# Rocket Pool Improvement Proposal #3

## Abstract

Rocket Pool has seen many changes over its lifetime, several caused by shifting goal posts regarding ETH2.0 and scaling solutions; others caused by wider token sentiment.

As the next step in this development & evolution, [🔥_🔥](https://medium.com/fire-eyes-dao/hello-world-e3c9a409ea49) proposes RPIP-003, which outlines key changes for the RPL token (both mechanism & distribution) and the introduction of RPL community governance.

RPIP-003 proposes a number of changes around the usage of the RPL token, the introduction of community governance and RPL inflation, and a variety of mechanisms to incentivise protocol growth and protect against system failure states.

## Issue:

RPIP-003 is a pre-emptive solution to drive protocol adoption & growth rather than aiming to solve one specific issue. Encouraging protocol usage (Minipool deposits & Rocket Pool validator creation) and correct protocol governance are two factors that will drive value accrual to Rocket Pool and RPL.

**Three core improvements that RPIP003 is looking to address:**
- Validator RPL stake requirements - collateralization & governance weight
- RPL rewards & sustainability - RPL validator rewards, native RPL inflation
- RPL Protocol Governance - Rocket Pool DAO (Protocol & community governance)

Rocket Pool 2.5 introduced tokenized staking and the ability to run a Rocket pool validator without staked RPL. This proposal aims to build upon RPL 2.5 and continue to develop towards RPL 3.0 mechanics - Building clear & concise RPL value and security for the protocol.

## Solution:

As mentioned above, there are three key areas this proposal addresses;

### **RPL Validator Staking:**

Node operators will be required to stake between x% and y% (variable discussed below) value of their 16 ETH deposit when initiating a validator. The utility of this stake is three-fold:

- Provides security for the 16 ETH of user pool funds in the event that a > 16 ETH slash is actioned against the validator (consensus attack).
- Provides one of the metrics used to calculate governance weight in the Rocket Pool DAO.
- Provides one of the metrics used to calculate validator rewards, proportional to their RPL stake.

#### **RPL Reward Claim:**

If a validator’s collateral drops below the minimum bound (x%) that validator will be unable to claim RPL inflation rewards until their stake is topped up to above the minimum. Rewards will be claimable on a weekly basis and rolled over to a global pool managed by governance in the event rewards are not claimed.

#### **RPL Slashing:**

In the case that a validator is slashed beyond the 16 ETH node operator deposit (due to a consensus attack), the equivalent of the lost ‘user deposit pool value’ is slashed from the validator’s RPL stake and sold for ETH using a pre-established contract or AMM. This ETH is then used to re-collateralize the deposit pool(and therefore rETH) as follows:

- RPL leaves the validator's ownership after being slashed
- RPL is deposited to the **Rocket Pool Re-collateralization Contract** and sold for ETH.
- ETH from the Re-collateralization Contract is deposited to the deposit pool which then gets picked up by node operators, bringing the ETH in the user deposit pool back to parity with user ETH deposits.

### **RPL Inflation:**

RPIP-003 proposes inflation to solve four core problems:

- **Incentivising ETH2.0 staking** - Building native inflation incentives for node operators gives Rocket Pool a competitive edge compared to other ETH staking options.
- **Incentivising RPL stake to protect against slashing** - Introducing RPL inflation drives more node operators to stake higher RPL balances, better protecting the deposit pool funds from being slashed.
- **Incentivizing Trusted Nodes** - These nodes sit in a meta-group above normal Rocket Pool validators, and transmit ETH2 data back to the ETH1 chain. Incentivising the correct relay of this data is critical to the early phases of Rocket Pool development.
- **rETH/ETH liquidity incentives** - Creating deep liquidity for rETH to be leveraged inside of the DeFi ecosystem, allowing rETH to act as a composable building block while still being ‘staked’ inside of ETH2.

RPIP-003 proposes RPL inflation sitting between 3-6% of total token supply per year. This RPL would be allocated to the following areas to address each of the above problems:

- Node Operators - Rewards are based on a ratio of two/three parameters; validator overcollateralization (RPL staked to validator), liveliness (validator performance) & Commission rate **Discussion needed, see Commission Rate variable**
- Trusted Nodes - Rewarding trusted nodes for relaying ETH2 beacon chain oracle data to ETH1 - validator Performance, time staked, etc.
- rETH/ETH liquidity - Reward liquidity provided & time spent providing liquidity on AMMs.
- DAO treasury - RPL inflation being provided to the Rocket Pool DAO, to be governed by staked node operators.

While the introduction of inflation may seem like a counter to token scarcity, Rocket Pool is the first & currently the only ETH2 ‘minipool’ enabling protocol. Introducing RPL inflation to reward value-added actors introduces a mechanism for active participants to earn governance weight in line with their contributions to the network.

### **Rocket Pool Governance & DAO:**

The Rocket Pool DAO will continue to evolve with community feedback, starting with ‘minimal viable decentralisation’ along with the launch of rETH and validator RPL stake. This will mark the first step of Rocket Pool governance, starting with a set number of parameters and over time expanding to full protocol upgradability & governance.

