Temperature Check | Reserving a portion of new stakes for non-reSDL holders

Meta Discussion
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Introduction

The Priority Pool has been a fantastic mechanism, but it’s important that we, as a DAO, strategize around its evolution. We’ve seen the LINK balance in the PP decrease, at an accelerated pace. Maintaining a significant balance in the PP is beneficial for both users and the protocol.

One strategy to ensure a continued healthy balance in the PP is to reserve a percentage of all new staking distributions to users/addresses which have zero reSDL. This change would incentivize a wider addressable market to deposit into the PP, and ensure a continued healthy PP balance.

Purpose

The purpose of this discussion is to get a temperature check on one possible solution. Additional solutions should be discussed in their own thread.

Rationale

The LINK balance in the Priority Pool has been on a steady, and accelerating decline. This can be seen by referencing the Analytics section on Etherscan.

We should proactively strategize around how to ensure a healthy PP balance is maintained, as there could be undesirable consequences if it were to continue its downward trend. Some potential effects to contemplate if the PP were to be significantly reduced:

  • removes a withdrawal buffer. Currently the PP is used as the main source for liquidity of the liquid stLINK, allowing anyone to swap their stLINK back to LINK without a wait (and without using an AMM).

  • added protocol friction. Without the deep liquidity buffer, the protocol will need to create liquidity to allow for instant 1:1 conversion from stLINK to LINK. One way to create this liquidity is for the protocol to have constant unbond requests to the community pool, so LINK can be withdrawn and used when stLINK holders want to swap back to LINK instantly. This would add complexity, could create a negative talking point, and potentially create additional fluctuations to the reSDL reward rate (as the protocol unstakes, and re-enters the locked reward period).

  • lending markets and feeds like deep liquidity. We’re not there yet, but hopefully in time stLINK will be available on lending markets, like AAVE, which may or may not need a Chainlink feed to function correctly. Feeds and lending markets work best with deep liquidity and low volatility, and while we don’t have these yet, our best chance to get there is maintaining deep liquidity, starting with the PP.

  • potential for whale domination of the PP. Imagine a scenario where the vast majority of reSDL holders have all their LINK staked. A LINK whale (and potentially an adversary/competitor) could stake a small to moderate amount of reSDL along with a large amount of LINK and dominate the pool, creating a stLINK concentration which may be unfavorable.

Proposed Solution

Quick background - the protocol currently monitors for new staking space in the community pool, and deposits LINK from the PP when space opens. When >15K LINK is staked, the resulting 15K stLINK becomes claimable for reSDL holders, pro rata based on how much reSDL they have and how much LINK they had deposited into the PP.

As soon as technically possible, the protocol should be modified to reserve a percentage of the stLINK distribution to PP depositors who have zero reSDL. The percentage (perhaps starting at 10-15%) can be variable and tweaked through governanace, based on campaign success and necessity.

The distribution to non-reSDL holders would be pro rata based on how much LINK they deposited into the PP.

Result

Rolling out this proposed solution would (hopefully) have the following effects:

  • significant increase in the LINK PP balance, negating the consequences listed above.

  • wider distribution and adoption of stLINK, creating more demand for stLINK use in DeFi, and increased token velocity.

  • allows for users who are ‘on the fence’ about using stake.link an avenue to try the protocol, and gain trust while getting their feet wet. This is important as staking expands.

  • when the PP is also available on L2’s, it would exponentially lower the barrier of entry for smaller holders, as they don’t need to buy/stake SDL, or pay high gas fees.

  • sets the stage for an increased addressable market as staking expands and the need for LINK collateral increases.

There are considerations to this approach which could be perceived as negative too. For example, it creates less immediate utility for SDL, as some users can stake LINK and receive stLINK without first acquiring (re)SDL. The counter is that they can do this already through an AMM, which have recently had a reduced premium as the PP balance decreases. Ultimately, SDL will be most successful when stLINK increases in circulation and utility.

Should this proposal move forward, a discussion surrounding a marketing budget will be raised to ensure awareness of the new feature.

Unknowns

Question for the core contributors – Is this even possible without significant technical changes? Are additional contract audits required, and if so, is the protocol in a place yet where those costs can be absorbed?

Conclusion

This temperature check is designed to start a proactive discussion around how the DAO could seek to encourage deposits into the Priority Pool. This post also proposes a solution for discussion. Should the sentiment of the DAO participants indicate this is a valid solution, a formal SLURP will be drafted for voting.

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Hey OG130, thanks for putting together this discussion. Sharing my thoughts below on a few points you’ve made here

People wanting to swap their stLINK back to LINK today have the option of using the Curve pool today. Based on current liquidity, it looks like one could swap up to 3400 stLINK to 3400 LINK without “losing” any LINK versus using the priority pool to do this. Any amount less than 3400 stLINK today and they would get more LINK than if they had used the priority pool for this. They could also do it in smaller amounts and wait for users to swap LINK to stLINK to reduce this slippage over time.

Additionally, more people using the Curve pool to swap between LINK/stLINK instead of the PP increases fees to LP’s on Curve and further incentivizes more liquidity on the pool - addressing one of your points about increased liquidity being desirable.

