Liquid staking for $ENS

Continuing the discussion from [Temp Check] Enable CANCEL role on the DAO:

This is true, but it still substantially increases the cost of an attack, which is the goal here.

Fair enough, though I’d argue this is more due to a weakness in the token design than anything else.

I’m curious what yield opportunities you expect to exist for a liquid staked token, however? Lending staked tokens seems unlikely to be attractive, since borrowers can’t use the voting power the tokens represent - if they could, the staked token wouldn’t be serving its purpose.

If the yield comes from rewards paid out by the protocol, then we could just as easily do this to all token holders, and thus incentivize the same behaviour (holding instead of earning, given that the defi protocols won’t be able to claim yield).

I think it’s consistent with ENS’s values to consider offering rewards in $ENS for staking $ENS tokens to active delegates, because it recognizes those contributing positively to governance with more governance power. Those rewards could be split between delegator and delegate in whatever way is game-theoretically sound.

I don’t think paying registration & renewal revenue to tokenholders is consistent with ENS’s values or constitution.

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Happy to move the staking discussion elsewhere!

I do want to clarify a point that maybe hasn’t come through.

If we reward delegation then the choice would be: “I hold my token, delegate it and earn rewards” vs “I deposit it in Defi and get rewards”. I agree with Nick that I fail to see why the concept of “staking” adds any value. We don’t need to stake in order to reward people.

We’re not specifically trying to reward people, we’re trying to create incentives for people to leave their voting power with the DAO. When they deposit it into DeFi, DeFi gets control over the DAOs security, and those potential votes become inaccessible to the DAO.

Importantly, the DAO can’t reward people without some sort of “exchange” of work. Token holders need to be incentivized to return security to the DAO, and the DAO can’t incentivize them directly because some folks would benefit without doing work to earn it.

We believe that DAO tokens today, as they are purely “governance tokens” are valued in the market based upon a speculative premium that itself is based on the assumption that one day the DAO will return value to the token holders.

When token holders become convinced that the DAO will indeed never return value to token holders, they have only two rational economic choices: sell the token, or find some other way to extract value from the DAO.

When we look at the outflow of delegations in ENS and the outflow of tokens to exchanges, we see that this assumption appears to be correct. Token holders who were once delegating are leaving ENS, and a significant share are moving their tokens to exchanges for sale.

It thus follows that the only rational purchaser of a DAO token, that will never return value to token holders, is a malicious entity that seeks to extract value in a different way. This is exactly what happened in the DAOs which were attacked in your analysis @AvsA and what we are worried about happing here. ENS isn’t alone in this struggle as you pointed out, and at Tally we have discovered that more mature (and successful) DAOs are experiencing this problem.

Essentially there is a fundamental economic misalignment between token holders and the DAO itself which leads to the illogical situation where the value of the DAO is not reflected in the security of the DAO.

The CANCEL role is a necessary tool, but it’s not a permanent fix, as we can expect delegated votes to continue to fall. Worryingly, the DAO security outflow is significantly higher than inflows.

Potentially eventually making it impossible to reach quorum unless new measures are introduced. In the long term, such a centralized option will jeopardize ENS’s claim to being decentralized.

The staking idea isn’t about giving rewards, it’s about incentivizing token holders to return security to the DAO so that we don’t need centralized options. For that reason I believe @bendi originally proposed it as a more scalable long term solution to the decline in DAO security.

Sorry if this seems to have hijacked your thread, happy to move it elsewhere.

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Wild Card Idea : Why not create an ENS economy by introducing an internal currency? This currency could be used for ENS-specific purposes, such as discounts on domain registrations and renewals, or for other resources valuable to builders. Delegates could lock their tokens and, in return, receive an increase in voting power. The DAO wallet would match their locked ENS tokens with a proportionate amount of the internal currency. Additionally, staking rewards and yields could be paid out in this internal currency.

Who are these rational actors? When you hold ENS, you have a right to participate in the governance of ENS DAO. That’s not “nothing”.

Maybe… in an internal currency though. :wink:

Actually, I think it’s more important for us to first define what being an ‘effective delegate’ means: what delegate activity is considered valuable to the ENS DAO? (Props to @jengajojo for posing this question during the Meta-Governance Working Group call.)

