Preface:
The recent post by Element Finance has sparked a lot of discussions surrounding treasury management and its role within ENS. Given ENS is still very much in the early stages of this process, these discussions are important, and along with exploring the range of options available, will ultimately identify the best route for the DAO to take. The Element proposal touched upon several aspects of DeFi, however I wanted to focus upon one section in particular within this post - ETH2 staking - and why it should be an important consideration for ENS DAO. Note that I make reference to multiple liquid staking providers, one of which (StakeWise) I have an affiliation with.
What is liquid ETH staking?
First and foremost, I want to clarify what is meant by liquid staking, as it is often misunderstood. Liquid staking protocols allow users to exit the staking pools at any time, without the need to wait for the Merge and consequent enablement of validator withdrawals. Users receive a tokenised representation of their deposit (let’s call it staked ETH token), and this token represents their share of the staking pool. Secondary markets exist between staked ETH tokens and ETH, allowing users to swap their staked ETH back into ETH at any time.
The only thing to be aware of are the trading costs associated with swapping staked ETH back into ETH, as this could equate to a couple of weeks worth of staking rewards (slippage costs are size dependent).
In short, liquid staking would not lock up ENS DAO capital, allowing the DAO to retrieve its ETH at any point in the future, should the capital be required.
Why ETH Staking Specifically?
I like to picture the world of DeFi like lego. Protocols can integrate with each other to build larger, more complex, and more lucrative opportunities for users to deploy their capital. The higher you build the DeFi lego tower, the more (smart contract) risk you undertake and the greater chance that one protocol fails and brings the rest down with it. ETH staking is different however, not that it doesn’t contain smart contract risk (because it certainly does), but it is more like the foundational layer within DeFi. The lego baselayer if you like…
ETH staking is arguably the simplest form of yield farming out there, without the need to monitor positions for potential liquidations, or to overcome technical hurdles that exist on even basic farming methods such as providing liquidity to an AMM (impermanent loss, for example). It removes any reliance on multiple protocols, does not involve any cross-currency risk, and does not involve leverage (something in my opinion that should be avoided completely by ENS DAO).
The current staking yield differs slightly from platform to platform, but it is around 4.75% on average. After the Merge, there are a range of estimations for the expected yield on staking following the introduction of MEV and tips to the Beacon Chain. All these estimates point to a yield higher than what it is today however, and ~8-10% would be a fair assumption of staking yields in the medium to long term. Given the level of risk involved, this is a decent return on investment. To reduce risks even further, you can diversify that ETH staking across providers (Lido, StakeWise, etc…).
Staked ETH tokens could also provide the DAO with enhanced yields, through utilization within the wider DeFi landscape. For example, staked ETH can be used as collateral to borrow against, or to provide liquidity on decentralized exchanges, such as Curve for Lido (as mentioned by Element), or UniSwap for StakeWise. With the increased yield comes increased risk however, given the exposure to multiple protocols. For the reasons mentioned above however, it would be prudent to look at ETH staking in isolation, before considering further yield enhancement later down the line.
Lastly, ETH staking would allow ENS DAO to actively contribute to the health of the network.
Conclusion
ETH staking is the cornerstone for many DAOs, given the balance between risk and reward. It can provide a solid foundation for ENS DAO to build upon and ultimately create a complete, diversified treasury management framework over time. This framework should look further than simply creating a yield from assets. It needs to be tailored to the DAO’s specific needs, such as operational costs, to better understand the amount of the treasury to be invested and the target returns. One solution that might be worth exploring is to partner up with Llama Community - Llama helps DAOs manage everything from financial reporting to treasury asset allocation and budgeting. More information can be found here.
Should the Meta-Gov stewards require any assistance or have any questions specific to ETH2 staking, I am more than happy to get involved in discussions and ultimately advise the committee in this space.