[DRAFT][GF: Phase 1 Proposal] Lido

ARCHIVED & OLD Missions Governance Fund: Phase 1
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[GF: Phase 1 Proposal] Lido

Incentive Proposal

Project Name: Lido Finance

Author Name: Justin, Jacob, Carvas

Number of OP tokens requested: 1,000,000

L2 Recipient Address: TBD Multi-sig

Relevant Usage Metrics: (TVL, transactions, volume, unique addresses, etc.)

For general usage metrics, please refer to the Lido Extended Dashboard.

Optimism alignment:

Lido started in ethereum and is aligned with ethereum’s values, actively contributing to its security and ecosystem.
One of wstETH’s core value propositions is to democratize access to ETH staking: it enabled anyone to contribute to ethereum’s future security and participate in staking rewards independently of how much ETH one may have.
As such, having wstETH available and liquid in Layer 2s further democratizes access to ETH staking and staking rewards to a new cohort of users who can’t afford or don’t want to pay (understandably so!) mainnet fees.

Proposal for token distribution:

The OP tokens will ultimately be used to incentivize the adoption of wstETH across the Optimism ecosystem, bringing ethereum staking yield to L2 DeFi.
The first step in that adoption journey is to have liquidity on wstETH on Optimism, and as such, OP will be used for a liquidity mining program geared towards wstETH pools on Optimism.

How will the OP tokens be distributed?

wstETH should be both very liquid against ETH as well as one of the main trading pairs for other assets (thus supporting native projects and allowing LPs to be exposed to additional yield than they otherwise would be).
As such, we propose the following distribution of the LM rewards:

  1. 50% $OP - A main Curve wstETH/ETH pool
  2. 15% $OP - An Uniswap v3 wstETH/USDC pool
  3. 35% $OP - Velodrome wstETH pairs with ecosystem tokens and OP itself

How will this distribution incentivize usage and liquidity on Optimism?

Liquidity for liquid staking derivatives is a necessary condition and driver for adoption, volume and TVL of these assets in any chain.

  1. Liquid staking derivatives are an essential money lego in any DeFi ecosystem. Bringing the most battle-tested, well-known and liquid ETH LSD to Optimism will both be another useful application for users in addition to making other protocols more useful via integrations.

  2. In ethereum mainnet bot stETH and wstETH have an increadible track record of bringing excellent amounts of TVL and usage to protocols that integrate it.

    2.1. In Aave, stETH became the highest TVL asset used as collateral, surpassing WBTC, the stables and ETH itself in just a few months. Currently there’s ~$2.5B in stETH deposited. (Lido Aave Integration Dashboard)

    2.2. In Curve, the stETH/ETH pool is the largest pool. (Pool dashboard)

    2.3. There are many more examples, but as a final one, wstETH has also brought a lot of TVL to Maker. (WSTETH-A, wstETH-B, steCRV)

    From this, we fully expect wstETH to have a big impact in increasing the TVL, liquidity and usage of many DeFi protocols deployed on Optimism, thus contributing to strengthening and growing the ecosystem.

Why will the incentivized users and liquidity remain after incentives dry up?

Having liquid markets for bootstrapping wstETH bridging, purchasing and TVL growth on Optimism allows further ecosystem integrations and synergies to become possible.
Similar to what happened in mainnet, we expect wstETH to become increasingly integrated across the most vibrant projects on Optimism, be it as a trading pair for other assets in DEXes, as collateral in money markets or anywhere else the community sees fit.

Furthermore, the staking yield is sustainable and independent of incentivization. As such, users and TVL should be sticky both for simply holding as well as in the DeFi uses wstETH has (collateral, LP, etc).

Over what period of time will the tokens be distributed?

The OP tokens allocated will be distributed over a 6 month period, starting from the date Lido announces wstETH on Optimism.

How much will your project match in co-incentives?

Lido will match OP liquidity mining incentives with LDO for the same pools and for same or longer duration.

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From an Ethereum public good perspective I would suggest that the last thing we want to do is add our funds to incentivize wstETH. Lido already controls almost enough of the total number validators to halt block production on mainnet by preventing the 2/3 attestation requirement to be reached.

While I don’t think that you are an active attacker of the network or would have any intention to act in a hostile way, the fact that any entity could do so damages the legitimacy of the network.

If you decide to self-limit in some way to ensure there is a hard line to prevent the 33% share being crossed then of course feel free to come back and make a proposal. Until then this is the hardest no possible from me.

