Integrate CSM into the Decentralized Validator Vault

Summary

The upcoming introduction of the Community Staking Module (CSM) offers an opportunity to expand the scope of Mellow’s Decentralized Validator Vault (DVV). This proposal aims to integrate the CSM into the DVV alongside the Simple DVT Module, benefiting stakers using the CSM, Mellow DVV users, and the overall decentralization of the Lido on Ethereum protocol.

This proposal suggests to augment the current scope of Node Operator incentives such that:

1. The CSM will be included within the vault's scope, allowing stake from the vault to flow to the module without any changes to the existing on-chain code of the Lido Staking Router deposit methodology, while also providing DVT provider incentives to the relevant participants.
2. Vault users will receive 80% of the DVT provider incentives allocated to CSM operators that utilize DVT* within the module.
3. CSM operators utilizing DVT will receive 20% of the provider incentives pertaining to the validators they run utilizing DVT as a node operator within the Community Staking Module.

* Analysis of which CSM operators are using DVT is ultimately performed by each DVT provider separately and independently based on their own criteria.

No on-chain actions are required to implement this proposal. If accepted, cross-team coordination with the DVT providers and Mellow will continue for point calculations, also including the CSM Operators utilizing DVT in the point calculations for Node Operators and vault users.

Motivation

Since its launch in August, the DVV has facilitated the addition of over 4,700 ETH staked through Lido on Ethereum, equivalent to 140+ validators.

The Lido protocol benefits from the continued expansion and decentralization of the Lido Node Operator set via the addition of solo and community stakers, as well as via the incentivization of participants to utilize DVT which provides benefits to infrastructure resilience and key security when combined with Distributed Key Generation (DKG).

Stakers using the CSM will receive stake to their validators faster via the DVV, and for those operators utilizing DVT they will receive 20% of the DVT provider incentives generated for the validators they operate.

Users of the Decentralized Validator Vault receive an incremental 80% of the DVT provider incentives generated via CSM validators utilzing DVT in addition to 90% of the Simple DVT Module incentives, while continuing to support the decentralization of the Lido Node Operator set.

Why Should CSM be Included in the DVV?

While the use of DVT is not mandatory within the permissionless CSM, some Node Operators using the module are likely to utilize DVT given the benefits it provides to infrastructure resilience and decentralization as well as key security when combined with DKG. Given the ongoing SSV Incentivized Mainnet and Obol Contribution programs, these DVT-based validators may be eligible to receive incentives from the respective DVT providers.

As described in the Community Staking Module summary thread, users of the module will put forward a bond to provide coverage for possible issues or malicious actions on the side of the Node Operator. Currently, the proposed bond curve has been set between 2.4 to 1.3 ETH per validator depending on the number of total validators a node operator is running using the CSM. The validators running via CSM receive the 32 ETH required to run a validator from the CSM via the Lido Staking Router, while their bond is locked separately within the CSM contracts.

Given that CSM Node Operators are utilizing the Lido protocol to receive the ETH required to deposit to the validators, the protocol should also receive a portion of the incentives from the given DVT providers as is the case within the Simple DVT Module.

This proposal suggests that CSM Node Operators receive 20% of DVT provider incentives pertaining to their DVT-based validators utilizing the CSM, compared to operators in the Simple DVT Module that receive 10% of the incentives, to reflect the higher capital requirement for CSM validator operation.

In the case of a DVT cluster running a single validator using CSM, the cluster would put forward a 2.4 ETH bond, equivalent to 7.5% of the ETH required to run a solo validator. Taking this into account along with the 1% reward share for Obol Contributions, or the 0.5% network usage fee (expected to increase to 1% over the next 18 months) from SSV Network, a 20% share of the incentives reflects the incremental bond provided by CSM Node Operators as well as the rewards share required to utilize DVT.

In addition, it also reduces the likelihood of the potential en masse outsourcing of validator operations in the CSM Module in order to collect incentives from DVT providers, which in a negative scenario could lead to delegated stake representing the majority of CSM validators.

What is the impact to DVV users?

Users in the vault will receive incremental points for CSM node operators utilizing either Obol or SSV to run validators. The vault will accrue 80% of the points for any validators in CSM utilizing DVT. This will be tracked utilizing the SSV Incentived Mainnet calculation algorithm and Obol splitters for the respective DVT providers.

Vault users will continue to receive 90% of the DVT providers points generated via the Simple DVT Module and 100% of related Mellow points. Currently, as the module has a significantly higher number of Obol based validators active compared to the amount of ETH in the vault, users are receiving a boost to the number of Obol points on their stake within the vault.

While some deposits from the DVV will flow to non-DVT based validators within the vault, this is also true in the case that no changes are made, as a result of the existing stake distribution algorithm inherent to the design of the Staking Router. The CSM currently is proposed to go live with an initial 1% share limit of stake compared to the 4% share limit of the Simple DVT Module.

This proposal will allow for DVV users to receive incremental points while continuing to support the decentralization of the Lido protocol.

Incentive Splits

Current Distribution of the DVV + SDVTM Points:

| | Mellow Points | SSV Points | Obol Points | | --- | --- | --- | --- | | DVV user share of incentives | 100% | 90% | 90% | | SDVT Cluster share of incentives (respective to number of clusters operated using specific DVT infra) | 0% | 10% | 10% |

Proposed Distribution of the DVV + SDVTM + CSM (DVT) Points:

| | Mellow Points | SSV Points | Obol Points | | --- | --- | --- | --- | | DVV user share of incentives (SDVT validators) | 100% | 90% | 90% | | SDVT Cluster share of incentives (respective to number of clusters operated using specific DVT infra) | 0% | 10% | 10% | | DVV user share of incentives (DVT CSM validators) | 100% | 80% | 80% | | CSM Cluster share of incentives (respective to validators operated using specific DVT infra) | 0% | 20% | 20% |