SD staking mechanism (xSD)

1. Context & Introduction

Over the past couple months, Stader has been taking strides towards decentralization, and community-led governance.

Stader (SD) token is the native governance token for the Stader platform. It is an ERC-20 token in limited supply, capped at 150Mn tokens.

The token distribution, release schedule and more details can be found here. For an in-depth look at our vision, business model, and tokenomics, please refer to our litepaper.

Today, we are happy to unveil the SD staking mechanism devised to enable a decentralized governance of the protocol.

The staked version of SD, called xSD, has governance power and will be entitled to a portion of the protocol revenue generated across the different chains Stader is live on, once approved by Stader governance. Further details regarding this revenue-sharing feature will be shared in a subsequent post.

2. xSD Design & Mechanism

xSD design is similar to Stader’s liquid staked tokens ETHx, MaticX, BNBx, HBARX etc. SD holders stake SD to receive xSD (at the prevailing exchange rate). Staking rewards are added to the smart contract periodically leading to xSD price increase vis-a-vis SD.
SD staking will be solely available on Ethereum mainnet for now.

xSD staking mechanism has four core features:

2.1 Real Yield: SD stakers receive a proportional share of protocol revenues (once approved by governance). A portion of protocol revenues is dedicated to buy back $SD from the open market and provided as rewards to the staking contract.

2.2 Exchange rate xSD:SD: Since the supply of xSD remains the same even with the staking rewards, the price of xSD increases vis-a-vis SD.

2.3 Governance power: Once SD staking goes live, xSD will be eligible for on-chain governance* (currently via Snapshot).

2.4 Unstaking: Users can redeem xSD and unstake SD at the current exchange rate. Unstaking will be allowed upon launch. The unstaking period is set at 7 days. This serves a double purpose:

  • To enhance the security by allowing bigger time for response in case of abnormality,
  • To reward long term holding and governance participation in Stader protocol

3. Smart contract security

Security of user’s funds are paramount for us. Stader’s staking contract has been audited by a top tier audit firm, Halborn Security. Additionally, we will implement on-chain monitoring with our existing partners including Forta and Certora.

4. xSD Staking mechanism analysis

The following mechanism has its pros and cons, and they have largely been discussed with key community members. Here is a brief outline:

Pros

  1. The staking yields given out are “Real Yield”, i.e. generated from real protocol revenues, instead of inflationary rewards.

  2. It is potentially tax efficient** across several jurisdictions.

  3. It is a model preferred by large SD holders/ institutions as they don’t have a mandate to provide and stake LP tokens.

  4. SD being bought from the open market to distribute among stakers creates a positive buying pressure

Cons

  1. It incentivizes people for locking out their token out of circulation but it does not help increase the on-chain liquidity of the SD token.
  2. It does not incentivize longer-term locking by giving a non-linear increase of governance power / rewards (like the ve model does).
  3. Judging at existing projects having used it, the buyback mechanism does not necessarily bring a better price action to the SD token.

5. Additional SD utility & Road Ahead

With the advent of ETHx, the team is finalizing designs regarding additional SD utility to be used as a bond by the node operators. More info on this in subsequent forum posts.

While the xSD model planned for Phase 1 is basic, it seems to have several benefits to Stader tokens holders as highlighted before. Team is actively engaging with several community members to design the roadmap for SD staking beyond Phase 1.

Would love to hear thoughts and suggestions from the community regarding SD staking details shared above.

Till here today. Do you want to shape the future of our staking mechanism ?

Join this forum and let us know your thoughts below ! :point_down:

*As any other multichain DeFi project, Governance is best executed if performed solely in Ethereum. We feel multichain governance is a frontier yet to be explored by the blockchain industry, and we choose to put our focus on growing our product suite and our user base at the moment. We however remain vigilant of new developments in this space.

**Not financial advice. Consult a tax professional.

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I wanted to share some though on both the pros & cons, even if I’m not so much concerned as ther eis no way i’ll use ethereum chain.

Pros.

  1. " 1. The staking yields given out are “Real Yield”, i.e. generated from real protocol revenues, instead of inflationary rewards."
    ==> real yield would be distributing revenue AFTER paying expenses. My understanding is that it isn’t the case. (Which isn’t a problem, actual meta being around your kind of real yield)

  2. " 1. It is potentially tax efficient** across several jurisdictions."
    ==> Sure is, and this is smart to consider this point.

