I think the proposed RPL staking adjustments themselves are a positive enhancement to the protocol alignment of RPL tokenomics. They provide additional incentives for protocol growth through minipool creation. However, these changes do not exist in a vacuum. The proposal’s possible impact on collective NO and investor behavior should also be considered. People adjusting their RPL investment thesis may have a bigger effect than their direct sensitivity to personal changes in yield.
Based on views different people have expressed over time, I believe a RPL sell-off scenario is at least plausible. Whether it is actually likely depends on the collective market reaction and is difficult to predict, even with further market research. The worst case risk would be a sell-off that is rather deep or prolonged, accompanied by negative secondary effects, such as loss of trust in the protocol by node operators and investors, harming future protocol growth.
The proposed slow phase-in of the changes, as well as striving to maintain civil discussions and ramping up communication as the proposal matures are good mitigations to reduce the chance of such an event. These also help to avoid the perception of rushed governance.
The RPL staking proposal is an adjustment to RPL tokenomics broadly consists of two separate, yet interrelated changes:
A frequently mentioned concern about the adjusted RPL staking proposal is how these changes combined could lead to a large sell-off of RPL. People holding this view mention that the proposal would not just hurt RPL price in the short term, but could also cause longer term harm by damaging NO and speculator trust in the token and the protocol (DAO.)
Valdorff’s model suggests that a large scale sell-off will not happen, since returns for the RPL-heaviest NO’s are affected much more by RPL price appreciation than by the impact the changes have on RPL reward APR. This applies even more to unstaked RPL holders, who do not earn any yield at all.
Even so, the sell-off concern keeps being voiced. This steelman argument is intended to help discover whether there are any gaps in our understanding. People can have different objectives beyond direct profit maximization, as well as varying risk outlooks and investment timeframes. We should consider these angles too.
The argument will consider several personas that would sell RPL in response to the proposal. Then, I will examine a scenario where the interaction between these personas’ behavior causes a negative feedback loop that is damaging to the protocol.
As this is a steelman argument, I do not necessarily agree with all the personas’ viewpoints that I will present. For clarity, my own opinion of the proposal at this point is that I see the changes themselves as a positive enhancement to the protocol alignment and long-term viability of RPL tokenomics.
But these changes do not exist in a vacuum. The proposal’s possible impact on collective NO and investor behavior should also be considered. People adjusting their RPL investment thesis may have a bigger effect than their direct sensitivity to personal changes in yield. RPL currently enjoys a speculative premium above many of the RPIT's floor values. Selling RPL is not in and of itself a problem, but upsetting a large contingent of investors / NOs to the point they lose trust in the protocol is.
As a community, we should be welcoming of different views even if you don’t agree with them or if they aren’t presented in the best way. Discussion on the proposal has been mostly civil so far, which is great. Let's refrain from applying negative frames to others' views, but instead strive to understand them so we can make the best overall decision possible in the interest of the protocol.
Lisa is an actively involved Node Operator who values having both ETH and RPL in her portfolio. She currently stakes the maximum RPL collateral for her minipools. Lisa is moderately bullish on RPL appreciation, falling into the range where Valdorff’s model shows selling RPL would be beneficial.
Brian is a large holder of RPL who based his investment on one of the several community-published investment theses (e.g. Xer0’s or Marceau’s.)
Mark is an an early adopter node operator who bought RPL at low ratio and spun up some minipools at Rocket Pool’s launch. He has a rather hands-off mindset, only doing what’s needed to keep his node running once in a while and earn some passive income.
Jennifer is a Node Operator who joined Rocket Pool fairly recently. She’d have preferred not having to invest in RPL, but RP’s additional rewards and benefits (such as the smoothing pool and the smart node’s ease of use) eventually swayed her. She entered with near-minimum collateral. Her outlook on RPL appreciation is neutral.
Robert is a speculative investor who purchased RPL under the original tokenomics.
We’ve considered several personas that would, by themselves, already sell RPL in response to the proposal. But market participants also try to anticipate and react to others’ actions. If they think many others hold similar beliefs that lead to selling, they could attempt to front run them. Liquidity for RPL is low. A small initial move could trigger a downward price spiral as others react, interpreting the price action as confirming their personal narratives. For some people like Brian, Jennifer and Robert this could mean the difference between staying involved in a more limited manner or leaving the RP ecosystem permanently.
A very deep or prolonged sell-off would put a growing share of Node Operators into undercollateralized levels. Instead of being champions to the protocol, these people can have buyer’s remorse, leave and / or become active detractors, hampering future protocol growth and reputation. Then the proposal would inadvertently cause the opposite of what it set out to achieve - protocol growth through minipool creation incentives.
I believe the proposal is not free of risk when considering how a diverse set of market participants react to it. Market research could provide some additional insight into the relative size of each user group. However, people’s actual behavior as the changes take effect cannot fully be predicted in advance. Hence, we should try to avoid a sudden ‘system shock’ as people adjust their positions all at once.
The proposal currently already includes mitigations, i.e. a phasing in of the 15% unstaking threshold and the adjusted curve over time and introducing a withdrawal time-lock (exact timelines can be tweaked.) I think this is a good approach. It gives people time to observe actual market reaction and protocol growth over time in response to the changes, and adjust their positions accordingly.
Finally, we should move slowly and deliberately to avoid the perception of rushing a large change. Not everyone follows the day-to-day discussions on Discord. So, as the proposals gets more and more concrete, we should ramp up communication, so that no one is surprised if and when it gets to the point of a governance vote and has to form an opinion under time pressure. There’s a balance to hit here on timelines, though. Rocket Pool has a limited time to carve out a share of the LST market for itself over the next several years, while new competitors keep popping up.
Throughout this argument, I’ve touched upon the role of speculation for RPL. In this final section I want to make a few points more explicit as I think these are relevant to the discussion.