Liquid staking for $ENS

@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?

I agree, at it’s core you’re correct, but I think you can make the cost-prohibition vastly higher if token holders earn yield.

Example:
(note: I understand ENS can’t return revenue to token holders, but just for example sake)

  • Current Scenario:
    • DAO “A” market cap: $100m
    • Revenue: $100m/year, not shared with token holders
    • Quorum: 100m votes
    • Treasury: $200m ETH
    • Attack Cost: $100m for $100m profit
  • Improved Scenario with Revenue Sharing:
    • Token holders receive 100% of yearly revenue ($50m)
    • Market cap now effectively earns $50m/year
    • Valuation with Time Horizon:
      • 1-year horizon: $150m (market cap + 1-year revenue)
      • 10-year horizon: $600m (market cap + 10-year revenue)
    • Attack Cost: Increases with the time horizon, making attacks more expensive.

Summary:

  • A DAO that returns value to token holders increases in value based on the time horizon of token holders, making it more costly to attack.
  • Non-Value-Returning DAO: Valued at X, attack cost is X.
  • Value-Returning DAO: Valued at X + (Time horizon * revenue), increasing the cost of attacks proportionally.

I think for the restaking platforms the TVL metric is the most critical metric. The higher their TVL the higher the “economic security” they can sell to Actively Validated Services. These AVS will be rational, and I suspect the switching cost of restaking providers to be minimal, thus they will always switch to the service with the highest economic security. They use TVL as the only mechanic by which they can compete for customers.

Eigenlayer, Symbiotic, Karak, now Babylon, are going to be locked in an insane war to suck up the most TVL. I personally worry that without liquid staked protocol tokens, they will consume every protocol in Ethereum. Because why not? They don’t even need to pay real yield to ENS token holders, they will pay them in “points” (promises).

The restaking services don’t care about the governance, just like they don’t care of ethereum validators, all they care about is: Can they take your money if you misbehave?

The governance part of ENS tokens makes ENS tokens more valuable, but it’s actually a cost, not an income. Token holders pay with gas fees and long nights reading forums to enact governance (for which they are not compensated). Eigenlayer doesn’t want the goverance piece.

I don’t know if it can only be implemented in an LST, but the LST is the only version I’ve thought of that splits the governance power from the economic yield component of the underlying token.

The feedback mechanism is specifically that token holders can look at their portfolio and see if their yield is going up or going down.

  • If yield goes up, the DAO is performing well, the delegates should get more support from Token holders.
  • If yield goes down, the DAO is not performing well, token holders will seek different delegates who promise more yield.

Yield is a proxy for revenue, and revenue is a proxy for success. I know it sounds overly capitalistic, but it does create a real feedback loop with token holders in a way that VE style does not.

In VE style staking, token holders can only evaluate the success of delegates at the end of the locking period: Are the resulting additional tokens worth more than the yield that could have been earned if the tokens had been locked in Eigenlayer?

This is an incredible thread. Thanks everyone for the participation.
I’m adding an opinion here that concurs with this comment:

It seems to me this is one of the most important points that’s been made. While this doesn’t immediately peg the value of the token to the value of the treasury, it would further the goal by diluting any of the inactive participants while increasing the number of active or delegated votes.

I know it’s nuanced, but isn’t this idea at least a part of a cleaner direction with less possibility for negative externality?

Because this:

This is an incredibly true statement, but it’s doesn’t fit exactly with the goal of the ENS DAO. If the purpose of the ENS DAO is to protect the stability and longevity of the protocol, would we want voters to be incentivized to increase the DAO revenue so that their personal yield goes up?
Voters making decisions to increase the protocol’s revenue might not be prioritizing the long term stability of the protocol.

Any incentive should reward decisions that prioritize the ENS DAO’s mission.

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Thanks, this is by far the most fun I’ve had in a forum in a loooong time.