EDIT - or removing the block production from Lido: Ethereum MEV Extraction and Rewards - Discussion & Policy Groundwork - Department of Decentralisation - Lido Governance

Blocks would only be accepted from the open block market via the chosen infrastructure (e.g. MEV-boost) or from the normal block-building process via the public mempool (fallback mode in case MEV-boost is not functioning properly), blocks should not be built in-house by Lido or by Lido Node Operators (NOs are free to build their own blocks for blocks proposed by other validators that they run, but not for Lido validators)

The safety and legitimacy of Ethereum mainnet is more important than TVL growth and adoption of Optimism, as all of our security and legitimacy is inherited from the L1. At the moment your project is a threat to that, hopefully this will change in the future.

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Disclaimer: I’m Lido contributor (the quote at the bottom of your post re: MEV and block production is mine).

My reason to post in this thread is to attempt to add more information and context into a concern raised by @MinimalGravitas and not be antagonistic, so I would like to present the information and resources for the reader and leave it at that. I’m not saying that the risk posed by MinimalGravitas is incorrect, but I would say that without additional context it seems much likelier and impactful than it actually is.

There is an ongoing discussion on the Lido forums currently regarding whether Lido should self-limit or not, which I think is useful to read in order to develop an understanding of how deeply and seriously Lido and its contributors think about and consider its reach and possible effect on the network. I think statements such as

Lido already controls almost enough of the total number validators to halt block production on mainnet by preventing the 2/3 attestation requirement to be reached.

and

the fact that any entity could do so damages the legitimacy of the network.

can be misleading without further context.

Lido is both a DAO and a protocol, but it’s not a single entity in the traditional sense nor does it act as one (it’s a DAO, and each set of Lido operators for a network is more like an independent coop). Lido does not have the control over its validators that these statements make it seem like it does. This was a conscious design choice and Lido continues to show that the choices it makes are driven by the protocol’s best interests. Lido’s stake stake share via an on-chain protocol that is basically a federation of independent operators is nothing like stake share of a solely or tightly-controlled group of them. The technical feasibility of such a halting attack happening directly is nil – Lido cannot flip a switch, and it cannot force the Node Operators running the validators to flip a switch either. For such an attack to be carried out, it basically relies on coercion via governance (i.e. threat of removing future rewards) of the totality of Lido node operators to get them to act in a way that is a) against their long term interests and immensely damaging to their reputation, b) against the short, medium, and long-term interests of Ethereum, and c) if ultimately successful in substantively damaging the network, most likely would lead to a hard-fork of Ethereum where the attackers would essentially lose any ill-gotten gains anyway. The likelihood of 3-4 actors who in aggregate control 30+% of stake on Ethereum directly colluding or being captured is orders of magnitude larger than Lido being successfully and effectively usurped via malicious governance.

With respect to the focus point of this thread – whether Lido’s stAssets (wstETH in this case) are public goods worth supporting via OP incentivization, I would argue:

  • (w)stETH has been one of if not the most successful mediums through which average users (who cannot afford or do not have the time/resources to run their own validators) have gotten exposure to staking on Ethereum
  • (w)stETH has shown that it can weather increasingly dire markets and large sell-offs and still maintain deep liquidity
  • (w)stETH can be utilized in a variety of DeFi protocols that are already on, or coming soon to, Optimism
  • the purpose of the incentivization is to encourage users to participate in the DeFi ecosystem on Optimism and (w)stETH will likely be a key driver of such participation
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I absolutely agree with @MinimalGravitas. Even though the proposal is earnest and within the spirit of Phase 1, and I believe that Lido has good intentions and is made up of good actors, I am worried about the concentration of power that Lido enjoys. I would therefore be disinclined to approve incentives that would further strengthen Lido’s already herculean strength.

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I appreciate the detailed reply, and it’s nice to see that we’re at least directing readers to look to the same discussions in the forums regarding this issue.

If Lido’s growth is throttled, or if some measure passes like the one you wrote that removes block production from Lido in a way that renders an attack literally (rather than just practically) impossible the I will welcome a future proposal, but that’s clearly not where we are now.

While I understand that Lido is a DAO and theoretically not centrally governed, looking at your Snapshot it is clear that in almost all of the proposals 2 out of the 3 following addresses have had enough voting power to render all other participants irrelevant:

  • 0x8b1674a617F103897Fb82eC6b8EB749BA0b9765B

  • 0xE017a4e967c9939d01628E805DC0CC3370184e63

  • 0x458075B1AAa3A9E24503786091090547116B5f81

These actors and indeed all of those currently taking part in Lido may well be acting in the best interests of the protocol, but that doesn’t detract from the delegitimizing effect of your dominance over the Beacon Chain.