  3. " 1. It is a model preferred by large SD holders/ institutions as they don’t have a mandate to provide and stake LP tokens."
    ==> Wouldn’t that be possible to make both work together, with a share of revenue used to bribe for liquidity, and and an other to distribute to SD ? (Which would, btw, make this closer to “real yield” and allow) Doesn’t need to be 100% of the incentives for LPs, but participating in it is a first step toward equilibrium.

  4. " 1. SD being bought from the open market to distribute among stakers creates a positive buying pressure"
    Sure. But is is also selling the exact tokens that are used to farm SD in the first time.
    Did you think about a mirror model where staking on any chain would allow some to harvest rewards in the native token on any chain ? Ie, I stake on BNB, and can claim my share of revenue on FTM whenever I want to.
    It could be developed even more, allowing users to claim with gas being paid by the contract itself, thus allowing people to migrate/explore new chains without having the struggle of bridging gas alongside whatever they wanted to bridge.

Cons

  1. " 1. It incentivizes people for locking out their token out of circulation but it does not help increase the on-chain liquidity of the SD token."
    Which is actually a problem protocol wise. more and more protocols do realize that single side staking is not paradise, even if reducing the effective circulating supply. Can’t the “large SD holders” work on their mandate ? I’m sure they would prefer SD to adopt a more beneficial approach long term.

  2. " 1. It does not incentivize longer-term locking by giving a non-linear increase of governance power / rewards (like the ve model does)."
    ==> Not going for ve model is actually a great thing, this model is really not user friendly. Why not look to work with one of your actual partner, Byte Masons, who is about to release a product to incentivize long term holding without the locking aspect of it ?

  3. " 1. Judging at existing projects having used it, the buyback mechanism does not necessarily bring a better price action to the SD token."
    ==> This will depend on so much many other things.

Happy to be here, I really like the work done so far, but I think it would be premature to launch xSD the way it is framed now.

All the best,
Jackswiths.

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Agreed on all items @jackswiths

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Hi!!

Nice to read the proposal.
Although -like shared in the ‘Real Yield’ topic- i am more enthusiastic of paying dividends in another token (ETH), I understand why you have chosen for a buy-back model and pay the SD-tokens to the xSD pool. I would suggest to buy-back on a (daily?) basis, to prevent front-running/pump/dumping once a month or so. (So the buying pressure will be constant, and hopefully grow over time).

Also it would be nice to have some transparancy, with a buy-back dashboard that is open and easy to understand/read for everyone.

About the locking/incentivize long-term holding;
Maybe we can incentivize node-operators for holding (locked) SD LP’s as a bond? This way we make sure that as Stader (node operators) grow, there will always be liquidity on chain.

Looking forward to the next months! Exciting!

Warm regards,
Jens

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Excited to see this finally moving along and getting potentially finalized.

My assumption regarding the revenue sharing/staking model is USDC/ETH payouts are not going to be considered because of regulation fears.

I’d love to see the UMAMI model looked into. You have the base token UMAMI. mUMAMI is their “marinate”(staking) token with payouts in WETH. Want to compound rewards? cmUMAMI (compound+marinate) is the token you receive. That’s how I want to own my Stader tokens. With options. To get revenue sharing. Or to stack/compound automatically. Having options is nice. “REAL” yield in USDC/ETH/DAI is really, really nice. Not just more of a governance token.

My point not being an extra token is needed (SD + xSD + cxSD) but that payouts in ETH would be huge. No other LSD protocol does this currently.

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Amazing to see this coming.

I like the design, a lot. The only issue is that I think 2 other models would be even more effective, and maybe you can consider it for a v2.

  • a ve model, where people can lock the SD token from 1 month to 4 years, getting a bigger share of the revenue and more governance with it.

  • a model in which you lock liquidity of SD (eg veSD being 80 SD : 20 ETH).

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I also really like it if there would be an option to receive real yield in another token -for example WETH.
Stakeholders/investors that -for different reasons, like taxes- would like to compound (receive SD) could in that way still choose for that option while the real yield narrative is there and strong.

Also i believe real yield in WETH would give a huge marketing boost. (price increase → getting attention, more staking, more yield, etc. And since still most tokens are locked, most yield would still go to staderlabs… what is nice to expend markets etc.

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xSD is ERC-4626 token? No compouding needed?
I would prefer to get ETH too.