I think thats probably true. It’s important to keep in mind that token holders might still value the ENS token because in the looooong run they might think there is still a future when they get part of the ETH revenue. But yes, I think you’re probably right. Distributing ENS as rewards is probably safer and more aligned with ENS as a whole.

Well if we accept it to be true that yield going up means protocol is doing better, then maybe yes? In practice its probably more messy: token holders optimize for delegates that redistribute the treasury as yield, run out of money, token holders switch to delegates who promise to rebuild treasury, reduce yield, treasury goes, folks want treasury as yield, and then repeat in a cycle.

I definitely agree.

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@dennison thanks for your responses but I’m still having difficulty evaluating your points since you’re making a set of broad claims without providing enough substantiating details to tell if they are correct. Here are just some of the points I’m having trouble with:

Why is this a bad thing? Wasn’t the whole point of this exercise to prevent a treasury attack by making the total delegated market cap as high as possible, which depends on the token price?

Length of lock up time is just a multiplier. The reward to delegators would still be a function of the success of the DAO, and delegators would be able to switch delegates at any time even if their tokens were locked. Why would this be different from the LST case?

Again, isn’t the point of this exercise to mitigate this problem? Rugging the treasury will crash the token price. If the token price is high enough, vote sellers are not going to risk selling their votes since the payout won’t be enough to make up for the loss in token price. VE makes the token price higher, as you’ve pointed out above. How does having an LST instead change this dynamic?

I can appreciate the idea that Symbiotic and others will try to expand the types of “economic security” they can sell. But it’s hard to evaluate the impact this will have on ENS staking without more details. Rather than relying on a CoinDesk reporter’s reading of an private internal document, is there anything else you have found and can share?

Anyway it seems like we keep circling around the same points. Maybe it’s better to just wait for this lite paper to get the long-form details of what your concrete solution will look like.

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This is an interesting discussion and I would like to share my thoughts on it.

The starting point of the discussion was about finding ways to mitigate the counterparty risk of a governance attack that could lead to an attacker taking control of the DAO’s funds.

As @AvsA mentioned in [Temp Check] Enable CANCEL role on the DAO, one possible measure to prevent this would be by increasing the number of active delegates. However, I am hesitant about considering liquid staking as the solution for this since it is a relatively new concept that comes with its own set of risks, such as smart contract risk and secondary market risk of LSTs.

A prudent approach would be to wait for now and consider liquid staking once the lite paper is released and there is some available data from a working implementation that would help properly assess these risks.

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I appreciate the example, but as you observe, it doesn’t apply to ENS.

It’s still not clear to me what restaking services get out of encouraging people to lock ENS tokens with them besides a marketing number. Can you elaborate?

This doesn’t sound specific to the LST mechanism at all. It also directly describes a scenario in which ENS governance token holders are incentivized to optimize for maximum value extraction from ENS users and the DAO, which is absolutely not what we want to happen.

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The marketing number is reflective of the perceived economic security that the restaking service offers. If you are a project that relies on the security provided by restaking, you will choose the service with the larger number.

There is a limited amount of ETH, to continue growing their TVL larger, restaking will need to lock protocol tokens.

It’s a bad thing because each subsequent token holder stands to earn more money by selling their token. Each token holder that locks in the VE system raises the token price making it more attractive to sell the token to the next token holder.

On the surface that might seem like it makes attacking the DAO harder, because the tokens are more expensive, but it doesn’t work because the incentive to sell goes up.

For the system to work, you would want each person that locks their tokens to make locking more attractive for the next person. The VE design makes locking tokens less attractive for each subsequent person, and more attractive for selling the tokens.

In reality, there is probably some stasis between the demand of “future tokens” and the demand to sell tokens, but I’m personally convinced for DAOs where you can’t use the voting power to extract money, or direct capital flows, the stasis is very low. I think it works for Curve, but I don’t think it works for ENS.

Yeah, I’ll probably reach out privately at first until we’re ready to share our design, and then will share publicly.

I appreciate the willingness to debate!

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Sounds good, looking forward to that.