That’s an interesting point. So, essentially, the only reason anyone would want to participate in the governance of ENS DAO long-term is to cash out? Alright, I guess people are entitled to do that and might as well, but why can’t we think of a way to make it more worthwhile to hold onto ENS as a governance token than to sell it for liquid currency? Is the only solution a financial one, or can we think of a more ingenious one?

How many of those token holders are ‘effective’ and value-aligned delegates?

Why so pessimistic? We have barely begun to discuss—perhaps we will come up with an elegant solution that seeks to identify and reward delegate activity, such as @AvsA’s ENS matching proposal.

This has been great, thank you.

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I largely agree with this, and it fundamentally describes my main concern here. I’m just not convinced that liquid staking is a meaningfully different proposition to paying out rewards to any token that delegates to an active delegate.

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@dennison thanks for the detailed posts. To better understand your position:

Assuming that stakers are rewarded in both the VE and LST case, why do you feel there’s more of a direct link and greater alignment in LST vs VE?

Assuming rewards are the same again, why would LST provide more targeted incentivization than VE?

Do you have a post somewhere on what a better version would look like or an implementation you’ve built for another DAO?

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Thank you for clearly outlining your ideas @dennison I believe these arguments are DAO agnostic, i.e. all gov tokens without an incentive for users to hold them are down only and hence the current model will only lead to reduced token participation.

We state in our research also that ‘Enthusiasts, true fans, and wealthy idealists are the only ones who’ll stick to an unpaid governance work or malicious actors who fake it until they can execute a governance attack.’

This is an interesting idea and can possibly compliment the liquid staking strategy, but difficult to supplement it since the user base of seeking APY is much higher than the user base of seeking specific perks at ENS DAO or using the product.

There will be more token holders and consequently stakers when the yield on the token is high .i.e when the ENS product suit is growing in usage. This also aligns the incentives of the delegates who will receive these delegated tokens from the DAO to increase product adoption and usage as opposed to engaging in other forms of politics. The delegate compensation can then be tied to product usage which ultimately aligns incentives of stakers, delegates and the DAO as a whole

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Assuming that stakers are rewarded in both the VE and LST case, why do you feel there’s more of a direct link and greater alignment in LST vs VE?

Assuming rewards are the same again, why would LST provide more targeted incentivization than VE?

The LST model creates a stronger direct link and greater alignment compared to the VE model because it aligns the interests of token holders with the long-term success of the DAO while providing increased liquidity and flexibility.

In the LST model, token holders can earn staking rewards while maintaining the ability to use their tokens in other DeFi applications, creating multiple income streams. This increased utility makes LST tokens more valuable, incentivizing holders to actively participate in governance to ensure the continued success and growth of the platform. Crucially, because the LST token has a revenue stream, holders are motivated to treat it as a productive asset and work to drive yield up. In contrast, in the VE model, the locked tokens may incentivize holders to extract value from the DAO rather than contribute to its long-term success.

Moreover, the real-time rewards in the LST model serve as a direct feedback mechanism for token holders to gauge the effectiveness of the DAO’s governance and management. If the rewards increase, it indicates that the DAO is making sound decisions, encouraging holders to support the current governance structure. Conversely, if rewards decrease, it signals that changes may be needed, prompting holders to reassess their delegate choices and push for improvements. This feedback loop is less apparent in the VE model, where the results of mismanagement may not be immediately reflected, making it difficult for token holders to judge performance and react to poor management.

The VE model’s token lockup can also trap disenchanted participants and deter new entrants, potentially leading to a stagnant governance system. The lack of flexibility in the VE model can lead to a misalignment of interests, as holders may feel stuck with their delegate choices and have limited recourse to address underperformance.

In contrast, the LST model provides the flexibility for participants to enter and exit based on the DAO’s performance, fostering a more dynamic and aligned governance system that can adapt to changing circumstances and attract new, committed stakeholders. This fluidity allows the DAO to naturally evolve as disengaged participants leave and more aligned participants enter, contributing to the long-term health and success of the DAO.

While some may argue that the liquidity of LST tokens could allow bad actors to buy up governance power from the market, the revenue stream attached to LST tokens serves as a strong incentive for holders to act as responsible stewards. The LST model encourages long-term commitment by allowing holders to auto-compound their rewards, similar to the VE model, but without sacrificing liquidity. This ensures that holders can adapt to evolving circumstances while still maintaining a long-term perspective.