I’m not familiar with how other LSD Governance staking models operate. I think any system that generates protocol revenue and shares a portion with stakers of the native token will be hot in the next bull run if done correctly. I am not 100% sure that buying SD and adding to the pool is the right method though. If the fees generated are converted into stables and distributed as rewards, to me this would be an indisputable superior model, as the rewards are clear and visible (real), whereas, during longer periods of sustained rewards selling pressure, there needs to be a way to incentivize people to want to stake. I think having rewards in a stable coin would be far superior than having to manually buy SD and add to a contract periodically.

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Thanks for the elaborate post. Really like the pros vs cons analysis you have shared @jackswiths Could you please share what the bytemasons team is building? We are close to finalising validator related tokenomics on ETHx and there might be an interesting synergy.

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Very interesting. But it’s necessary to mention that it seems like you miss the point of “real yield”.
Real yield is when you receive rewards in stables, value that can’t be decreased over time, can’t be dumped, crushed, erased, not depends on market conditions, not creates selling pressure.
All fhe models if buy backs of the same governance tokens - failed.
Whale’s wallet will accumulate SD rewards much faster than retail investors. Sell the tokens to takes the profits of real yield.
This is not a good model.

Stader’s rewards is coming from stakers, as operational fees.
That’s meant Stader will have to sell the ETH, MATIC, NEAR, APTOS and other native coins. Than buyback the SD and only than send the SD to xSD pool to increase its value.
Don’t it seems like too much operations? How often will you do the harvesting of fees? Daily? Weekly? How many gas fees will it cost?
If it’s going to be daily it’s high cost of converting and will lower the real yield.
Monthly - SD can be dumped in price and stakers will receive even less rewards.
On the other hand, you are already collecting the native tokens as fees, why don’t you distribute this coins as real yield. This is a real share of your rewards. But instead you will sell the native coins to buy back the SD.
It’s like if I buy McDonald’s shares and they will distribute hamburgers as dividend.:rofl:

Look at the example of MintDAO.
Sharing 75% of revenue in USDC for governance token holders. This is real yield.

Holding and staking governance token to be rewarded in governance token is kinda ordinary staking model there is no real yield.

Is MintDAO available in the US? As per my knowledge, giving yield in stable (or non-staked token, non-SD in this case) would deem SD as a clear security token and as we have seen security tokens haven’t had best time in the market. Yes, Stader is DeFi and they can block US traffic, but is it smart to leave out biggest market in the world?

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No need to ban US citizens. US citizens can receive rewards in ETH or any other staked token/coin.
Now let’s be honest, more and more projects on market don’t give a sheet about SEC’s opinion.
Thу corruption of SEC is so clear and visible that many big players not influenced by SEC’s prohibitions.
SEC day’s are already over, FREE market can be build only where no corrupted institutions ruling it,
and that’s not only my opinion ;D

Thanks a lot for key suggestions on the forum regarding SD staking and xSD design. Capturing below are key areas of suggestion and my thoughts below:

  • Giving yield in other native tokens
    • This is a great suggestion. We have liquid staking contracts across 6 chains as of now. With Eth, Aptos launching soon, it will be 8. Each of the L1 community would prefer to receive yield in their own native token.
    • It becomes a bit impractical to do this as we need to manage and account for rewards in 8+ different chains (e.g. overheads etc.). Would also add susceptibility of rewards to bridge related risks etc.
    • A potential option could be to do an on-chain vote on the top 2/ top 3 tokens to receive yield.
  • Giving yield in stable coins
    • This is an interesting suggestion and we have had an initial consultation with one of our legal counsels. Preliminary assessment is this may pose a risk of construing SD as a dividend-paying security.
    • However, they are doing a deeper diligence again. We should have a final assessment in a week or so.
  • Liquidity based staking
    • On-chain liquidity is one of the important areas we are focusing on. Immediate changes are
      • 1.) Moving POL to Uniswap v3
      • 2.) Building deep liquidity on Balancer for SD <> ETH pool
    • We will bribe and continue to incentivise on-chain liquidity. Adding a veBAL type of token as the only way to receive SD staking rewards exposes us to any Balancer related smart contract risks. Apart from Balancer and their ecosystem projects, are there any other protocols that utilize this model?
  • In case of xSD, SD buyback timing
    • If we choose to go ahead with the xSD model, this could be a combination of daily buys/ opportunistic buys during the dips.