How does locking ENS tokens improve their economic security? Is the implication that the party locking them risks losing them if they equivocate?

Yes. ENS holders would lock their tokens in a restaking system on a promise of yield, and pick someone running a validator for some 3rd party service to “pledge their tokens to”.

If the validator for the 3rd party service acts honestly, they pay the ENS holder some amount of yield from the revenue generated by the 3rd party service for having pledged their tokens to them.

If the validator for the 3rd party service behaves poorly, the restaking system confiscates the token holders ENS tokens as punishment for supporting a malicious or incompetent validator.

Depending on the system the confiscated tokens can be destroyed or redistributed among the other validators.

The perceived security of the 3rd party services is dependent upon the dollar value of all the collateral that has been pledged to the validators (and thus available for confiscation in case of misbehavior). 3rd party services want the highest possible dollar value on their perceived security because in order to successfully compromise the 3rd party service, an attacker would need to have some amount of capital equal to some portion of the total dollar value.

Hi @nick.eth, sorry for the late reply. I’ve spent some time thinking deeply about your question over the past couple of days.

I suspect there are two dimensions here, and we should separate it out. If we aren’t clear that the problem has two dimensions we need to solve for, we (general we) are going to start talking past each other when discussing solutions.

Two dimensions:

  1. How do we incentivise delegation to reduce risk of a Treasury attack? (This was the original purpose of the discussion) Followed by: how do we prevent Cobra-effect / Goodhart’s Law type problems from emerging when we incentivise delegation (this was the point @alextnetto.eth brought up, and that I was arguing)
  2. How do we design incentives that still pull people to contribute? (this was the point you were making).

We can restate these two dimensions as:

  1. Incentive is only given out if long-term outcomes are achieved. We can call this ‘incentive-outcome alignment’, for short. And obviously we need to be clear what the outcome is, and what proxy metrics we want to pick to represent that outcome.
  2. Only stakeholders who participate in achieving that outcome receive the incentive. We can call this the ‘incentive leakage’ problem. I know this seems like a subset of your ‘incentivise contribution’ point, but I assume you want to incentivise ‘meaningful’ or ‘effective’ contribution.

One thing I’ll add here is that I don’t think we can get 100% incentive-outcome alignment, and we can’t get 0% incentive leakage. Or, to put this simply: there will always be some stakeholder activity that won’t lead to meaningful outcomes for ENS, and there will be stakeholders (e.g. ENS stakers) who will be rewarded even though they did not play a meaningful governance role.

It is not possible to get a perfect solution, but that’s ok.

For the purposes of this discussion, I think I should go back to the original topic of this thread. I don’t want to introduce a new tangent. So:

  • At least one long term Outcome that we care about is to prevent a Treasury attack.
  • @AvsA has already laid out that Treasury attack prevention is a matter of increasing delegated market cap.
  • Increasing delegated market cap is a function of a) token price, and b) % of token delegated.
  • Given this, what we’re trying to do in this discussion is figure out how do we give an incentive only when token price and % token delegated increases, and how do we give that incentive only to the stakeholders who were responsible for it.
  • (Of course we can’t achieve 100% of this goal — replace the word ‘only’ in the prior sentence with ‘some high % of the time’ — but we can try).

Of course there are other long term outcomes that we care about and may want to incentivise, like the overall growth of ENS’s ecosystem, or strengthening ENS’s network effects. But preventing a Treasury attack is a concrete application of our earlier incentives framework, is a long-term outcome we care about, and is the primary topic of this thread.

Hopefully this problem statement is easier to discuss.

I have not proposed potential solutions, because I think it’s more important to be clear on the shape of the problem first. If we are all aligned on the problem, our solution discussion becomes easier.

To be super clear, I think this means that we can have separate mechanisms (and separate discussions) for a) how do we achieve incentive-outcome alignment, plus b) how do we prevent incentive leakage.

So far it looks like we’ve mostly been talking about (a) in this thread, in the specific context of preventing a Treasury attack. And I want to stay on topic here.