This hypothetical scenario could also occur with this proposed change, if we allocate 15% of PP deposits to non reSDL holders, and a whale with 0 reSDL deposits 10,000,000 LINK, then they would be dominating the pool in a similar fashion as what you’ve described.

100% agree on this, however stLINK continues to increase in circulation as more is staked each day.

Overall my first impressions are that i am against this proposal, as it reduces the utility of the SDL token. Presently we have a dynamic where if you want to get your LINK staked, you must own reSDL. This incentivizes whales to purchase larger amounts of SDL/reSDL if they want access via the PP. In your proposed solution, a whale could make up 99% of LINK from non reSDL holders, own 0 reSDL, and still get a substantial amount of LINK staked each deposit.

Looking forward to hearing others thoughts on this

Edit: I also think that as the PP gets closer to 0, users will naturally gravitate towards staking in the PP. As the reward rate of stLINK is higher than that of LINK, any rational market participant would deposit LINK into the PP as opposed to depositing it into regular community staking, if given the two options.

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I am in support of this proposal.

I have been contemplating the potential consequences of the Priority Pool running low for some time now, and it currently stands as my primary concern. From the risk of a bank run scenario where users hastily withdraw all their stLINK from the Priority Pool, to the creation of a significant imbalance in the Curve pool, the stakes are high. Additionally, there is the potential for reputational damage if we, as a DAO, fail to address this issue promptly. If stLINK loses its “liquid” value proposition (caused by the main liquidity buffer getting emptied), we, as reSDL holders & stakers, will cease to grow our rewards by capturing higher portions of the Community Pool, which is crucial for improving stLINK liquidity and reinforcing its presence in Lending dApps, thereby enhancing the StakeDotLink DeFi journey.

While the team may have contingency plans to maintain liquidity, initiating this conversation within the DAO is crucial. I have been considering various approaches, including marketing efforts such as call-to-action campaigns or paid advertisements to encourage people to deposit their LINK in the Priority Pool. Some have even suggested implementing a point system, although I’m unsure of others’ opinions on this matter.

Ultimately, stLINK forms the core value proposition of the protocol. Without stLINK being attractive – meaning liquid and offering a higher APR – the entire protocol’s value proposition could collapse. Therefore, I support the notion that additional measures are necessary to prevent such a scenario. While some may argue against this proposal due to its potential impact on the SDL value proposition, it’s important to note that users can already stake their LINK with the protocol without holding SDL by purchasing stLINK on platforms like Curve or Camelot, specially now that pools are incredibly balanced. Moreover, this is a small trade-off when compared with the potential consequences of the pool running dry.

I fully endorse the core idea of implementing additional measures to safeguard the protocol’s stability, whether it’s through the proposed solution or any other viable alternative.

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Fair queueing is a tough problem on a blockchain. Taken together, the stLINK liquidity pools and reSDL system are already a fair way to allow access to the limited resource that is LINK staking capacity.

As the priority pool depletes, the cost of entry trends toward 0 (being hypothetically free if there is no one else in the pool). I think this will naturally encourage arbitrage, and it is unlikely that the pool will become fully empty.

Will the priority pool liquidity be as deep as we want? That depends entirely on the demand for staking. I think hesitance has less to do with the immediate cost of entering the pool, and more to do with the unknown nature of BUILD rewards. Given that airdrop criteria often take time staked into account, I could see long-time community stakers being unwilling to unstake and move.

“New LINK” might also be unwilling to join because prospective new stakers can’t yet evaluate whether BUILD rewards provide sufficient incentive to stake.

BUILD rewards should however be a driver for new entries to the priority pool, since until the community pool expands, the stake.link pool will be the only way for anyone currently outside the community pool to access those rewards.

Let’s allow the economics to play out.

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I strongly agree with the proposal.

I believe that opening up the Priority Pool will be hugely beneficial, not only for the previously discussed reasons (I align very much with Sinbua here) but also from a PR perspective.

Reducing friction and open to the wider Chainlink Community and essentially all LINK holders the access to stakedotlink’s staking service will create much healthier dynamics than a token-gated service. I can imagine this will have a huge impact on general awareness and community growth. I also think Chainlink Labs would view this move very favorably.

As a side note, something that could be eventually considered is a staking-as-a-service fee i.e. 0.1% of all LINK staked by stakedotlink to help pay protocol expenses (automation, gas, etc)

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The priority pool is already general access. Staking space is the bottleneck — we can’t make it bigger. The proposal actually makes the system less fair. Currently, the LINK gigawhale has to buy $100 worth of reSDL to compete with joe blow and his 10 LINK. In the proposed “pro rata for LINK staked lane”, joe has no chance.

We could debate about what percentage of a carveout might be palatable. But we could also just ask ourselves why someone with tens of thousands of LINK can’t be bothered to simply compete on the same level playing field as everyone else, by providing some kind of commitment with reSDL. If demand for staking space is high enough, rational market participants can already solve this problem themselves with a couple of transactions.

