mixed bag, ranging from its “a ponzi scheme” to “finally something useful for LDO.”
It’s also not super unique.
Aave, for example, does precisely this via its safety module. AAVE holders can stake their tokens, earn extra yield, but also bear a similar slashing risk should the lending platform face a bad debt situation.
Given the community’s general take on the proposal, we’re likely to see a new draft soon.
It’s a good first attempt at adding a bit more utility to what’s essentially just a voting token after all.
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