Importantly, if there is a VE style system, someone will create the liquid version regardless. What we’re promoting is that we should build the liquid system as a public good, neutral infrastructure to prevent 3rd party liquid systems from capturing the DAO.

Do you have a post somewhere on what a better version would look like or an implementation you’ve built for another DAO?

Yes! I’m doing a talk this weekend in Prague on this and we will have more material to share in the coming days. We’ve been thinking hard on the question of: how can this be done in a way that is safe for DAOs? How can it be done in a universal way? How can it be aligned with the DAO itself?

We’re mostly talking about the “Liquid” part of staking, but thats not really the important piece here.

The important part is that many LST holders, will hold for the financial utility of the token, without any interest in voting themselves. In that case, the LST can redistribute the voting power of disengaged speculators in radically different ways.

For example, if 1 million tokens are staked, and there are 1 million LST tokens, but only 50% of the LST token holders bother to vote and instead lock their LST tokens in Eigenlayer, that means the DAO has 500,000 available votes to redistribute. These are votes that are not stuck in Eignelayer as naked ENS tokens inevitably will be, and these are not votes that are locked in a “bribe protocol” for sale to the highest bidder. (Bribes are a form of yield after all).

How do we redistributed these 500k votes? The active LST token holders get to decide. We’re working with the HATS team, for example to think of design where the LST holders nominate delegates with HATS to be able to vote with this voting power. Other possibilities would be to use this power for Student groups or delegate activation platforms. Jana Bertram (Disclaimer: my wife) built a delegate launch pad for Rari DAO where every quarter the community selected new delegates who received decaying voting power as a “boost” to get them visibility early on and an opportunity to use their visibility to earn new organic delegations.

In the most extreme example the Cancel role itself could be a more democratic mechanism where it’s voting power is directly funded by the inactive participants themselves.

I agree with @nick.eth that there aren’t any systems for “active” participation that can’t be gamed. But the best way to evaluate delegates is probably via incentivized token holders who have a financial interest in holding delegates accountable for work.

In any case, to prevent this from getting too long- we’ll be shareing a lite paper soon!

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My pleasure!

I believe these arguments are DAO agnostic

Absolutely, at Tally.xyz we see this as the failure mode for DAOs and are looking to build an ecosystem wide solution.

We state in our research also that ‘Enthusiasts, true fans, and wealthy idealists are the only ones who’ll stick to an unpaid governance work or malicious actors who fake it until they can execute a governance attack.’

It’s even worse than that, because it’s not unpaid governance work: it’s actually paid by the delegates themselves! Paid with their time and frequently transaction fees. When we speak privately with delegates across the ecosystem most say they expect to stop participating because they are tired of working for free.

This is an interesting idea and can possibly compliment the liquid staking strategy, but difficult to supplement it since the user base of seeking APY is much higher than the user base of seeking specific perks at ENS DAO or using the product.

In many ways the LST is a kind of ‘internal’ currency if you think about it. It would be entirely possible to give discounts for holding the LST version. In fact if you have a LST token that earns yield, you could sell ENS names for yield. Just lock you LST into the naming contract, and the yield pays off the protocol fees. (funny idea)

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I’m a new commenter here, and not a delegate, but I’ve been an active follower of this topic due to my interests in ENS and in protocol + business history.

I want to contribute to the way we’re talking about misaligned incentives (e.g. @alextnetto.eth mentioned the Cobra effect, and various other participants have talked about the difficulty of incentivising ‘meaningful’ participation.) I think we can have a more productive discussion if we have a better framework for thinking about this.

The framework that I like to use comes from software programmer Kent Beck.

Beck observes that Cobra Effect/Goodhart’s Law type situations typically occur when there is a loose relationship between Effort and Outcomes. (I am simplifying here. The full piece has more: Parts One and Two.)

Let me summarise quickly. Some activities have a very tight relationship between Effort and Outcomes. For instance, a recruiting pipeline is easy to incentivise. This is because Effort (a recruiter filling a candidate pipeline) is quite tightly connected to Outcomes (a hire at the end of an interviewing process). You can incentivise Effort (pipeline fill rate) quite safely.

