Recently some community members have voiced concerns about whether the current staking rewards derived from protocol fees and early unstaking penalties are enough to incentivize Bitocracy stakers relative to other income-earning opportunities presented by the protocol (one example here). I think this is a valid concern. This raises an important topic that has been on my mind recently, which is about the emission schedule for SOV. I was asked on today’s staking rewards call to write up a forum post with my thoughts, so here it is.
In the Tokenomics section of the wiki, we can see that ~38% of the SOV supply has been earmarked for an “Adoption Fund”. This is where SOV for the recent Loot Drop campaigns comes from.
We could use some of this SOV from the Adoption Fund to incentivize staking as well. The SOV could be split in some way between liquidity providers in the AMM+lending pools and Bitocracy stakers. We would set an emission schedule and let it run on autopilot until the Adoption Fund runs out.
The inspiration for this idea comes from bitcoin mining, where early miners earned a significantly greater share of the total BTC supply than miners who joined later. There are several good reasons for why the bitcoin emission schedule was programmed this way:
Mining bitcoin early on was riskier than mining bitcoin later. Although the cost of mining was lower, it still took a significant investment of time to participate and the legal risk was not nonexistent given the history of digital currencies before bitcoin. Today, bitcoin mining is a relatively straightforward and predictable business (in some jurisdictions, anyways).
Bitcoin was most vulnerable when it was young. Since early miners received a larger share of the BTC supply, they were more likely to want to protect bitcoin rather than try to attack it.
The proportionally larger rewards attracted miners, which helped quickly bootstrap bitcoin security faster than attackers could potentially amass the hashpower needed to launch an attack.
There are similar reasons for why it makes sense to give Bitocracy stakers SOV subsidies:
Staking early on is riskier than staking later. There is a great deal of uncertainty regarding whether or not Sovryn will ever reach product-market fit and financial sustainability. Still, some stakers are locking themselves in (subject to early unstaking penalties) for up to three years. While one could argue that stakers are being compensated for that risk by the opportunity to purchase SOV at prices that are lower today than they likely would be later on if Sovryn is successful, by staking they are forgoing the opportunity to liquidate SOV at higher prices before their staking duration ends. Subsidies would help compensate for the extra risk and opportunity cost taken on by SOV holders who are staking early in Sovryn’s lifetime.
Sovryn is most vulnerable while it is young. We want to achieve a relatively high participation rate in staking to make it more difficult and expensive for an attacker to acquire a large stake in Sovryn to precipitate a governance or price manipulation attack. The quadratic formula used for staking is itself a nice defense against attackers, but increasing staking participation adds another layer of “defense in depth” that can further discourage would-be attackers. We could use subsidies to target a specific participation rate, increasing subsidies if we dip below that rate and lowering subsidies if we go over that rate.
As an example, let’s say we decided to split the Adoption Fund 75/25 LPs/stakers. The SOV allocated to LPs could be split evenly across all pools, or concentrated in particular pools. The SOV allocated to stakers would be split pro rata between all fully vested stakers i.e. SOV still subject to vesting terms would not be eligible for this subsidy. Then we decide on an emission schedule. For LPs, we could use bitcoin’s emission schedule as a reference: 50% of the supply emitted in the first 4 years, 25% in the next four years, 12.5% in the next four years, and so on, until zero. For stakers, we could use participation rate targeting, aiming to have at least 30% of the SOV supply staking and increasing or decreasing subsidies as needed.
(Keep in mind, these are just example numbers for illustration, and this is just an idea not a formal proposal. I’m totally open to feedback or alternatives if anyone else has thoughts on this!)
For several reasons I think that this kind of blanket subsidy would be a poor idea:
The rich get richer. The largest SOV stake weights are held by those who acquired SOV earliest. This mechanism would simply distribute more SOV to them.
The incentives are poorly aligned. The majority of staked SOV is under a vesting schedule. These stakers will continue to stake regardless of the subsidy. We would be “throwing away money”.
Cultural. I think it would be a very poor cultural schema to introduce the idea that SOV stakers can vote themselves more SOV. I would be very opposed to this.
Inwards facing. We grow Sovryn by growing Sovryn user-base. Not by creating a hermit kingdom of rewards for those already here. Stakers should be incentivised to make choices to grow the system.
I don’t think the analogy to Bitcoin miners is a good one. Bitcoin miners could not change their own rewards schedule. Bitcoin is a coin, SOV is not - it is a revenue coordination token. Sovryn requires active coordination to grow the Sovryn protocol.
