[Temperature Check] LSD Benchmark Rate
Introduction
Liquid Staking Derivatives are an ever-growing part of Ethereum staking. Considering their prevalence, there are not many protocols that exist which directly support the fluidity between these derivatives beyond a common swap. This Temperature Check will outline a protocol that could give support to the end user who is holding onto these tokens. This will be a Temperature Check to explore a novel protocol design. If the community is interested it will be followed by a technical proposal and a testnet.
Background
Blockswap Network always keeps the end user in mind. Simple tools which help users complete complex tasks have been a cornerstone of Blockswap protocols. Now that Stakehouse LSD Networks are on mainnet, the DAO should consider developing tooling which assists not only dETH holders but the entire LSD landscape to have a unified path to deliver Ethereum staking benefits to mainstream users.
One idea that could be executed is a benchmark rate yield for LSD tokens. The protocol could be designed to create a staked ETH unit of account. There is only one consensus layer yet all LSDs are giving a different rate. Creating a protocol that gives a single rate that the rest of DeFi protocols can use as a benchmark could serve many purposes.
dETH
dETH has atomic guarantees of ETH redemption. That means that every dETH in existence has a corresponding ETH staked in the consensus layer. Derivates are never minted prior to the ETH actually being staked. It could be seen as a wrapped ETH which is staked. dETH is traceable down to the validator level so that each holder of dETH knows where it is staked. The same thing can not be said for many staking derivatives. dETH has a close relationship to ETH just like wETH; This is something to keep in mind as the protocol is being discussed.
Objectives
- Create a strategy for unified liquidity across liquid staking derivatives with higher capital efficiency.
- Build a unified benchmark staked ETH unit rate protocol for Ethereum staking derivatives.
- Create a single fixed rate for the consensus layer yield to be used by DeFi protocols.
Tokens to Utilize
When considering which tokens to use in such a protocol, there are two main factors that should be considered.
- Ample liquidity.
- Familiarity and current integrations with DeFi.
Having enough liquidity to facilitate a staked ETH unit of account is crucial. Additionally, users who are commonly using LSD tokens around DeFi would likely be heavy users of the protocol. Although it would be great to integrate all tokens, it makes sense to start with three and build from there. In the future, it would be ideal to expand this to all liquid staking derivatives. There needs to be a set target weighting for stETH, rETH, and dETH which will need to be determined based on protocol design. The proposed first tokens are:
- stETH - Lido
- rETH - Rocket Pool
- dETH - Stakehouse
High Level Protocol Overview
Basics
For the end user, the process is simple. They can deposit their stETH, rETH, or dETH tokens and in exchange get newly minted kETH. kETH gives a fixed target rate for the LSD tokens. The protocol would maintain a stable fixed rate among all tokens in parity with the Ethereum network rate. Depositing rETH, stETH, or dETH would result in receiving kETH which can be later burned for ETH or dETH. From the onset, kETH would likely require a lockup period (users are still gathering yield) although the lockup period can lower as time passes when there is substantial liquidity. Remember that dETH always has a claim on ETH and can be traced back to the validator.
A separate vault could be created in which users can deposit dETH. Even though there is no market liquidity available for dETH, a user can still provide their dETH and get the target rate. The protocol could utilize the dETH vault and acquire dETH as needed to match the ratios required. It is important that this be a separate vault as the liquidity for dETH is not as substantial as other LSDs. Users could also deposit dETH directly to the kETH vault.
The protocol should place a ceiling on initial deposits at 500,000 ETH until it’s proven resilient to the market and has initial user feedback. Afterward, the ceiling could be raised to 1,000,000 with additional strategies, token pairs, etc in the kETH vault.
Step-by-Step User Flow
stETH and rETH Deposits
- Alice deposits stETH, rETH, or dETH.
- Alice receives kETH.
- Alice waits for the unlock period.
- Alice can burn kETH for ETH and dETH + fixed rate yield rewards.
dETH Deposits
- Bob deposits dETH to the dETH vault or direct to the kETH vault.
- Bob waits for the unlock period.
- Bob can redeem dETH and/or ETH + fixed rate yield rewards.
Returning to ETH
kETH Vault
kETH is minted for stETH, rETH, and dETH deposits and kETH can be burned for ETH or dETH plus rewards earned. dETH is included here as it can be unwrapped and the underlying ETH redeemed via a validator Rage Quit. This could give a sense of security to liquid stakers knowing they can exit to ETH or dETH. Initially, as the protocol is bootstrapping the withdrawal period might need to be 30 days and lessen over time.
dETH Vault
The dETH vault would return dETH or ETH to users plus rewards earned.
LSD Ratios
Maintaining a consistent target rate will require a tight ratio of dETH:stETH:rETH. To do this the protocol will use a rebalance logic to keep the target ratio. This will need to come via the technical proposal after determining the most advantageous ratios. It will get updated from time to time to by the strategy manager in the contract. This will be to align with prevailing market conditions for the benefit of the protocol to keep the target rate preserved.
BSN Token
To bootstrap the new protocol the DAO could allot 50,000,000 BSN tokens over 120 days. Any tokens that are not distributed after 120 days will be returned to the DAO. These can be split up into two categories. dETH deposits and all other deposits.
dETH Incentives
Those adding dETH to the dETH vault or kETH vault will likely be forgoing potential rewards that could accrue on their dETH. They will still maintain the fixed rate, but can not use them in other places in DeFi. Therefore, the DAO should look at incentivizing dETH within this vault. Emissions for this vault should take into account the amount of dETH deposited. It is also worth noting that there are various other temperature checks which could give dETH stakers an extra advantage when creating dETH. The below represents a sliding scale and is just for visualization. Distribution would be 25,000,000 BSN tokens.
Other LSD Incentives
To mitigate the opportunity costs of holding stETH or rETH it would be prudent to also incentivize these deposits. Because this is a Blockswap protocol, BSN emissions could be set at 25,000,000 total for stETH, rETH, and other LSDs if added.
Proposal
- Release a protocol that creates a staked ETH unit of account for LSDs and provides a single yield rate for LSD tokens.
- The DAO sets aside 50,000,000 BSN to bootstrap the protocol over 120 days for incentives.
- Blockswap DAO empowers core contributors Blockswap Labs to design, develop, create, support, and execute the LSD swapping protocol.
- Blockswap Labs will create a technical proposal outlining the protocol in more detail.
Conclusion
Ethereum could benefit from a stable staked ETH unit for liquid staking derivatives. DeFi protocols could benefit from a single rate across all staking derivatives. This is a Temperature Check to outline a possible way that Blockswap could create such a protocol. The actual implementation and protocol design will need to be determined based on what is viable. All community feedback is welcome.
