Borrowing and lending market personal overview and ideas

General
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Intro

This is not a proposal, just a post to share some personal thoughts on how certain aspects of the lending market could work from a user perspective (both from the lender and the borrower side).

For reference, read before “Phase 2: Collateral-free SD borrowing for Node operators” in this blog entry: Explained what are Stader's Node Operator-Centric Tokenomics

Potential Mechanics

General Market Workflow

-Borrow APY set at 0%. NOs using this feature get 0% SD collateral rewards, and these just get redirected to the SD lenders pool, where it’s distributed equally among all the lenders.

Therefore:

  • NOs get to run a node with 0 exposure to SD and no volatile Borrow APY: This will attract many NOs currently waiting on the fence who want the additional rewards vs solo staking, but no governance token exposure.
  • You give SD holders a huge pseudo “Staking” feature, with the potential non regulatory risks of it not being purely staking.

-Lenders don’t get “matched” to Borrowers 1:1. Instead, lenders are treated equally as members of the pool, and get a proportional share of the rewards.

-Borrowers must put some collateral in ETH, which would be equivalent to the current SD bond to ensure security and prevent MEV theft or misbehaving.

Locking SD for higher Lend APY

SD lenders could have a locking model to opt into lending. This would introduce some sort of lineally ascendant rewards depending on the time locked.

Let’s say the current Lending APY is 30%, and the max lock period is 2 years, then:

  • 30% APY for 24 months lock
  • 22.5% APY for for 18 months lock
  • 15% APY for 12 months lock
  • 7.5% APY for 6 months lock

(APY would be variable and directly related to the Lend pool TVL, SD collateral APY, etc)

The Stader Trifecta Flywheel (NOs, SD stakers and Boosted ETHx yield)

-The ETH collateral could be staked (without minting ETHx), and its rewards flow directly into ETHx yield.

This way, Stader could kick-off its own organic flywheel to get a little boost for ETHx APY.

-When ETH depositors exit their position, they would be getting ETHx instead of ETH, so there’s no need to exit validators, rather them withdrawing or selling if they will.

-The whole tokenomics parameters would still be relevant and could be decided by the DAO. These are some possible models:

Model 1: Neutral, no balance toward any of the sides

  • Collateral ETH: gets no Borrow APY, but no rewards from their ETH = pure ETH exposure for NOs

  • SD Lenders: get the SD collateral rewards (~pure SD staking)

  • ETHx yield: Collateral ETH staking rewards goes fully to ETHx yield = higher ETHx yield than competitors if this feature gets traction (although impossible to beat sfrxETH)

Model 2: Push for more NOs

  • Collateral ETH: get a slight commission from the staking rewards of that ETH. Can boost NOs incentive to run validators with Stader.

  • SD Lenders: get the SD collateral rewards (~pure SD staking)

  • ETHx yield: the staking rewards from the ETH yield don’t go purely to ETHx yield, but gets a cut directed towards the NOs

This scenario would allow to ask NOs for a slightly higher amount of ETH bond to borrow SD, as they would be getting something from it, therefore not impacting so much in their net investment.

Model 3: Give some “Real Yield” to SD lenders

  • Collateral ETH: gets no Borrow APY, but no rewards from their ETH = pure ETH exposure for NOs

  • SD Lenders: get the SD collateral rewards (~pure SD staking). Apart from this, they will get a commission from the Collateral ETH staking rewards.

  • ETHx yield: the staking rewards form the ETH yield don’t go purely to ETHx yield, but gets a cut directed towards the SD lenders.

This scenario is clearly balanced towards SD lenders. The main issue would be that if you don’t get enough NOs to use the feature, the rewards directed to the lenders would be negligible.

Model 4: Push for NOs and SD lenders, give up considerably the ETHx boosted yield.

  • Collateral ETH: get a slight commission from the staking rewards of that ETH. Can boost NOs incentive to run validators with Stader.

