Proposal: The Decentralized Validator Vault

The below proposal follows the discussion post created on June 20th 2024.

This proposal seeks DAO support for the implementation of a vault solution by the Lido Alliance member Mellow that would be used to serve as a focal point for user stakes and DVT incentives.

Voting for this proposal would mean that:

1. The Mellow team would be responsible for the implementation of a vault that accepts ETH and stakes it to the Lido protocol with the goal of driving net-new stakes to the Simple DVT Module;
2. 90% of potential future Obol contributions and SSV mainnet incentives (both calculated off-chain) will be allocated to the vault, with the remaining 10% allocated to the Node Operators in their corresponding SSV & Obol Simple DVT clusters. Any potential Mellow incentives would be directed to users of the vault;
3. Cross-team coordination will take place to facilitate staking to the Simple DVT Module. Relevant data will be provided in support of off-chain contribution and incentive programs.

Background

In light of the recently updated ReGOOSE goals, Simple DVT Expansion proposal, and as discussed in the Decentralized Validator Vault discussion post, a vault strategy can be implemented that will increase the pace of adoption of Distributed Validators via the Simple DVT Module.

Since SSV Network’s mainnet launch, the protocol has seen significant success, partially boosted by its mainnet incentives program. Currently, SSV Network has 26,685 active validators representing over $2.9B of ETH staked. If the Snapshot vote is successful, a proposal to the SSV DAO will be shared to greenlight the allocation of Lido related SSV incentives in an off-chain format to the vault, with user eligibility following the format described below.

In the coming weeks, the Obol team plans to announce a contributions program in conjunction with their 1% for Decentralization retroactive funding initiative. Stake that is deployed on Obol DVs will contribute 1% of their staking rewards to the retroactive fund. The expectation for Liquid Staking Protocols is that potential future Obol incentives will be allocated to stakers by taking into account the contributions made on the relevant staking platform.

Within Lido Simple DVT, Obol clusters are about to start the process of scaling their validators while the first SSV Network clusters are expected to go live in the coming weeks, with scaling to follow soon after.

The Snapshot vote for Expanding the Simple DVT Module successfully passed through governance, and an on-chain Aragon vote to raise the share limit of the module to 4% is expected in the next two weeks. This proposal has also greenlit the creation of Super Simple DVT clusters, that would allow for quicker scaling of both Obol- and SSV-based DVT clusters via the Simple DVT Module over the next two months.

Proposal

Given the additional capacity soon to be available within the Simple DVT Module, the upcoming launch of Obol’s contributions program, and recent revamp of SSV’s incentive program, an opportunity has been presented that can 1. Quicken the adoption pace of DVT via the Simple DVT module, leading to a more secure, resilient, and decentralized Node Operator set and 2. Drive net-new stake to the protocol.

This opportunity can be capitalised on by implementing what would be called the Decentralized Validator Vault, implemented by the Mellow team. The Mellow team has indicated that they can provide the proposed solution in a timely manner that is integrated into the Mellow front-end, allowing for Lido community members to access the vault.

The vault strategy would offer capital allocators (stakers) the ability to stake ETH or WETH into the vault. This (W)ETH would be staked via Lido, with stakers earning the normal staking rewards from the protocol. 90% of the incentives generated via the Lido protocol Obol & SSV Network validators would be allocated to stakers of the vault, with the remaining 10% allocated to the Node Operators in their corresponding SSV & Obol Simple DVT clusters.

Why Do This?

The combination of the expansion of the Simple DVT Module, the launch of Obol’s contribution program, and re-work of SSV’s incentive program presents an opportunity for the DAO to increase the resilience of the Lido Node Operator set via DVT, drive a material amount of net-new stake into the protocol, and offer capital allocators access to incentives that they otherwise would not receive (as SSV & Obol incentives are based on running validators).

With the Simple DVT Module expanded to 4%, there will be capacity for 11,868 validators evenly split between Obol and SSV over the coming months. Excluding the 60 active validators running through Simple DVT currently, this suggests capacity for an incremental 377,856 ETH staked into the protocol to fill the capacity of the Simple DVT Module.

Vault Mechanics

Structure

The vault would be introduced by Mellow with one of the existing Mellow Curator teams, integrating functionality to drive stake to the Lido protocol and the ability to show monthly snapshots of the allocated points to individual stakers utilizing the vault.

The capacity of the vault would be controlled via the Mellow administrator, reflecting the current stakeable capacity of the Simple DVT Module, with an up to 10% additional buffer. These parameter changes would be communicated to Mellow when key limits of clusters within the Simple DVT Module are raised, as explained in the Simple DVT Proposal and Expansion Proposal.

Incentives Eligibility

Similar to the current rewards share program, and in order to dissuade possibly deleterious effects to the protocol due to farming incentives, analysis would be conducted on vault stake. In order to be eligible to receive full vault incentives for the stake provided, stakers would need to:

1. Hold a position for a minimum of 3 days in the vault through the conclusion of the Snapshot period.
2. Not unstake existing stETH or wstETH that is then re-staked via the vault from the moment of vault launch. The incentives are calculated on the base of ETH staked to and persisting within the vault during the relevant snapshot period minus any stETH withdrawn after the launch of the vault.
3. Not swap existing stETH on DEXs/CEXs: this condition does not expel a staker from all incentives, but reduce corresponding amount of stake provided by the volume of sold ETH. Similar to the above, the incentives would be calculated on the base of non-swapped ETH staked to and persisting within the vault during the relevant snapshot period.

The 10% of potential incentives for SDVT participants would be split evenly across respective Obol and SSV clusters, with each participant earning a share of any incentives from the provider who’s software they utilize based on the number of clusters they participate in.

Summary

With the expansion of the Simple DVT module imminent, it is an opportune time to consider utilizing both Obol and SSV’s mainnet contributions and incentivization programs to quicken the pace of DVT based validators being added to the protocol.

The vault strategy implemented by Mellow would allow for a faster flow of Simple DVT validators being activated, for capital allocators to access DVT provider incentives, and most importantly, hasten the pace that DVT is rolled out across the expanded Simple DVT Module, improving the resilience of Lido Node Operator set.