TEMP CHECK | Explore avenues for Protocol Owned Liquidity

[Tokenized2027]

Abstract

I believe liquidity in secondary markets (UniswapV3, Camelot, Curve) for stakedotlink’s LST (stLINK, wstLINK) is a crucial key factor for the protocol’s success, and the protocol with the highest liquidity will prevail in a “winner takes it all” market share battle in a few years. Therefore, our protocol should have built-in mechanisms in the form of smart contracts to funnel a part of the protocol’s revenue and/or rake a fee from our LST users (stLINK/wstLINK holder’s reward rate) towards bootstrapping, growing, and maintaining liquidity in secondary markets without relying on third-party variables (“mercenary capital"), ensuring liquidity is sticky, and (in the long term) not relying on SDL emissions to incentivize the pools. That is why I propose creating a protocol-owned liquidity that is governed by stakedotlink DAO with the sole purpose of increasing our LSTs’ liquidity depth, which will lead to the continuation of our LINK staking market share dominance, enable DeFi lending, and create a more robust and resilient ecosystem for everyone involved.

Note: POL in this context is not about bonding mechanisms like OlympusDAO, rather stLINK liquidity controlled and retained by the protocol funneled to liquidity pools.

Rationale:

With over $47B in TVL primarily in ETH, the LST sector is one of the fastest-growing categories in DeFi, mainly due to capital efficiency: receipt tokens open up the composability with other DeFi applications such as non-custodial lending (AAVE, Gearbox), enabling staked tokens to be used as collateral, while still providing the LST owners with the underlying reward rate earned by participating in validating ETH’s network. While ETH staking is unlike Chainlink staking, which is in its v0.2 infancy, we can still find similarities for its LSTs and learn from how they’ve evolved to capture market share (or failed).

stakedotlink is backed by top 15 Chainlink node operators, including LinkPool, who serves as a core contributor to the SDL protocol. It has captured over 4.4% staking dominance and offers a higher reward rate than native staking itself due to the blended reward rate from the two native pools. It’s currently the only LINK LST with a 100% market share! How cool is that? Well, it’s definitely something to be proud of, but is it enough?

If you believe in the future of a Chainlinked world powered by smart contracts (protip: you clearly do), you can easily extrapolate by looking at the wstETH demand on AAVE and understand everyone will want its share of the Chainlink LST pie, which is only growing as time progresses.

It is not enough to be the first: Myspace, Yahoo!, BlackBerry, Blockbuster - the list goes on. While being first in a market can offer an early advantage, maintaining and expanding our market share will require continual innovation and adaptation. We are going to face fierce competition, both from DeFi protocols (such as Lido, RocketPool) creating their own version of LINK LSTs and custodial CeFi iterations (Coinbase, Binance).

It’s also safe to assume we might see a similar “winner takes it all” scenario being played out as we see in the ETH LSTs sector, primarily due to the known flywheel effect - a self-reinforcing cycle that helps protocols grow and maintain momentum. In DeFi, we can call it “The Chainlink Effect”

There are different factors that can be attributed to an LST capturing high market share, but there is clearly one that stands out: Liquidity.

“By integrating with the Chainlink platform, LST/LRT asset issuers instantly gain composability across an array of DeFi protocols that also leverage Chainlink, such as lending/borrowing markets, stablecoins, DEXs, derivatives protocols, and more—ultimately driving shared high-security standards across protocols and increased opportunity for more user adoption and TVL. This catalyzes a unique flywheel effect (i.e., The Chainlink Effect), where asset issuers gain instant composability within Chainlink’s growing ecosystem of leading DeFi protocols, which can help boost their asset’s utility, visibility, and adoption. As LSTs/LRTs become more adopted, Chainlink can further accelerate their growth by providing more advanced and additional services and security needed for the next level of scale.”

stLINK & wstLINK liquidity is crucial for a Chainlink effect to kick in for stakedotlink. It makes it easier for users to get in and out of stLINK (we’ve already seen users hesitant to swap due to slippage), and it is what I believe will keep our competitive edge: a platform with high liquidity is more likely to attract and retain stakers who are looking for security in the form of liquidity depth, which is especially relevant for LSTs. It also enables DeFi composability with Chainlink price feeds, which will open the gates for lending in a secure manner. So how can we funnel stLINK & wstLINK liquidity directly from the protocol? There are different options I think we should explore, each one of them has its own pros and cons. So far, these are the options I had in mind:

• Add a “POL” fee taken from the node operator pool/community pool, funneling a portion of the reward rate to bootstrap liquidity provision. This might take a while to have a substantial effect, but it’s important to remember this liquidity is STICKY and will stay there, unlike mercenary LPs.

• Mint reSDL using part of the treasury’s SDL and direct the weekly payouts to the stLINK pools. This option dilutes other reSDLers. I would be in favor of this only if we increase the rake taken from the community pool.

• Gradually sell part of the treasury’s SDL on secondary markets to purchase stLINK. That one is not something I think is feasible at the moment, given SDL/ETH and SDL/LINK low liquidity, but something to consider in the future. (OTC?)

• Create a protocol-owned arbitrage bot that keeps all of our different liquidity pools balanced across chains and dapps, while directing the profits minus operational costs back to the pools. We have two pools in ETH and ARB, and they are being arbitrage’d already. Can we compete with the current arbitrageurs, and funnel the profits back to stLINK liquidity pools?

Hopefully, I was able to express my desires to grow our liquidity in a manner that isn’t susceptible to non-aligned LPs, and slowly shift to a sustainable feedback loop powered by smart contracts.

Would love to hear your opinions on this subject.

~Tokenized

[Jonny]

Thanks for raising this proposal @Tokenized2027.

I’m personally in favour of generating POL and mentioned a similar idea to the team last week. The only difficult part is the how, as each mechanism has its own pros and cons.

I think the most feasible solution, especially considering the long-term is this option:

@Tokenized2027

Add a “POL” fee taken from the node operator pool/community pool, funneling a portion of the reward rate to bootstrap liquidity provision. This might take a while to have a substantial effect, but it’s important to remember this liquidity is STICKY and will stay there, unlike mercenary LPs.

In an ideal scenario, there needs to be a positive flywheel that increases the amount of secondary liquidity the more the platform grows. This can then negate the need of the treasury to spend SDL on incentives as time goes on, while also increasing the amount of stLINK incentives that get funnelled to the pools as the amount staked increases.

As identified, this is especially important for DeFi composability that will retain the platforms competitive edge.

The only other feasible option is the idea for the treasury to mint reSDL. Although in practise, it’s similar to the change in protocol fees as it’s essentially lowering the “fee” received by SDL stakers as the treasury is diluting the reward rate but with the side-effect of a large treasury SDL spend to dilute SDL stakers to earn stLINK rewards.

Changing the protocol fee structure would be the simplest and easiest solution for users to understand. The problem is just how the fees are changed.

I will write a reply to TEMP CHECK | Increasing Community Pool delegation fee to reSDL stakers shortly after this, but if both temp checks are seen as favourable then they could be bundled as one as an overall protocol fee structure change.

To properly direct any fee change in regards to POL, it needs to be modelled so the incentive reward rate into the pools overtime is known based on target liquidity. I will take this on, which can then also feed into any future proposal for SDL incentives.

[resdl.eth]

100%, agreed with above. I lean more towards the treasury minting resdl as that will drum up POL while also being a potential avenue to onboard link stakers who want to stake with the priority pool, but need an easier way in.