Hello folks! Great points @nick.eth and @dinesh.eth, I’d like to respond:
The VE (Vote Escrow) model, while successful in the context of Curve Finance, has several drawbacks that make it less suitable for the ENS ecosystem:
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Opportunity Costs: The VE model forces token holders to choose between the potential rewards of the VE system and the yields offered by external protocols like restaking, (which I fully expect to become a blackhole for governance tokens). This tradeoff introduces an unnecessary opportunity cost and could discourage participation in ENS governance.
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Concentration of Power: The VE model can lead to the concentration of voting power among a few dominant players, as seen in the “Curve Wars.” This can result in a less decentralized governance structure and potentially enable a small group of actors to exert disproportionate influence over the direction of the DAO.
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Vote Markets and Complexity: The competitive dynamics of the VE model can give rise to vote markets and complex strategic maneuvers, as participants vie for control over reward distribution. This complexity can create barriers to entry and may not align with the ENS DAO’s goals of fostering an inclusive and community-driven governance model.
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Lack of Flexibility: The VE model locks tokens for a fixed period, which can limit token holders’ flexibility to react to changing market conditions or participate in other opportunities. This rigidity may not be optimal for the dynamic and rapidly evolving DeFi landscape, especially when considering token holders must now evaluate the opportunity cost of re-staking services like Eigenlayer against long-term VE lockups. In the worst case scenario this may lead average token holders to pursue regular short term yield via restaking, while malicious actors pursue leveraged voting power via VE lockups. Effectively segregating your token holders by speculative intent: (make money by restaking or rugging)
Additionally, a liquid staked version of veENS is inevitable: the opportunity cost of the VE model is simply too high for token holders. Without an ENS-aligned liquid staked token (LST), the most likely outcome is the creation of 3rd party extractive liquid staked veENS tokens, leading to vote markets that sell voting power for additional yield. This is an extremely negative outcome for ENS, and also the most likely.
In contrast, the liquid staking model offers a more suitable and effective solution for the ENS DAO:
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Alignment of Incentives: Liquid staking creates a direct link between the performance of the DAO and the rewards earned by participants. This alignment encourages a more engaged and committed governance community, as token holders have a vested interest in selecting delegates who will drive positive outcomes for the ecosystem because their yield depends on it. Token holders will hold their delegates accountable for non-extractive, aligned yield. Because ENS earns revenue, effective long-term management is economically more valuable than short-term extraction.
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Decentralization and Inclusivity: By providing a liquid representation of staked tokens, the liquid staking model promotes broader participation and decentralization. This makes it more difficult for any single entity to accumulate excessive voting power and exert undue influence over the DAO. A malicious entity is now in competition with aligned token holders, as the former is incentivized to pursue capture, while the latter are incentivized to pursue an ever larger share of ever growing protocol yield.
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Flexibility and Adaptability: Liquid staking allows token holders to benefit from both governance rewards and external yield opportunities, providing greater flexibility compared to the VE model. Moreover, the ENS DAO can adjust incentives, parameters, and rewards based on the evolving needs of the ecosystem, ensuring that the governance model remains responsive and resilient.
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Targeted Incentivization: The ENS DAO can leverage liquid staking as a tool to incentivize desired behaviors and contributions from its community. By allocating rewards to active participants, high-quality proposals, and ecosystem development, the DAO can align the community’s efforts with its strategic objectives and foster a more collaborative governance environment.
In summary, while the VE model has its merits in specific contexts, it falls short in addressing the unique needs and goals of the ENS DAO. Liquid staking, on the other hand, offers a tailored solution that aligns incentives, promotes decentralization, and provides the flexibility needed to adapt to the ever-changing DeFi landscape. By avoiding the pitfalls of the VE model and empowering the ENS DAO to shape its own governance dynamics, liquid staking presents a more promising path forward for the ENS ecosystem.
As a note, while Unistaker as mentioned by @bendi is a great starting point for underlying staking, we believe there are better versions that could be built. As alluded to above, there will be LST versions of VE tokens, so also possible to build the liquid staked version of ENS on top of a veStyle system, so it’s also not a binary choice. We could do both if the Unistaker model really doesn’t appeal. (Although I think it’s better than veStyle for ENS)