The danger is when there is a loose relationship between Effort and Outcomes. Software developer productivity is notoriously loose: a developer’s Effort (lines of code deployed) is not directly related to Outcomes (change in user behaviour that leads to higher engagement in the software and eventually more revenue). This is why rewarding a software developer on lines of code deployed is usually a bad idea.

When we say that we want to incentivise ‘meaningful’ engagement, I think it’s important to clarify what we mean by ‘meaningful’: is it in terms of Effort, or in terms of Outcomes?

Most of the discussion so far seems to assume that incentivising on Effort is difficult but possible (e.g. one, two). However, in ENS’s case, I suspect engagement should be incentivised based on Outcomes (the long term success and growth of the ENS protocol) instead of Effort (governance activity).

This is because there is a loose relationship between governance decisions and the long term success of the protocol.

For precision:

  1. What is the DAO’s vision for long term success, that it can incentivise towards? Is it the number of name registrations? Is it fee growth?
  2. If we can agree on a long term Outcome that is worth incentivising towards, then perhaps we can have a more productive discussion about how to connect that to a specific form of governance incentive.

I know this sounds theoretical, but I can give you an example. Tradfi is rich with examples of Outcome incentivisation because they’ve been grappling with the problem of meaningful governance for longer.

The Visa payment network was basically the world’s first DAO. In its original form, Visa was not a company — it was a network governed by a for-profit, non-stock, membership organisation. Any bank could apply to be a member, and each member was given a non-transferable right of ownership (basically, a ‘soul-bound token’). These Rights (or tokens, heh) gave each member bank three things: 1) the right to vote on a governance proposal, 2) the right to propose a vote, and 3) a share of transaction fees generated by the network, where each member’s share was determined by the % of transactions each member bank sent into the network.

Member banks were often competitors outside of the network. Inside Visa, much like ENS, representatives would be elected to policy boards to govern the growth and disputes within the network. But they were not rewarded based on their governance activity. Instead they were incentivised based on outcomes. And the outcome here was a profit motive: the long-term growth of the network for the benefit of all members. This reduced some of their competitive tendencies. (Source)

I’d like to apologise for a long post. I hope this is useful, and am happy to answer any questions about these concepts. I also look forward to reading more on the current debate on LSTs — this is an interesting development I did not foresee.

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This reads like marketing copy. We need you to be concrete: What specific aspect of the mechanism creates a “stronger direct link and greater alignment” than simply apportioning rewards to token holders who delegate to an active delegate?

What other DeFi opportunities do you expect there to be for wrapped ENS tokens? Shorn of their governance rights, I’m struggling to understand why there would be, say, a lending market for them.

Why is the feedback loop less apparent in the VE model? On the surface, I can’t see any reason why the level of rewards would be more affected by outcomes in one model than the other.

Also, this reads very like a typical argument for shareholder governance - eg, that shareholders will and should push the corporation to extract maximum value from its market to return to the shareholders. This is explicitly not what ENS is for, and runs contrary to our goals and values.

Good insight!

However, these two statements seem to be in conflict:

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@nick.eth Ahh I thought I was being clear! I mean that prior discussion in the forum seems to believe we can incentivise Effort (that is, we can figure out what constitutes meaningful governance activity and reward that), but I think given Beck’s framework that this is dangerous.

I think we should just incentivise Outcomes directly. For example reward delegation by aligning rewards with X, where X is a positive long-term outcome. For instance, this could be fee growth, or number of names registered, number of L2s ENS has spread to or … something that reflects the long term health and success of the protocol.

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If you incentivise outcomes exclusively, doesn’t this effectively remove incentive to contribute? On an individual basis, I’ll get the same benefit as a passive holder as an active contributor, while the value from any contributions I make will be diffused over all holders. It’s more rational for me to be a passive holder and apply my efforts elsewhere, where they’re rewarded directly.

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Re: staking while maintaining delegation/DAO security

This is something I’ve been doing thought experiments on for about 6-12 months.

Here is a one proposed solution using ERC-6551:

• ENS creates a governance staking NFT (unlimited/no mint cost)
• user would mint the staking NFT
• user transfers their $ENS to the staking NFT ERC-6551 account (token bound account or “TBA”)
• user could delegate the $ENS in held in the staking NFT TBA
• user could then stake the staking NFT/transfer the
Staking NFT without effecting the delegated $ENS within the TBA
• if redelegation were needed user could unstake the nft, redelegate the $ENS in the TBA, then restake

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Sorry for the delay in replying, doing a bit of traveling right now.