While we both referenced the discussion within Lido’s forum’s regarding self-limiting, it is clear from the current vote that this is not going to be passed:

https://snapshot.org/#/lido-snapshot.eth/proposal/0x10abedcc563b66b1adee60825e78c387105110fa4a1e7354ab57bc9cc1e675c2

As is always the case, token holders will vote in their personal short term interests rather than for the greater good of the wider ecosystem. This is a case in point of why Optimism’s governance model is designed around 2 houses, one built from token holders and one from citizens, the latter of whom will be able to vote without their influence being directly proportional to the incentives of their tradeable tokens.

Perhaps the simplest way to look at the issue for those delegates who are unsure on this is to compare the motives of people making up the two sides of the debate. Almost all of those claiming that Lido doesn’t represent a threat are people who stand to gain from Lido’s continued growth. On the other hand those raising the alarm such as SuperPhiz, Vitalik and Danny Ryan do not gain from the wider adoption of their position or from Lido’s reduced dominance.

It is difficult to avoid the obvious analogies between tobacco companies claiming that smoking isn’t linked to lung cancer, or to oil giants funding campaigns disputing the effects of fossil fuel use on the climate. One side’s position in each case is clearly not motivated primarily by the goals of maximizing public goods but by maximizing profits.

I can’t have much effect on the wider problem that Lido represents to Ethereum’s legitimacy, but I intend to use any influence I have in Optimism’s governance to ensure that at the very least we do not contribute to making it worse.

I apologize if this comes across as overly confrontational, but there are times when I think that is a necessity, even when, as I said above, I don’t believe you or your team are trying/intending to act as a threat.

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Good DAO I will support this project.

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Thank you for writing this. I could not have said this any better.
I support your view and would even ask Lido and any project calling themselves DAO, is it still DAO when 3 addresses can decide the the final outcome.

Snapshot

this snapshot is an perfect example for that, should we call this still a DAO ? Are they working to counter this, I am not saying abolish DAO but may be apply logic that Gitcoin does with their donation, cant they apply the same logic to amplify voting power of users with less token.

It is proven that just token based gov is not ideal, it does give confidence on the outcome of DAO decision, at least in cases like that. Thankfully OP is trying to fix this with its two pillar gov model.

Not to name but few days back there was a vote from another project, DAO based, where a single address voted to stop the chain to liquidate a user position. Just because Lido is saying, and may be they are not bad actor, I would not trust them. Not until they do something to fix their broken DAO structure.

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Fully support this! Having wstETH on Optimism will strengthen the bonds between Ethereum and Optimism.

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IMO, the issues regarding stETH’s dominance are very real but to be resolved at the Layer 1 level. Regardless of how that is resolved, as the most liquid LSD, stETH liquidity on Optimism will be a significant benefit to Optimism itself, so I’ll be voting Yes.

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I agree with @polynya on this one. The dominance of stETH in L1 staking is real and concerning but I dont see how incentivising its use on Optimism will make it worse. It increases stETH liquidity on optimism and doesn’t directly incentivise more staking on Lido. It will be a good addition to Optimism.

It would also be ideal to have the OP foundation and a trusted OP delegate to be signers in the multisig to ensure the OP is not used for governance or anyone uses other than the ones mentioned in this proposal.

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Reading back my comments above I realize that I didn’t specify how I believe this proposal will contribute to the problem of Lido’s dominance on L1.

At the moment demand for stETH is reduced and it is therefore trading below the price of ether. This means that if people want to get some they are better off buying from the market rather than adding their ether to Lido’s pool and obtaining it ‘fresh’.

This means that not much new ether is flowing into Lido and therefore their share of the total staked on the Beacon Chain is not really increasing as it was previously. They have effectively been paused before crossing the 1/3 line. If this situation continues indefinitely they will only ever be a potential threat and not a realized threat to Ethereum’s legitimacy.

The proposal here is asking for 1,000,000 OP to add incentives for people to use Lido’s LSD on Optimism. This will increase the demand and increase the value of their staked product. If demand increases enough then it will again be financially viable for people to obtain stETH directly from Lido by adding their ether to the pool, rather than buying it from the market. This will start the increase of their share again and bring us closer to the crisis point on L1.

I don’t know whether our OP incentives would be enough to push demand for the LSD past the point where more ether flows into Lido again, but it will certainly have some effect. If you recognize that Lido’s dominance on Ethereum is a concern then surely taking action that will actively increase this is not in our best interests. If the legitimacy of Ethereum is compromised, where does that leave Optimism in the long run? I don’t see another L1 that we could ‘migrate’ to, and considering how closely aligned Optimism is in terms of Ethereum Equivalence I’m not sure we’d even attempt it.