I think there are many good reasons to Stake SOV in the early days as well. The most important of which is to receive passive exposure to the entire Sovryn ecosystem via Origins launchpad projects. I think there might be some justification for a small, subsidy to encourage new UNVESTED stakers.
Anything else I think could be an absolutely ruinous mistake.
any calculations need to take into account that SOV is scheduled to be fully diluted after seven years.
IF i were to “vote” for subsidising staking, it would not be for the whole term to dilution, it would only be for an early phase (ie, six months in early stage of the protocol)
i’m not sure that subsidised staking is an additional security guarantee as you argue, and tend to believe that exactly the opposite would occur - ie, tendency towards oligarchisation as @yago points out.
again, “were i” to support staking incentives, it would only be to incentivise new stakers as a balance to the LM rewards, and not already vested stakers - here i am also in alignment with yago.
We should be using the ADOPTION (it’s called that for a reason) allotment to grow the sovryn user base, not reward (bribe) existing stakers for maintaining their stake.
I’m also sceptical of the precedent of stakers voting themselves more money - how’s this different from congresscritters protecting their salaries / health benefits with raises every term while the rest of the population has to eat caek?
Essentially, this discussion has started because community members are used to staking rewards programs on ethereum that incentivize short term gains on worthless pump and dump coins, and as yago points out, Sovryn is a revenue sharing and governance coordination token with an actual usecase, whereas food emojii YF coins have no other use other than driving price action for trading until the rug is pulled or the next, higher APY is offered and liquidity dries up.
I think we have done a poor job of explaining the alternatives to users who tend toward expecting immediate gains for staking, and indeed, we often confuse the wording ourselves when talking about “staking in a pool” and staking in governance / protocol.
As was also mentioned on the AMA - we don’t have enough historical data for activity on the platform to make any type of informed decision about balancing short and long term incentives for how to earn on the protocol across the different opportunities (low risk, low time preference vs high risk short time preference)
While i think this discussion is necessary for a decentralised, open-source, transparent protocol governed by it’s community, i don’t think we should be making ANY calculations until we have at least 3 - 6 months of historical data to go on.
long story short: some type of short term SOV incentive for NEW STAKERS to balance LM rewards might be something i would support - long term, fixed emission disbursals at the protocol level as rewards for continuing to stake, or to vote… not something i’d like to see gamified.
An important issue to think about, definitely. Light does raise a valid concern. I feel the same tension, as both a multi-year staker and liquidity provider.
The staking rewards from protocol usage are, as it stands, next to nothing. Only rewarding in the long term, if adoption significantly improves.
Passive exposure via Origins launchpad projects: interesting, for sure. And a benefit that could help market the protocol to new users very effectively. But also a fairly big unknown, for now. Likely mainly rewarding in the mid to long term.
The sizable unstaking penalties are a pretty big disincentive to staking at the moment. Basically, staking requires a lot of long-term faith.
@Yago rightly brings it down to the essence, I think:
We grow Sovryn by growing Sovryn user-base. Stakers should be incentivised to make choices to grow the system.
New stakers is good. New lenders, borrowers, and traders is even better.
Such protocol adoption would automatically mean more trading fees and more launchpad projects, which is the reward stakers should get. It also means a better story to communicate; increasing word of mouth; deeper liquidity, all of which help to further the flywheel effect of ecosystem growth.
I’d love SOV rewards for my staking SOV. And a tiny bit may indeed be fair, considering the sizable LP rewards. But I would focus the adoption fund primarily on:
-Better liquidity for margin traders, so this becomes more attractive
-More awareness and liquidity on the decentralised stablecoins
-Incentivise borrowing and trading
-Incentivise professional communication about Sovryn; blogs, vlogs, tweet threads, whatever
-Consider a referral system to passively incentivise the community to spread the Sovryn gospel
Personally I would not support a blanket subsidy for staking going forward, due to the reasons that others have outlined regarding concentration of staking power. Making it a time-limited promotion would alleviate some of this concern but I don’t feel that is the best use of the Adoption fund.
I would however be more interested in another form of incentive to encourage more users to engage with the dapp/protocol, instead of providing funds directly to stakers. I’m not sure what form this would take, but perhaps some type of rebate to encourage margin trading (e.g. make more than $20k worth of trades within a specific time period and receive X SOV), similar to the current Loot Drops for liquidity providers.
As someone with a large stake in Bitocracy, I would love to see increased rewards from staking, however I believe that should come from growth of the platform instead of direct subsidies from the Sovryn protocol.