In a way, I think they are the same thing, in that if there are rewards being given to a token that delegates to an active delegate, someone will tokenize that. I actually don’t think there is a way to do this without the financial opportunity cost of holding the token giving rise to the liquid version of it. Oddly, i think the existence of either of these two designs, causes the other. If there is yield, it will be tokenized, if it is tokenized, that will give rise to an incentive for yield. We already see this happening, even without the DAO sanctioning it via bribe markets.

What is different about what we are proposing (and maybe haven’t emphasized enough) is that by building a DAO aligned LST, we can enshrine the practice of returning un-delegated tokens voting power, and thus security, back to the DAO for redistribution.

A DAO owned and aligned LST can neutralized the danger of non-aligned LST systems by having a liquidity and TVL advantage in the market, giving it the most utility.

Totally agree. Although I wonder if this is actually a form of security. I could imagine that high cost of attack might just select for the most highly motivated attackers. You could certainly assume North Korea could obtain the “Startup capital” to create an attack. Also, the attack doesn’t need to succeed, it really only needs to induce volatility in the market, which itself is a form of financial opportunity.

I agree. I think folks could write treatises on how tokens bootstrap liquidity and network effects but trap DAOs at the same time.

Largely I expect them to be locked in Symbiotic, Eigenlayer, Karak and other restaking platforms.

ENS as a DAO has value in aggregate, and the restaking platforms will incentivize liquidity coming onto the platform because they are in a TVL arms race. Basically every DAO token is going to get locked in restaking as they compete, so the danger here IMHO is ecosystem wide. The restaking security narrative is premised on someone having the greatest amount of TVL, thus the greatest economic security. ETH, although super valuable, is a finite resource. To out-compete one another they will have to incentivize the restaking of protocol tokens like ENS.

We can’t do it for all token holders because that would turn the token explicitly into a security. We are forced to require some sort of effort on the part of token holders in order to earn a reward. The simplest way to do this is staking. Also, I don’t think you would want to do it for all token holders, because many aren’t adding value. You probably want to at least set a super low bar of “do you even care to find out”. But the core problem is securities laws. (Full disclosure: I am not a lawyer)

I’m not super opinionated on which is better, and the token holders agreed on the constitution. Rewards in ETH might align a wider base of ENS holders on purely financial basis, but rewards in $ENS it dilutes the voting power of inactive holders, which I think is very aligned with selecting for the most aligned participants. Over a long enough time those who care about ENS are rewarded while the inactive participants are diluted out.

@dennison thanks for your reply but I’m still not clear on your position since the analogies you use seem to be from different contexts.

I get why bribing markets are inevitable in Curve and Yearn since there gauges to vote on. There is someone willing to buy votes since there is a financial benefit to getting more votes for your gauge.

Could you describe why there would be a bribing market for ENS though, who would buy the votes? Bribing in ENS to raid the treasury seems like a pathological case compared to protocol-sanctioned gauge bribing in Curve and Yearn.

I get why restaking platforms exist. Staked ETH provides economic security because slashing is defined at the protocol level and this security can be re-used. How would ENS in Eigenlayer work? Do you mean that the staked ENS would get slashed if there’s misbehavior?

As Nick mentioned, it would really help for you to be concrete and specific in the examples you use and why they apply to ENS.

I’m still hazy on why LST provides more aligned and targeted incentives compared to VE.

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Sorry, I’m responding to many different points. But high level point is that there are multiple failure modes.

An attacker would buy the votes. That is the problem that @AvsA pointed out originally, that there is an incentive to attack the DAO. You don’t want bribe markets, because in ENS, the only purpose of a bribe market is to rug the DAO.

  • Restaking platforms will never stop competing with one another for TVL.
  • When they exhaust the supply of ETH, they will consume protocol tokens to continue to grow their economic security.
  • Restaking platforms will outbid the ENS protocol for users tokens (IE: ENS does not pay token holders revenue).
  • Eventually all outstanding ENS is locked in restaking
  • No one is left to vote,

The LST allows the DAO to hold onto it’s voting power, while allowing token holders to earn yield in restaking. It splits the voting power from the financial utility. This is because the underlying DAO tokens are in the LST contract, not in Eigenlayer. The LST allows the DAO to manage the voting power of the tokens locked inside it. It also eliminates the opportunity cost of participating in governance and earning yield.