TL:DR; If we incentivize Lido’s LSD on Optimism, it will increase the demand and may restart the inflows of ether into their pool, hastening their rise past the 33% line. It is therefore in Optimism’s best long term interest not to do so, despite the fact that it would increase our TVL.

Our position may be equivalent to the shepherds in the classic Tragedy of the Commons scenario, each dApp and rollup is financially incentivized in the short term to make use of Lido’s LSD to increase our TVL, but if everyone does that then demand for stETH increases, Lido’s dominance of L1 increases, Ethereum is no longer perceived as having the decentralized legitimacy it once had, without it’s fundamental advantages less people are drawn to build on and use the ecosystem and everything loses value in the long run.

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Appreciate your opinions and there is value in having all views present.

However, this last post is an inconsequential point.

The Lido DAO’s budgets for incentives and rewards programs have been upwards of 4.5M LDO monthly (e.g.: april, june), with overwhelming majority geared towards stETH.
Depending on markets and price, this amounts to between $3M and $22M in incentives monthly.

The OP allocation for LM, at current prices, would be between $500k and $600k, to be distributed over many months (proposed 6).

As such, if we take the 6 months proposed and these current prices, it could represent an increase anywhere between 3.6% and 0.5% to the current incentives program.

I don’t think it is fair to argue that such a small increase in overall incentives will single-handedly “increase the demand and restart the inflows of ether into their pool, hastening their rise past the 33% line” (and that worry itself has, in turn, been clarified by Izzy above).

Again, the purpose of this GF proposal is to ultimately help Optimism users, protocols and DAOs have good and easy access to the most lindy and liquid ETH liquid staked derivative, strengthening OP’s DeFi ecosystem.

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You’re right of course that our OP would represent only a tiny fraction of your budget for incentives, it probably wouldn’t be enough to make the difference between your dominance continuing to rise or not… but it is the bit we can influence.

I am under no illusions that Optimism can stop or even significantly delay your progress, but we can chose not to contribute to it. That way if, as I’m predicting, this all becomes a massive drama in a few months, then at least Optimism’s reputation won’t be tarnished by having helped bring about the mess.

In a best case scenario, other dApps and rollups will do the same, which actually might end up slowing you down enough that that some kind of solution (maybe along the lines of the separation of block creation from Lido discussed above) might be implemented before anything comes to a head. If the risk to mainnet’s perceived legitimacy can have been mitigated before you get too big then everyone wins.

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I’m not saying that stETH incentives on Optimism won’t increase demand for Lido, or that it doesn’t matter. The correct way to address this on Optimism’s end would be to approve similar proposals by Rocket Pool, StakeWise etc. Where are they?

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In that case, would you consider withholding your support for this proposal, at the very least until until we are able to balance out the negative externalities we’d be responsible for by supporting equivalent incentives for other liquid staking providers.

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It’s up to the other LSD providers to submit equivalent proposals - when they do, I’d be happy to vote for their proposals. If anything, voting For would pressure competing LSDs into expediting their proposals. I’m open to withholding, but don’t see adequate reason to do so given the overall situation.

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Lido is great! Only problem is how much ETH they hold

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lido is good project but their control over eth is worrying

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Thanks for your perspective and useful insights as always polynya.

Myself (a Rocket Pool community member) and Langers (GM of Rocket Pool) have drafted a grant proposal requesting $OP to support liquidity mining programs for rETH in the Optimism L2 ecosystem. We would really welcome your support, and any feedback you might have on the proposal too.

You can find the rETH grant proposal here: [Draft] [GF: Phase 1] Rocket Pool.

It is currently awaiting feedback in the discord under gov-temp-check also.

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Wow Polynya, your powers of prophesy are really on point!

…

On the Lido issue I think we’re probably just viewing the potential public harm of Lido differently, I guess if we’re likely now to be funding at least one other LSD then Optimism won’t be seen as purely siding with the threat. I share your hope that other minority staking protocols like StakeWise also raise proposals.

I still think that voting against helping Lido’s liquidity incentives with this proposal is the right choice, and hope that others do the same. Part of my interpretation of the Optimistic Vision that positive impacts should be rewarded is that the reverse is also the case: negative impacts should not be rewarded. Multiple much more influential and involved Ethereum contributors than me have laid out the risks of negative impacts that Lido represents. I believe our role here is to listen to the assessments from unbiased sources rather than the proposal’s creators who will benefit directly from Lido’s growth being unchecked, and use our votes to take the only small action we can to stand for what is best for the ecosystem at large.

If your view differs from that then I guess I’m unlikely to be able to convince you.

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