  • SD Lenders: get the SD collateral rewards (~pure SD staking). Apart from this, they will get a commission from the Collateral ETH staking rewards.

  • ETHx yield: the staking rewards from the ETH yield don’t go purely to ETHx yield, but gets a cut directed towards the SD lenders and another cut to the NOs.

This scenario doesn’t get any considerable boost for ETHx, but could be substantially interesting for both NOs and SD lenders.

On another note, @Defi made an interesting post on how existing NOs who fall below the 10% threshold should be treated as borrowers (Phase 2: When NO SD bond is 0%-10%, lenders should have the option to receive a portion of their ETH yield instead of SD).
Personally I do not really like this idea, as it would be somewhat punishing for people that have already a decent commit with the project, and their investment is probably already underwater, so wouldn’t make sense to me to apply them this penalty in form of giving up part of their rewards.

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I am still digesting your thoughts, but I made my proposal more succinct using some language from cherubmi.

Under 10%, the NO automatically becomes a SD borrower, i.e. the difference between their SD collateral and the 10% requirements is filled through the SD lending market, and reward conditions for SD lending apply. The NO would still receive SD rewards for the amount of SD contributed to the 10% bond.

I don’t see this as a punishment but an opportunity to still be an active NO rather than current option of just letting them continue or exiting. You mean NO ~ 90% ETH investment is underwater? SD has dropped 30% against ETH since 2 weeks before ETHx launch so would be nice for SD to get more benefits.

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Thanks for posting this! I really like the idea of putting ETH collateral to use (the Flywheel) and I believe that model 1 would provide the right set of incentives to help grow the ecosystem. Below I explain why I think so.

When thinking about the different options, I first thought about where I believed we needed to increase incentives for ecosystem participation - 1) Stakers, 2) NOs or 3) SD lenders.

SD lenders are already invested in the ecosystem and SD token incentives are already quite high if we assume that the SD token price stays stable long-term. The only real economic use case of the SD token in my view is the ETH collateral – so I think we should focus on increasing the number of ETHx nodes spun up, and incentives for SD lenders will stay high in consequence. This will also keep the underlying economic model simple which should be favorable in the long run. Although I like the thinking behind models 3 and 4, this would rule them out for me.

Now, I know that the idea of a commission on the ETHx yield for SD lenders has been floating around, so I’d be keen to hear the counterargument and why we think SD lenders need more incentives.

The difference between model 1 and 2 for me lies in whether we think we need to attract more Stakers or more NOs. From my perspective, the low entry requirements for NOs are Stader’s edge in the industry at the moment, rather than a slight increase in NO rewards. From what I am reading on discord and here, most NOs seem to be in for the long run, and should therefore be more interested in long-term ecosystem growth, i.e. growth in TVL and the relevance of the ETHx.

This leads me to believe that option 1 is most favorable at the moment, especially since Stakers will be most sensitive to staking reward differences. If the requirement for ETH-only exposure for the collateral is higher (say 1 ETH instead of 0.4 ETH), we may see a 0.1 – 0.2 percentage point increase in ETHx yields. While not massive, this should give TVL and adoption a little boost.

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Gotta love the proactivity of the community members coming up with ideas like this one.

I believe that the SD lending market has a huge potential for Stader NO set growth, as it will unlock a huge marketshare of solo-stakers and ETH holders that will consider running a node much more conservative and attractive by removing the non-ETH token from their investment.
On the other hand, it will also give a staking feature for SD holders, and I think the locking approach is really good to balance the reward/commitment ratio. Borrowers (Node Operators) are usually long term investors, so pushing lenders to also become long term investors through unlocking higher rewards will put both in the same page.

If this approach were to be merged by the team in the development, I think the parameters of the trifecta flywheel should be discussed in-detail here in the forum, and perhaps voted by the community on snapshot.

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thanks a lot for this thoughtful exercise.

I agree with @cherubmi, Model #1 seems to be very balanced and will help scale both Node Operator front and staker front. I say this as a N.O myself, even if other models would benefit me more.

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