Key action items for the team include the following based on the above suggestions:

  1. Hear community’s feedback on the suggestions shared here and go for on-chain vote (if necessary)
  2. Further assess Bytemason’s and ve-LP models with relevant community members.
  3. Get back to community with final assessment on yield in stable coins

Responses to key questions about Stader’s overall revenues and expenses.

  • Revenues: As of current prices, Stader’s protocol revenues are around 1.1 Mn USD.
  • Expenses: Team expenses along with marketing etc. are approx 300k USD/ month
  • Rewards expenses: Please refer to the post here for monthly rewards budgets
    SD Token Emissions Budget- January 2023
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So I assume we are going to have a vote, if (big IF) it’s a green signal from legal counsel about paying rewards on xSD in any other token than SD.

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Thanks @Amit for this great breakdown. Appreciate it. And look forward to more updates.

“A potential option could be to do an on-chain vote on the top 2/ top 3 tokens to receive yield.”
I’m a huge fan of this. In my opinion the community has to be realistic about what is a good balance of not flying too close to the sun with wanting exactly what’s good for them but the team risking problems(SEC regulations coming who knows when, plus you’re locking yourself to Circle who is the issuer of USDC) with closing themselves off from their biggest market currently, the USA, and also seeing what is best for the design and efficiency of the protocol and the costs associated for their business to run in profit enough to be able to keep expanding the ecosystem.

Even if Stader made a big splash with starting to pay in real yield on just the Ethereum network only (ETHx) to start off. See how it goes and slowly expand to the next biggest revenue network after that. Slowly release it. Learn as you go. But start off with ETH. Have a slick staking page showing APR and other stats. Compare it to the staking page of frxETH. It could be simplified more. Made more user friendly. Less is more.

There is no doubt though that the real yield narrative is extremely hot right now. I don’t see it going away. I’m basically investing in a company that’s paying me dividends. I can comfortably hold through any market condition as I know this will indefinitely keep paying me. Protocols not a LSD but that are currently doing real yield: GNS / GMX / BFR / GOVI / CAP + more. 2 of those are actually forks(only the staking part is forked) of GMX. I’m just trying to make the point that the potential here is massive for the competitive LSD landscape. Who else is doing true real yield? No one. Someone will be the first. And whoever is will be the one to forever be able to say: “we were the first LSD protocol to offer real yield.”

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You can find some information about Reliquaries here : Reliquary — The new chef in town? | by 0xSkly | Beethoven X | Medium

There are some other articles about it, and I’m sure Justin Bebis would be happy to answer any quetsion you have.

The tl;dr : allowing user to deposit a position into an NFT (no lock at all) to earn staking rewards ; the longer the tokens are staked, bigger the share of reward they receive.
The revenue share received is calculated on a time weighted basis, allowing users to add to the position, remove from it, split an NFT, merge two NFTs, etc.

Very flexible (also the curve is flexible), no lock, and rewarding long term positions to remain in the NFT while still allowing users to trade it.

Lot of future use cases will be possible, way more than with a locked position. (You can imagine the separation between yield and principal easily)

Hope it helps, and would be very happy if this solution was at least looked at.
We have to stay innovative, no repeat the past.

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What do people think of month long minimum lockups of xSD to earn the yield (ETH/ETHx if possible)? SD no lock for governance and xSD locked for yield. I’m fully for it. No technical knowledge on the matter but I would assume it would simplify things a lot with not letting people have an unlimited of times to stake/unstake.

Not a fan of tiered lockups where for full yield you have to do 4 years and it steps down all the way to 1 month let’s say for 1/10th of full yield, 1/4 for 1 year for example (made up numbers). PREMIA has a model like this I think, as many others.

Might bring more serious participants to the protocol. Ones that are more devoted to the platform. Makes it more sticky. Makes people maybe consider governance more. Maybe follow the Twitter account more. Random thoughts. If I can get in and out of something I care less about something that I am married to.

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Hey, @TD86 thank you for sharing with us your ideas.
Locking models were discussed earlier in other topics, and there is more members against the locking model.
I’m now of them. Locking is against Stader’s vision of liquid staking.
It’s a killer of portfolios, locking never can be profitable.

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@WaXTeP Definitely best for end user to have non locking. I was thinking of it more of as being a concession. That if it took that to finally push it over the edge to get ETH/ETHx rewards then I would be willing to consider it. No locking would be fantastic. The combo of that + real ETH yield would get a lot of attention.

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