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Thanks, that seems like a very clear description of the problem.

I still think there’s a huge issue with building a system that directly incentivizes people to do things to increase the ENS token price. That is likely to lead to a sharp turn in the direction of short-term value extraction.

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The discussion should be filtered through the above-quoted and be reframed as a research question:

How can we design an incentive mechanism that reliably rewards stakeholders, at least 80% of the time, who directly contribute to increases in both the price and delegation rates of ENS?

I am tempted to say that the approach involves conducting a technical analysis of the ENS token price to identify key events in the ENS protocol’s development that have influenced its fluctuations.

My hypothesis is that the majority of the positive price impact is based on key developments to the protocol, such as the recent announcement of ENSV2, and infrastructure plays, such as the GoDaddy partnership. This partnership allows users to easily link their Ethereum addresses with their domain names. This is thanks, in part, to the DAO’s approval of EP5.1, which details an upgrade to a smart contract that implements CCIP Read at the DNS TLD level.

Going one step further—and I will stop hereafter—we can identify actors in the previously mentioned scenario who played a role: ENS Labs, the Delegates, Stewards, etc. Perhaps, then, the focus should be on defining what ‘effective delegate’ activity means to the ENS DAO, based on the demonstrated actions of these actors.

I believe the issue is a lack of research effectively addressing this matter, leading to unsuitable proposals that apply solutions designed for DeFi protocols. ENS is explicitly NOT a DeFi protocol, so any solution not specifically tailored to ENS seems moot.

I do think it’s possible to crowdsource an elegant solution, and I believe it is something the DAO should consider.

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Actually, it’s useful to look at tradfi for examples where there is incentivisation for long term price, but without short term value extraction. There is a long history of grappling with this exact problem.

I’ll tell one story, and then I’ll talk about what this might look like for ENS.

When Warren Buffett first took over the textile company Berkshire Hathaway, he had to deal with old shareholders that were motivated by regular dividends.

This was problematic because Buffett didn’t want to issue dividends. He wanted to reinvest the cash generated by the company on further growth (through acquisitions of other companies, etc). To align shareholder interests with his goals, he offered shareholders a swap in 1967: anyone who wanted an income-producing security could have a 7.5% debenture (a debenture is like a bond — think: yield!) in exchange for Berkshire stock. A total of 32,000 shares were turned in. As a result of the move, Buffett washed out of his shareholders those who wanted short term income, ensuring that the rest were more likely to care about long term per-share price growth. He also stopped issuing dividends.

I use this as an example because this is alignment on long term price appreciation. Just because one incentivises price does not mean that we will get short-term value extraction. The trick is to think about how you incentivise price.

What might this look like for ENS? Well let’s say that delegated ENS is rewarded under some formula built around the rate of growth of name registrations (or some other long term aligned outcome). That puts a floor under ENS’s price because the token is now a productive asset. You also incentivise delegation.

But the key thing is that delegated yield is tied to a long term outcome — that is, it is hard to influence the rate of growth of name registrations without doing long-term things: e.g. grow the ecosystem around ENS, ensure ENS is integrated into as many apps as possible; make sure ENS is top-of-mind as crypto grows. And even if there is a temporary bump, say because the DAO does something short term like a new partnership that doesn’t bring in long-term ENS users (they buy once but don’t renew) — the returns from that one-time boost won’t last, and will pale in comparison to the long-term price appreciation of the token as a reflection of the overall success of the protocol.

Obviously this is a terrible solution and I don’t expect you to take it seriously; I can see all sorts of problems with it. I’m just using this to illustrate a point: price incentivisation does not necessarily have to be short-term oriented.

To reiterate, the principles are:

  • We want to increase token price + increase % of tokens delegated.
  • We can pick, as a delegation incentive, a hard-to-game long term outcome. (For this specific discussion, I am skipping over how to solve the incentive leakage problem, though I’ve mentioned we can have that be a separate mechanism + happy to have a separate discussion on that).
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