tl;dr

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.

Context

The RPL staking proposal is an adjustment to RPL tokenomics broadly consists of two separate, yet interrelated changes:

Adjust the RPL NO reward curves so that only the 10-15% collateral range gets full linear rewards, above that would get diminishing returns.
Allow unstaking of RPL collateral in excess of 15%, so that people above are not locked into reduced rewards.

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.

Approach

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.

Caveats and limitations

Personas are based on personal insights and opinions voiced by various people in Discord over time. They are amalgamations and not reflective of any specific individual.
This article is not intended to be a full risk analysis. It is merely to show that a sell-off scenario is at least plausible. As such, I will only focus on personas that are likely to sell RPL. The likelihood of a harmful sell-off actually occurring depends on the cumulative market effect, including neutral and ‘likely to buy more RPL’ personas.
Market research such as Wander’s could give more insight into the relative size of each user group. Even so, what people say and what they will actually do can differ. This makes any predictions before the changes actually take effect difficult.

Personal notes

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.

Personas

1) Lisa – RPL-heavy NO, moderately bullish on price

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.

Lisa intends to be a NO for the long term.
Lisa is currently heavy on RPL, but has no problem holding more ETH or having more minipools instead. Reasons for her current RPL-heavy allocation could be:
- Tax implications of selling RPL
- Valuing the voting power of her staked RPL
- Anticipating the need for more RPL for hypothetical LEB-4 or LEB-2 minipools
While moderately bullish on RPL, Lisa had always planned a laddered exit to ETH over time at certain ratio points, to derisk by reducing her exposure.
The tokenomics changes convince Lisa to shift her strategy to maximizing the amount of minipools she can get immediately. She flips over to the other end of RPL’s bimodal distribution (minimal RPL collateral) and does not look back.

2) Brian – very bullish RPIT investor

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.)

Brian uses a higher-than-minimum RPL collateral target in these valuation. This is because his investment horizon is shorter than full protocol maturity.
Brian believes that on these timeframes, maintaining higher collateral levels is a bigger driver of RPL demand than protocol growth through increased incentives for minipool creation.
Brian predicts the change makes collateral levels go down much faster than he projected, rather than decreasing organically while the protocol matures.
As a result, Brian adjusts his RPL portfolio allocation downwards and shortens his investment timeline.

3) Mark – passive NO sitting on RPL ratio gains

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.

Over time, Mark’s RPL stake has grown in value, so he’s sitting well over the minimum collateral.
He’s not near the maximum collateral either. Not wanting to micromanage his minipools and RPL stake, he’s just left it as is so far.
The change in unstaking rules triggers Mark. He sells his RPL above the minimum to cash out to USD. Now that he’s seen the ease, he’ll keep doing so whenever the ratio rises.

4) Jennifer – undercollateralized RPL-sceptic NO

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.

Jennifer bought RPL at a higher ratio. Due to recent price drops, her node has become significantly undercollateralized and stopped earning RPL rewards.
She does not wish to top up RPL to start earning rewards as she does not want even more RPL exposure. The proposal’s increased rewards aren’t enough to change her mind.
What’s more, she thinks that future tokenomics changes could harm her own position. The current proposal has been referred to as a ‘small initial step’ at times, and there’s now precedent for disadvantaging specific subsets of NOs to the benefit of the overall protocol.
Jennifer just sits on her minipools for now. But she’s not happy and considering taking the loss and exiting the RP ecosystem.

5) Robert – tokenomics change-averse investor

Robert is a speculative investor who purchased RPL under the original tokenomics.

Robert dislikes changes to tokenomics, because they cause uncertainty for himself and among other investors, regardless of the proposal’s merit.
Furthermore, he interprets the proposal as RPL being driven towards only being a ‘utility token’, rather than leaving room for speculative growth for future demand drivers.
Robert reduces his RPL exposure to derisk.
Already having adjusted his thesis after the pETH / nETH change, Robert may also decide that RPL tokenomics change too often.
Robert thinks the community does not take these concerns seriously and perceives the changes as being rushed. This makes him lose trust in the community’s governance process. He exits his RPL position completely.

A RPL sell-off scenario

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.

Conclusion

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.

Additional thoughts re: speculation

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.

RPL speculation is the market pricing in expected future value, based on the investor’s expected parameters for RP protocol growth, collateralization levels, total supply of ETH staked, etc. but also as yet unknown (hypothetical) future demand drivers for RPL.
RPL price is important to the NO value proposition too, as becoming a NO involves a bet on RPL price appreciation being at least neutral.
Speculation plays an important role to the Rocket Pool ecosystem: it enables us to spend some of the future expected value right now, on incentivizing node operators, funding the team and the GMC / IMC, which in turn enables more future growth. Without the speculative value of RPL, we would not have been able to bootstrap the protocol in the first place.
As of this writing, RPL has a speculative value high above its fundamental floor based on minimum collateral. Some people see this as undesirable and argue it should quickly drop closer to its floor value (‘ripping off the band-aid’.) As said before, I believe a sudden systemic shock should be avoided, because of adverse effects on protocol growth and the node operator experience.
One key parameter that is often argued about is staked RPL collateralization level. People generally agree that over time it will trend to a lower, or even minimal, value at maturity.
The proposal could be seen as ‘forcing’ collateral levels down towards this end state quicker. As such, this removes some of the possible ‘decision space’ for speculation and removes some of the more bullish projections from the equation.
Choosing certain expected values for collateral level and protocol growth could also be construed as choosing a timeframe for one’s investment. This may force investors with shorter time horizons (like Brian) to reevaluate their extent of bullishness.
A large percentage of RPL is held unstaked, earning no yield. These holders are by definition yield-insensitive, but they are sensitive to perceived changes to their investment thesis. Furthermore, NOs are RPL investors too. They may share similar views and become less bullish because of how they predict the market to react overall, regardless of their personal sensitivity to yield.
This is however difficult to predict. It’s certainly possible that the net effect is actually positive, if the market expects extra demand for RPL from additional protocol growth to outweigh the demand reduction from lower collateral levels (as a simplified example.) This again lends itself to a methodical phasing in of the proposed changes.