This is a good thread, thanks @light. My concern after yesterday’s AMA was there is little to no financial incentive to stake early (not even an asymmetric gamble). Instead you can just sit on sidelines and wait to see if fees get larger. So, I was leaning towards some sort of subsidy or reward. However, I’m changing my tune for all the points mentioned above.
Ultimately, I think we all agree – Staked $SOV value should be derived from yield earned as an actual productive asset and in @exiledsurfer words, a participatory revenue share (‘PRS’). This IMO is what will separate SOV from shitcoin(s) and ponzinomics and ultimately justifies the token existence
On the call we referenced “data” and “statistics” that can inform our decision making. What exactly does that mean and when will it be ready? As simple hobbyist data analyst, I’d love to explore and see if I can contribute on this front. However, I have no idea how to get setup extracting data from RSK and Sovryn nodes. Is this something that can be made available or we could get assistance on? I just need to be able to get the data in a work-able format then we can toy around with it and see what if anything we can extract. I’m hoping this is something reasonably simple, but IDK?
I think some base-line metrics like Cost of Customer Acquisition (“CAC”) and Customer Lifetime Value (“LTV”) would allow us to create dynamic measurements that show how much revenue we get from each customer, which products and services people demand and then mostly importantly how much was our cost to get that customer?
Then we can use that to inform how much SOV from the adoption fund should be allocated and to which type of marketing campaigns. This is what will lead to higher staking rewards and justifiable token value.
Thanks for the feedback everyone! Responding inline:
SOV staking is already a “rich get richer” system, in that those with more voting power get more staking rewards. Adding a subsidy would amplify that somewhat, but so would any increase in staking rewards regardless of the source.
Note in the example I gave that SOV still subject to vesting terms would not be eligible to receive a subsidy:
I did not suggest that it would be SOV holders making this decision. In fact if there were a SIP to do this we could explicitly say that SOV holders CAN’T make this decision. Instead the decision could be made by someone else, like the Treasury Committee.
That said, I’m not so worried about introducing the ability for SOV stakers to vote themselves more SOV. If they can vote to increase fees (which also go to themselves) then what difference does it make if they vote to give themselves SOV?
This doesn’t have to be an either/or thing. Note that in the example I gave, 75% of the Adoption Fund would still go toward liquidity mining and other “outward-facing” activities. I also don’t think giving stakers subsidies changes their incentive to grow the system, especially if the subsidies are subject to vesting like the liquidity mining rewards are. Wouldn’t a greater stake in SOV = more incentive to grow the system?
Bitcoin miners can indeed change their own rewards schedule. Such a change can even be done as a soft fork! That said, the rest of the market does not have to accept that change. Similarly, if SOV stakers were to get overzealous with their staking rewards (assuming it was under their control, and not someone else’s as I suggested above) then the market could respond accordingly to keep stakers in check.
Right now, the only “sure thing” are the rewards from protocol fees and early unstaking penalties, which are so far unimpressive (understandably so given how early we are). I think more info should be published about Origins so stakers can better take that into account.
If by “unvested” you mean fully vested i.e. SOV not subject to vesting terms, then I think we’re in agreement
I think limiting subsidies to an “early” phase makes sense. As to what qualifies as “early”, I think that’s a point worth discussing if we decide to pursue this idea further.
See my reply to yago above on the point about “oligarchisation” as you put it. Regarding security guarantees, the idea here is that more voting power = higher barrier to attack (governance or price manipulation attacks), similar to how more hashpower = high barrier to attack bitcoin (which is also why I make the analogy to bitcoin in my original post). If you have more details about why you don’t think that idea makes sense I’d be interested to dig into this!
Sure, I think we are all in agreement here (again see my reply to yago above).
I don’t think there’s anything wrong with deciding later that the initial token distribution chart was missing an important stakeholder group (stakers), if it comes to that. Also as I said in my reply to yago above, this doesn’t have to be an either/or thing; in my example 75% of the adoption fund would still be earmarked for liquidity mining and other adoption-related activities.
See my reply to yago about how this doesn’t have to be something voted on by SOV holders; it could be the Treasury Commitee or someone else making the allocation decision.
Also, even if SOV holders were in control of this decision, this is significantly different than Congress because there are only a limited number of seats in Congress that people must be elected into whereas at any time any SOV holder can become a staker if they want to receive some of the staking rewards (including part of the hypothetical subsidy).
