Proposal: Reduce stakedrop rewards to increase allocation for tBTC v2
Joint proposal by corollari and state.
Background and summary of proposal
tBTC v2 is set to solve many of the issues from tBTC v1, namely capital efficiency, but will need KEEP incentives to get bootstrapped. The current supply schedule leaves no stakedrop rewards for v2, and this is a problem if we are to successfully launch v2 with the help of staking rewards. We are proposing to reduce stakedrop rewards going to v1 in order to reserve an amount of KEEP for v2.
Factors we believe we should optimize in this proposal:
- Keeping the initial promise to current stakers
- Making sure that tBTC v1 continues being viable till v2 is released
- Having enough for v2
New schedule proposal
- For the months of March, April, May, June, July and August, rewards would be cut by 30% versus the current schedule.
- For the months of September, October, November and December, rewards are set at 4.35M KEEP per month.
- Cut all rewards after 2022 to zero.
- Because of those savings, we will have 50M KEEP left in stakedrop funds for launching tBTC v2
For the first stage, we decided on a 30% reduction of rewards versus the current schedule. We believe this is the right amount needed to save the most KEEP while still maintaining a viable return on ETH.
The change, assuming same prices and TVL, reduces the APR from 48% to 32% for the next month. But given the reduction in staking risk and costs due to the recent collateralization changes and the upcoming introduction of the coverage pool, we believe that tBTC v1 will be able to retain its ETH. The returns will still be much higher than other returns on ETH, such as Alpha Homora (6%) or ETH2.0 (8%). In addition, current stakers have already covered the upfront costs associated with setting up a node.
For the last months of 2021. We decided to establish a minimum threshold of 4.35M KEEP. Otherwise, rewards in december 2021 would be of 2.5M KEEP (versus 3.5M under the current stakedrop). Using the current prices and bonded ETH amounts, this would result in a ~6.8% APY, which we believe would be too low.
We decided to remove all rewards past 2021. We believe that by then, tBTC v2 will be well launched.
It is also possible that with reduced emissions and a good reserve of KEEP for tBTC v2, the market will be more confident in KEEP and that could increase the APRs, but that remains speculative so we try not to base ourselves on this piece of information.
- We’ll still have 60M KEEP by EOY, which translates into 15.5% APY on v2* ( see Allocation for v2 section)
- Reward distribution is not heavily changed, minimizing differences with initial stakedrop and promise-breaking against stakers
- Fixes really small incentives during the last months, increasing viability
- Keep the rewards at a constant monthly rate. This would maximize viability of the network but it would mean a heavy (>50%) cut on the following months’ rewards, which may hinder investor confidence
- Use some kind of control system to determine rewards (eg: always maintain 20% APY while making sure that rewards for v2 will be >50M KEEP). The problem with this is that it’s hard to design something that properly maintains the invariants, it could disincentivize growth and a complicated reward mechanism makes it hard for stakers to calculate future rewards, thus increasing risk (maybe this would reduce risk though).
Further below we include some of the things we looked into to determine how to reduce rewards in the most viable way.
Usefulness of rewards
For the duration of the stakedrop, the amount of ETH locked in the system doesn’t seem to be correlated with the rewards (in USD) being distributed. What’s more, since the beginning of 2021 we’ve seen an increase in rewards that has not translated into an increase of ETH staked, which gives credibility to the hypothesis that some of these rewards are being wasted.
We speculate that the reason for this is that rewards are currently high enough to attract capital, but this capital is bottlenecked by the necessity to have exposure to KEEP, run offchain nodes, have enough capital to offset the high upfront costs and handle the risk involved with it. If that’s true, it would mean that currently rewards are overpaying and they could be decreased up to a point without a decrease in locked capital.
Allocation for v2
If we assume the conservative estimate that v2 will launch by the end of 2021 (we’ve seen estimates for Q3 thrown around but let’s take a cautious approach and assume a later date) and we follow the current stakedrop distribution with the assumption that random beacon rewards won’t be restarted before the v2 launch, we’d get that by the end of the year we’ll have already spent 164M, 82% of the total rewards, so only 36M will be usable to incentivize v2.
By then there will be 556M of KEEP on the market (including the ones owned by the SEZC) so if we were to assume that 50% (average for other L1 staking protocols) of those will be staked, stakers would get ~6.6% APY if those were to be distributed over 2 years (9% if distributed until the end of the original stakedrop). This is clearly a really low amount, as even eth2 staking, which is significantly less risky, currently offers >8%, and it also represents a heavy cut from the current ~55% APYs.
Here’s a comparison with other L1 staking protocols, in order to get an approximate idea of how much APY would be needed:
|Protocol||Requires running a node||Lockup||APY||Participation (total staked)|
|Keep v2||Yes||3 months||Unknown yet||Unknown yet|
|Cosmos||No (delegation)||21 days||10%||65%|
|Polkadot||No (delegation)||28 days||13%||58%|
|Dash||Yes (although it’s possible to lend to masternodes ~= delegation)||none||6%||48%|
Seeing how Keep requires running a node and makes stakers more illiquid (higher lockup), if we want to achieve a high staking participation we believe the APY should be >10%.
We compare the amount of locked ETH against rewards in USD instead of in KEEP because a rational actor would act based only on the USD value. If he believes that KEEP will appreciate but another farm offers higher APY on ETH then the logical thing to do is to farm there and sell those rewards for KEEP.