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ADR #3: Rewards distribution after The Merge
Context and Problem Statement
Lido has started a technical process to integrate into the new Ethereum hardfork The Merge. The merge event is expected to happen in March-April 2022. We have to have a working, tested, and audited solution by the 15th of March 2022.
At the moment the Lido protocol collects only Beacon chain staking rewards (i.e. ETH2-side rewards) and pays protocol fee (10%) by minting new
stETH
token shares. After the mainnet merge activation, validators will start receiving another two types of the rewards: transaction priority fees and an extracted MEV which would be paid on the execution layer (ex. ETH1-side) while staking rewards still would be collected on the consensus layer (ex. ETH2-side). The new rewards would be initially gained directly by validators and nominated in ether.How can we distribute the new execution level rewards after the merge?
Decision Drivers
Primary:
Secondary:
Considered Options
stETH
or switch to ether for the new rewards branchDecision Outcome
The currently selected options group:
Primary support points: the selected options provide compounding and have a fast shipment time due to little impact on the existing distribution scheme.
Secondary support points: the proposed decision reasonably automated and self-governed, and fallbacks to the already adopted solution in case of some frictions with the Merge hardfork schedule.
Positive Consequences
Lido.sol
, ~100 LOC), and another vault contract adds (~100 LOC)Negative Consequences
stETH
is a rebasing token and total circulating shares amount decreases immediately by burning discountedstETH
Pros and Cons of the Options
Stakeholder's rewards and protocol fee nomination
Option 1. Nominate protocol fees in ether
There are two suboptions that exist:
Pros
Cons
Option 2. Nominate protocol fees in stETH
We propose to setup a dedicated vault contract to collect the new rewards (tx priority fees and extracted MEV). NOs should use its address as a coinbase for the EL-collected rewards. Then we could withdraw all ether from the vault contract as part of the Lido oracle report to perform re-staking keeping the established ~24h rebase period.
Pros
Cons
Lido.sol
)Protocol fee distribution under the slashing conditions
📝 Due to the possible controversies in the discussion stage we leave possibility to re-stake with or without minting the protocol fee
stETH
with a minimal contract code impact.Don't mint protocol fee when the consensus layer (conventional Beacon Chain) reward base becomes negative
Points on interruptless distribution (mint the protocol fee if execution layer rewards cover consensus layer losses)
ETH-stETH auction option to restore the exchange rate when it's lowered for stETH
Pre-withdrawals (between the Ethereum phases 1.5 and 2.0), we could also consider complementing a re-staking (i.e. compounding) mechanism with a mechanism to help stabilize the stETH-to-ETH exchange rate. A portion of extracted MEV and tx fee rewards could be used to purchase
stETH
from the market (and potentially burn it) instead of using those rewards for re-staking. This would have a restorative effect on the exchange rate if it's >1:1, and would potentially reduce the liquidity mining necessary for exchange rate stabilization. In the event that the exchange rate would not need restoration, then the amount that would otherwise be used for this could be used in the compounding mechanism instead. The DAO could control parameters on e.g. what percentage of MEV+tx fee rewards would be used in this way.Pros
Cons
📝 This option could be implemented at the next iteration after the Merge adoption completes successfully. For example, we could withdraw EL-rewards from a vault contract somewhere before the next oracle report will happen and use it on a money market.
UPDATES
18-05-2022: 'exchange rate' term is used to represent stETH/ETH relative price