When Node Operator SD collateral falls below 10%, they should be treated as SD borrowers and 0-10% of their ETH rewards should go towards lenders.
I’m thinking this should be implemented in Phase 2 if possible. When SD collateral falls below 10% of ETH value, their SD rewards should go toward their bond instead of getting no rewards. Then 10% ETH staking rewards * [1-(current SD value / 0.1 SD ETH value bond)] goes towards Lenders. This entire process can be seamless since there was supposed to be a check when collateral falls below 10% for 0 rewards.
This will add some more utility to SD lenders and SD overall.
I like the proposal. For the node operators, I believe we only earn the 5% rewards on the additional 28 eth. The other 5% goes to Treasury for stader. This would be a slight modification to the formula you’ve proposed, but I’m in alignment with you.
We’ve seen a fairly stable token price thus far based on historical volatility, although I’m sure we’ll be in for some big swings along the way. In these situations, liquidity also tends to dry up which makes your proposal that much more spot-on.
you are saying that rewards should KEEP flowing so they can replenish their SD bond… but then, there would be no actual incentive to make sure the bond always stays at 0.4 ETH or above.
I like the current system because SD rewards are super juicy (30-50% APR is my estimate) so it makes it palatable to N.Os to have to add to their bond in the event of a sufficiently big SD dip.
Anyways as the tips given by Stader suggest, it is better to add a buffer (e.g I added 0.6 ETH worth of SD!)
Hey sir! first off, thank you so much for taking the time to post your idea here!
I really don’t understand this math, do you mind to re-phrase for me?
Anyways the ETH staking rewards are not 10%, what am I missing? unless you are considering the boosted validator comission and perhaps conflating the ETH-on-ETH rewards and the SD-on-SD rewards.
It would be better if lenders got a portion of ETH yield when the NO SD bond is “under 0.4 ETH” than SD rewards.
On 7/10 ETHX launch I will use 0.4 ETH bond as example, SD was $1, ETH $1880 - 0.4 ETH $752 bond. On 7/23 SD was 0.79, ETH still $1880. SD has dropped 21% against ETH - now their bond is 0.316 $594. Under current system, NO would no longer get SD rewards, but still get full ETH staking rewards. In Phase 2, if someone showed up with a 0.316 bond, they would have to borrow SD to make up the difference.
Why does NO who started with a 0.4 ETH bond get a free pass and no longer have to maintain their bond when SD drops against ETH? Will Phase 2 allow partial borrows or would they have to borrow the entire 0.4 ETH bond?
Let me try and sum up my understanding of the issue. Please let me know if this is correct.
1/ Currently, NO with less than 10% SD bond continue to receive their ETH rewards but will not receive SD rewards until their SD collateral reaches 10% again.
2/ Phase 2 will allow NO to lend their SD collateral from SD lenders. If I understand correctly, SD lenders will receive the full rewards paid on the SD collateral borrowed, plus a small fee on ETH earnings of the NO. NO basically pay a small fee for having ETH-only exposure, while SD lenders receive ETH and SD rewards on lending SD.
3/ This also means a NO with SD collateral dropping <10% currently has no incentive to borrow SD as this would mean not only not receiving SD rewards but also paying a share of the ETH commission to the SD lender. When ETH prices go up, we would potentially see more NOs dropping below 10% SD collateral.
4/ If I understand correctly, the SD lending program is optional for new NOs, but NOs are currently not required to borrow SD if their SD collateral falls below 10%.
What are our options here?
1/ Current conditions - the NO does not receive SD rewards but receives ETH rewards.
2/ Defi’s proposal - the NO does no receive SD rewards while under 10%; a share of the ETH commissions go to SD lenders as per SD lending requirements but no actual SDs are borrowed.
3/ 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. This would be a modification to this proposal and would allow the NO to choose their own appetite for SD exposure.
From my understanding of current conditions - SD lenders get ~10% of NO’s staking yield who borrow the entire 10% bond.
Yes you got my proposal mostly right except I had some other thoughts.
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.
SD seriously needs more utility now even if Stader team is working on some other features that will be released in the future.
I like this actually, as it removes a major pain point for operators: When the price decreases relatively to ETH, they either participate in the full downside of the price action, when they keep adding SD collateral, or stop receiving SD rewards when they do not. But on the flip side, node operators do not participate in the upside of the price action, because they can only withdraw SD collateral that is above the 200% threshold, making the whole collateral requirement a potential sinkhole, and I believe the SD rewards cannot balance that out during bear markets.
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 think it is a nice use case for SD lending to use a SD lending pool to fill for the collateral gap in case a NO’s collateral drops below the 10%.
In my current thinking, I agree that we should work with positive incentives rather than punishments at this point, i.e. not having a “ETH commission” punishment if NOs collateral drops below 10%, as described in a earlier version of the proposal. As highlighted by @Dovah, current NOs are early adopters and take risks by using a new protocol and shouldn’t be punished.
Still, and fundamentally, we should think about a NO dropping below 10% SD collateral and a new opting choosing to lend SD for its collateral in different ways. The former will be undercollateralised, the latter will be fully collateralised through the ETH collateral, which, in theory, means higher risk for SD lenders in the first case.
Up for discussion, but I tend to think that a NO not meeting the 10% collateral requirements should not receive SD rewards on the SD used as a collateral that is not meeting the 10% collateral requirements. While I do think that most NOs are well-meaning, we should not just build on ethos but build compliance into the protocol, and there should be an incentive to meet the 10% collateral requirements.
This does not yet address the higher risks faced by SD lenders in the case of an undercollateralised NO, which should be built into the lending interest rate (again, there is a difference between someone using ETH as collateral and someone dropping below the 10% and being undercollateralized). This could potentially be done by distributing SD rewards that would go to undercollateralised NOs to SD lenders. However, there is an inverse relationship between risk for the SD lender and SD rewards for an individual NO. From a lender’s perspective, this could be smoothened out if we work with a SD lending pool. But we should still keep an eye on the evolution of undercollateralised NOs to ensure our incentives are set the right way.
Thanks for pushing this discussion forward. Looking forward to hearing from others!