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Thank you @OG130. This is a well thought out temp check on a hot button issue.
While you make some great points about friction, I think we have to weigh the pros and cons of that friction a bit more. Imo, I think that friction is opportunity for SDL at the moment. I more or less agree with Genghis’ rebuttals, but I really want to point this out:

This the the game theory I see playing out as well. With the PP being unincentivized, I think most non-reSDL holders will avoid depositing. As it gets closer to zero, their odds get better and it is worth the move. Build rewards should drive this as well.
As of now, I am in the conservative camp of letting things play out with the current setup. Anything that takes current value away from reSDL holders needs to be HEAVILY scrutinized and needs to have a very high % chance of value add. I see the potential rewards, but it doesn’t move the needle enough for me as a sure thing. However, it would very interesting to know from the team if this feasible from a technical perspective though, as see this hypothetical scenario being visited more than once.

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Incentives are our biggest driver for priority pool deposits, and adoption of stLINK in general. Our strategy seems to place great emphasis on the LINK/stLINK pair. So far it will:

  • be an entry/exit point for staking (time-arbitraged against the priority pool)
  • serve as an insurance pool for slash events
  • service on-chain liquidations for lending pools
  • increase the reward rate for stLINK liquidity providers (thereby increasing incentive to stake)

That’s a lot. The pool needs to be big. And we can’t rely on trading fees to sustain it. Liquidity providers will need to receive BUILD airdrops proportionate to the amount of stLINK in the pair. We will also need to cycle revenue into the pair. This of course means reducing the reSDL stLINK reward rate. This would be offset by the addition of BUILD rewards to the reSDL rewards pool.

Depending on how we choose to consolidate LP rewards, we could use stLINK to buy SDL and distribute the SDL to liquidity providers. We could distribute this SDL as ereSDL, the erc20 form of reSDL, to provide a nominally higher reward rate. The pros of distributing reSDL vs liquid SDL need to be weighed carefully.

It would be wise to determine our reSDL fee policy re: BUILD rewards. I had assumed that we would simply assess a 5% fee against BUILD rewards. If there are objections or alternative ideas, we should work them out soon.

Maintaining high sustainable rewards for LINK/stLINK should be a priority IMO

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Thanks @OG130 for taking the time to write such a well thought out and written proposal.

I think as a whole this proposal is a good one, but I have a similar opinion to others in which I think the incentives we have in play right now largely mitigate the need to enact a proposal like this at the current moment in time. I think it also sets a rather bad precedent in terms the priorities of governance in regards to the SDL token.

Currently, there’s two main reasons for needing deep liquidity in the PP: to match all community pool withdrawals and to facilitate 1:1 stLINK swaps back to LINK.

For the former, the decreasing of the PP balance will encourage more deposits at least to the point where the PP is not empty and for the latter, using secondary markets should be the preferential route for all those withdrawing, especially while there’s a premium.

A third reason is that deep liquidity would be favourable for stLINK to be listed on lending markets, but the problem then is that even if this proposal is enacted there’s no guarantee of an healthy PP balance that’d be able to facilitate the risk parameters defined in any lending market. For example, if suddenly the staking pool increased to 75M, the PP would be drained instantly which would result in a risk of bad debt.

In regards to this point, this is actively being worked on. The only guarantee of instant 1:1 withdrawals is if the protocol always keeps a certain amount of LINK in an unbonding cycle. Unbonding itself doesn’t decrease the reward rate, it’d only be if the PP was drained and then a withdrawal was made out of the underlying Chainlink Staking protocol. The risk of that happening unless there was a large run, is very minimal.

It’s only the implementation of the native withdrawals with guaranteed withdrawal liquidity that provides actual guarantee to any lending market setup with an exchange rate feed that X amount of collateral can always be swapped 1:1 removing bad debt risk.

I focus on these points at least because stLINK being prevalent in DeFi will be the core driver to the flywheel effect of adoption, whereas a large PP balance isn’t as it can be instantly moved.

To go back to the point around setting a bad precedent, if this protocol was passed then it would create the narrative that the protocol would vote for proposals that negates some of the core tokenomics if the situation arose where it needed to attract more users to the platform.

To quote @Fox 's last reply that I agree with:

Maintaining sustainable rewards for stLINK liquidity is one of the most important items that could be done to boost adoption in terms of users and across DeFi. Secondary markets allow people to exit & enter without needed to interact with the core protocol itself, while the minting of new stLINK (especially in times of no new allocation) should be prioritised to the long-term users of the platform who have a vested interest.

If there’s times where staking allocations become so large so it’s likely that the entirety of the PP would be staked, it’d have the same benefit since there’d be a rush of LINK deposits as the PP mechanism is proven and people will opt to a higher reward rate that is entirely liquid.

For me, to get similar benefits of this proposal there’s a couple of small wins:

  • Show how much LINK is backed by reSDL in the PP so it’s easy for users to see resulting in more deposits when it gets low
  • Voting on a native withdrawals proposal based on the current active development to guarantee 1:1 liquidity for lending markets
  • Incentivising stLINK liquidity as much as is feasibly and sustainably possible

Based on that reasoning, that’s why I’m against this proposal.

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