#### **Stakeholders:**
- Node operators automatically join the ‘DAO’ when staking RPL against their validators.
- Users join the DAO through a separate mechanism (TBD)

#### **Initial Governable Parameters:**
- Min/max bounds for validator commission rate
- RPL inflation:
- Overall inflation rate
- Allocation of inflation between different areas:
- RPL staking rewards
- Trusted Node rewards
- rETH/ETH liquidity
- Community incentives
- **Discussion:** Other governable parameters

## **Perceived Benefits:**

The benefits of the changes proposed by RPIP-003 include:

- **Stronger incentives to stake to ETH2.0 through Rocket pool:** RPL inflation creates a second-layer incentive to stake using Rocket pool as node operators will receive RPL rewards as well as ETH2.0 staking rewards.

- **Enhanced security for users depositing ETH to Rocket pool:** The deposit pool will be better protected from ETH losses caused by malicious validator action (consensus attack on ETH2). The likelihood of this happening is obviously low as the validator would essentially need to be willing to lose their own 16 ETH stake but this additional RPL stake protects the deposit pool against being used as a collective attack mechanism.

- **Decentralized control of the system:** By implementing a v1 governance system, we can begin to decentralize control over key aspects of the Rocket pool system. Experimenting with community governance alongside the launch of ETH2.0 Phase 0 gives Rocket Pool a unique opportunity in token governance & driving ETH2 decision making.

- **RPL value mechanisms:** RPIP003 introduces a number of RPL incentive mechanisms including:
- RPL stake being required to stake as a node operator (As protection against deposit pool abuse)
- This RPL stake is also used to proportion rewards; more RPL staked = more security for rETH = more rewards.
- RPL inflation to grow the Rocket Pool ecosystem.
- RPL inflation will be used to directly incentivise Rocket Pool security, growth, liquidity, governance, etc.
- Intrinsic governance value.
- DeFi systems are only just beginning to experiment with decentralised governance, governing composible token mechanisms with a total addressable market of ~$10b (DeFi). Rocket Pool is currently the only ETH2 minipool provider with an addressable market of ~$40b (Ethereum).

## Perceived Drawbacks:

The drawbacks of the changes proposed by RPIP-003 include:

- **Additional complexity introduced in implementation:** Adding inflation & community governance will create new challenges for the Rocket Pool community & technical implementation of the Rocket pool system.
- A token swap will be required as well as the development of a governance portal and updated contracts to include the proposed RPL incentives.

## **Variables:**

Variables involved in RPIP-003 include:

**Validator RPL stake:**
- Validator RPL stake is a variable which is chosen by the node operator when instantiating a validator. There will be both minimum & maximum bounds for this stake level, initially set by RPIP-003 and in the future determined by community governance. (RPL Stake = x > y)

**RPL Inflation:**
- This proposal outlines a native RPL inflation rate that could be initially set between 3% and 6% - this exact number could act as another RPIP set forth by Rocket Pool & Rocket Pool Community. The breakdown of inflation between different stakeholders will be determined in the same way.

**Commission rate:**
There are two potential methods for determining the commission fee:
- Node operators can choose to set their commission rate anywhere between the upper & lower bounds. They are incentivized to set their commission rate as low as possible to gain standing in the queue and have their validators picked up first by the user pool.
- The commission rate is determined programmatically based on the supply of ETH in the user deposit queue and the supply of available validators ready to pick up user ETH and begin staking on ETH2.0.

If node operators set their own commission rate, the level at which they set it provides part of the inflation reward calculation. A validator with a high RPL stake and low commission rate would receive the highest RPL inflation reward. Inversely, a validator with a low RPL stake and high commission rate would receive the lowest RPL inflation reward.
The minimum & maximum bounds for commission rates is another variable which will be controlled by community governance.

## **TLDR**

RPIP-003 proposes a number of changes around the usage of the RPL token, the introduction of community governance and RPL inflation, and a variety of mechanisms to incentivise protocol growth and protect against system failure states.

**Three core improvements that RPIP003 is looking to address:**
- Validator RPL stake requirements - validator collateralization & governance weight
- RPL rewards & sustainability - RPL validator rewards, native RPL inflation
- RPL Protocol Governance - Rocket Pool DAO (Protocol & community governance)

**RPIP-003 proposes a new system where node operators:**
1. Align validator incentives to protect the user deposit pool against slashing.
2. Protect the entire Rocket Pool protocol against being leveraged as a collective ETH2 attack mechanism.
- Staked RPL is automatically assigned Rocket Pool DAO governance weight and has proportional voting power used to determine protocol parameters.

**Validators are rewarded based on:**
1. Staked RPL
2. Set or be assigned a commission rate
3. Liveness (validator performance)

These rewards are introduced by native RPL inflation (proposed at between 3-6% annually) which directly incentivises Rocket Pool security, growth, liquidity, governance, etc.

The introduction of RPL inflation allows value-added actors to accrue the most RPL tokens and therefore, play an active role in the protocol governance and its future growth.

Node operators collecting inflationary rewards via validators they have instantiated introduces a clear-cut demand mechanism for existing RPL in line with the growth of Rocket Pool validators in ETH2 and the requirement for RPL as collateral.

All elements & exact numbers from this proposal are only estimates. We encourage feedback from all members of the Rocket Pool community to further ideate and develop robust incentives.

### 🔥🚀🔥🚀🔥🚀🔥🚀🔥🚀🔥🚀🔥🚀🔥🚀🔥🚀🔥🚀🔥🚀🔥🚀🔥🚀🔥🚀🔥🚀🔥🚀🔥🚀🔥