This is more aligned than VE, because in the VE system the ENS DAO must bid against Symbiotic/Eigenlayer for the tokens. The yield of VE lockups must be higher than the bid of Symbiotic/Eigenlayer.

Ok this formulation is helpful. Let me re-state your perspective to see if I’m getting it right.

You feel that LST is better than VE because the cost to the DAO of incentivizing token holders to provide governance is higher in VE than the cost in LST, since that cost is “subsidized” in the LST case by other streams of yield. I’m not sure I’d call this better targeting or alignment with the DAO, but at least I get the point you’re trying to make.

Where I’m still struggling is to understand why you feel these other forms of yield are a sure thing.

Why do you feel a bribe market, and a yield stream from bribing, is likely? I can see why it’s inevitable in Curve and Yearn since there is protocol-sanctioned, incentive-compatible bribe yield. Who would create a bribe market for ENS and who would sell their ENS vote if the only use case for bribing is to attack the treasury?

I feel like because we’re discussing “staked ENS” and restaking platforms use “staked ETH”, we’re treating those like fungible concepts. Isn’t staked ENS qualitatively different from staked ETH for the purpose of providing economic security in a restaking platform? How specifically would a restaking platform use staked ENS to extend security to other protocols?

I was speaking in that line specifically about LST vs VE.

VE style staking:

  • forces opportunity cost on token holders (Stake your tokens or sell them)
  • creates adverse competition between token holders: the first person to stake reduces the market supply, raising the price of the token, making the opportunity cost for the second person higher.
  • decouples reward from performance. VE style rewards holder on length of time they lock up their token, not the performance of the delegate they delegate to.

Liquid Staked Tokens:

  • have no opportunity cost. (vote and make money).
  • rewards are based on DAO performance, not lockup duration.
  • token holders can evaluate success of the DAO based on the fluctuation of their yield.

Put simply, I don’t think its enough to reward delegation to active delegates. You need a reason for token holders to delegate to effective delegates, and a feedback mechanism so they are sure to change their delegation when a more effective delegate emerges.

I expect restaking to consume them. Assuming the tokens have yield of some sort, the yield can be used in the economic security model of restaking. They can also always be exchanged for the governance token.

Thats not the intention. I’m coming at it from the point of view of:

“how can the DAO keep it’s security, and stay decentralized in a market where it’s security is for sale, and costs less than the value it protects?”

I really do think without a plan, the restaking services will consume the entire protocol eventually.

Yes! Also in my response to @nick.eth above I point out some other reasons the LST version is better as well.

I don’t know if they are a sure thing, but Eigenlayer doesn’t pay rewards (yet) and still has many billions already locked. I think for the near future, the restaking platforms will subsidize the yield with airdrops.

I’m not sure if there will be long standing bribe markets as successful companies and products, but I’m fairly sure there will be short term single purpose bribe markets. And example of a single-purpose bribe market is:

“Delegate to me and I will rug the treasury and give you your pro-rata share. The sooner you delegate to me, the larger the share you will receive. People who do not delegate to me get nothing”

Now you’re in a dangerous environment. If someone can make a plausible claim, maybe with an early big delegation, maybe with some coordinated disinformation, it can be very difficult to reason out of this situation. After all, there is no punishment if you delegate and the proposal fails.

No, its basically the same thing, but you’re right the terminology is a bit overloaded.

To be clear, they could use vanilla ENS, but I think thats bad because then the voting power pools in the restaking platform.

The restaking platforms can use any asset to extend security to actively validated services. If you read this article on Coindesk Symbiotic they say:

" CoinDesk also obtained internal Symbiotic documents that describe the project, which allows users to restake using Lido’s staked ether (stETH) token in addition to other popular assets that are not natively compatible with EigenLayer."

Popular Assets == DAO tokens (In my opinion)

What other form of security is there? You can’t make voting-based attacks impossible, you can only make them cost-prohibitive.

What is the incentive here for platforms to offer rewards to restake ENS tokens, if that doesn’t give them governance power over the ENS DAO? Just having a higher TVL metric than their competitors doesn’t seem like enough reason to financially incentivize ENS tokenholders to deposit their tokens.

What is this feedback mechanism? And why can it only be implemented in LST?