I welcome more data on staking participation rates and historical staking rewards. However I don’t think we necessarily need to wait to have the data to make a decision about whether or not it makes sense to subsidize staking. Did Satoshi wait to see how many miners would show up before allocating subsidies for miners? No, he had an intuition that it would probably be important to front-load the rewards, then he set it and forget it (and I think history will show he made the right choice). That said, if there’s consensus that we wait for more data before making a decision here then I won’t push back too hard on this point.
FWIW, I love all the debate and learning from everyone’s different points of view.
This makes me take a step back and wonder, does SOV want more or less stakers?
I have assumed that more is good, but if the governance needs are met with the current level of stakers, maybe there is no reason to deploy SOV’s limited capital towards staking incentives. Maybe it is better deployed in activities which increase liquidity, customer base, user experience, etc.
It feels a bit backwards that the most committed capital may have the least to gain, (highest opportunity cost by locking SOV up), but as long as the rules of the road are clearly defined and transparent, it should be workable. Since it does run counter to many other projects, the importance would be education of the potential stakers before they lock up their capital.
I’ll count myself firmly ‘in the middle’ on this one. I’d like to see some enhanced rewards, but I understand the other side much better now after observing the sausage-making session.
I was surprised at how low staking rewards are. As an investor, it makes no sense to lock up your capital with such a low yield. If I could go back I wouldn’t have done a mulit-year stake. I would have held SOV but I would have kept it liquid. Staking with a lock the investor is taking on a lot of risk. They should be rewarded accordingly.
Locking up tokens is a good thing. Few are going to lock up capital when their are significantly better opportunities elsewhere.
We all want to stack sats. Right now, SOV isn’t the best place to do that.
I am not an influencer so a rewards mechanism does nothing for me.
I think @yago point on presales makes sense but for that to work on a risk/reward basis, it should be weighted so the heavier stakers get larger guaranteed allocations.
Stakers are taking on a risk, we need to reward them proportionately.
The simple answer is more voting power staked = higher barrier to attack the protocol. My example for SOV subsidies suggested that there be a participation rate target, and if we are below the target rate then we increase the rewards and if we are above that rate then we scale rewards back (potentially to zero) until we find equilibrium at the target rate.
Agreed 100%. What is point of staking when your transaction/gas fees are higher (hypothetically) than the reaped rewards, especially for long time investors that chose to stake until 2024. By being an early adopter and early supporter, you are doing everything possible to market Sovryn to others i.e. I have referred a few people since the general public launch, that are actively staking and were super disappointed to see the rewards of 0.007 for staking. Incentivizing new users is interesting but I mean I can potentially unstake, pull out entirely then create a brand new wallet and become a new customer…
I think it’s pretty simple then. The conversation should be on the desired level of stakers.
Then the economic incentives have to be adjusted until the level is sufficient, as you’ve outlined.
As it stands now, we can expect the level of staking to go down, as anyone staked short term will not want to renew until they can verify that their return is going to materially exceed gas fees. And I wouldn’t expect any material number of new stakers.
Interestingly, due to the quadratic weighting formula, it is almost a certainty that short term stakers are never going to be thrilled (which is fine), so this is really a question around proper incentives for long term stakers. Because…
3 year staker has 10x weight, whereas 3 month staker has about 2.2x weight.
Therefore, if, for example, the 3 year staker yield ever came out to 5% APY, short term 3 mo staker yield would be 1.1% APY.
With the number of token unlocks over the next 3 years I staked based on the thought of rewards offsetting the increased supply over next several years. As it stands my reward from my 3 year staking on day 1 is about .005%.
For anyone who feels that the economic reward for staking is low, meaningless, maybe you should deploy your capital in a way that provides more income.
Staking is a governance issue, with an additional, low-risk, passive, economic reward.
It’s a simple opportunity cost calculation.
If a user “cares” about the protocol, and wants to participate governing its development, but also wants the high rewards of riskier capital deployment, the simple answer is: you can’t have your cake and eat it too".
I am currently jumping through hoops to stake because I believe in the protocol and the concepts espoused but if you expect the market to invest their capital without any long or short term rewards (even in theory) then you are basically looking to establish a cult and not a business or even a sustainable platform. I am not talking about oversized, self voted paychecks or some other toxic model - but people investing today for a future should see some upside to that future - no?
Then I totally agree,sir. Stakers holding governance accountability and are incentivized in the long term for SCALE and development of the community which drives their upside makes sense for a long term position. I thought you were suggesting that no long term upside was warranted. I understand now - thank you for the clarification!