Summary
The goal of this RFC is to coordinate with the Degen ETH (dgnETH) community to have a clearer understanding of staking distribution for staked Degen ETH (sdgnETH), how often yield will be distributed to stakers, and constraints regarding distribution. The recommendation is to launch auctions every Sunday until market cap grows enough for multiple auctions to occur weekly with meaningful distribution to sdgnETH holders.
Abstract
By the end of this discussion, the community will have clear parameters on how staking reward distribution works, how often rewards are expected to be distributed, how staking APY fluctuates, and how distribution could change as the product continues to grow.
Problem statement
Currently, there are questions from the community around staking yield, including how often yield is harvested, and how rewards are distributed. All mechanisms revolving around this can be found in the Reserve Protocol documentation. Rewards are distributed to the staking contract via the RTokens auction and auctions must be started manually. The community must clearly understand this and determine the best times to launch the auction to regularly distribute rewards.
Rationale
Understanding sdgnETH yield distribution
How is yield distributed to sdgnETH holders?
Yield is distributed to sdgnETH holders via an auction process where excess collateral accrued in the Backing Manager (BM) is used to mint more dgnETH and convert them into sdgnETH. The BM periodically collects yield from the collateral baskets, which cannot be immediately minted into RTokens. This excess collateral is auctioned, typically through dutch or batch auctions, converting it into more dgnETH The newly minted and auction-acquired degenETH is distributed to sdgnETH holders, by increasing the exchange rate of sdgnETH/dgnETH when unstaking. This process effectively distributes yield to sdgnETH holders by making each sdgnETH more valuable and redeemable for a larger portion of dgnETH.
Do rewards accrue to sdgnETH automatically?
No, auctions must be initiated manually in the auction section on DegenETH’s section of the Reserve App. This means that the prices of rewards accrued could change, based on the price at which they were earned versus when the auction was initiated settling it into Degen ETH.
Is there any other important mechanism that could change the yield earned?
Yes, the Backing_Buffer could change the rewards distributed to sdgnETH holders. The RToken Backing Manager uses a small Backing_Buffer (default: 0.1% of RToken collateral) to counteract potential slippage during collateral rebalancing auctions. This buffer prevents the RToken from becoming undercollateralized due to auction slippage. One potential downside of this safety mechanism is that it can delay revenue distribution when an RToken’s TVL suddenly increases. As TVL grows, the backing buffer grows with it, so revenue distribution can be delayed until the buffer is filled and revenue accrual automatically resumes.
Establishing parameters for yield distribution
DegenETH’s market cap currently stands at $2 million TVL. With steady growth, the backing buffer will continue to slow down yield distribution, however, auctions could regularly occur once a week, with more frequent auctions as dgnETH begins to scale its market cap. Here is a recommended schedule to distribute auction rewards.
- Until degnETH reaches a $5 million market cap, enough awards will accrue to only reasonably justify 1 auction a week. These auctions should occur on Sunday with the transaction submitted via the community discord channel once completed. Anyone could initiate the auction.
- From a $5 million market cap, the community should come together to explore whether enough rewards accruing to have to auction rewards twice a week. The recommendation would adjust to Sunday and Thursday. If enough rewards have an auction on those dates, the community will look to initiate an auction and show the transaction within the DegenETH discord channel.
- At a $20 million Degen ETH market cap, the community will explore pathways to launch more auctions.
Weekly Distribution
Auctions are launched every Sunday. Following this schedule, the first auction will be launched on Sunday 07/28/2024, and continue weekly from there. An auction will not be initiated if there are not enough rewards in the auction available to create a distribution. The community should look to see this auction completed every Sunday. If there are insufficient rewards, no auction would occur because not enough yield was accrued over that weekly period. This could be due to an auction already being initiated or significant TVL growth which has affected the BackingBuffer, causing it to need to accrue the yield for distributions to occur.
Risks
Rewards losing value
Some of the rewards accrued from the sdgnETH yield strategies include $CRV, $CVX, $MORPHO, and other tokens. These rewards fluctuate in $ value. Price changes could change the total yield distributed to sdgnETH holders.
Auctions are not initiated on time
Auctions may not be distributed every Sunday if a community member does not initiate them due to personal activities or high gas fees. The time to receive sdgnETH rewards could change due to delays. These are manual auctions and there are no incentives to reward someone to initiate it outside of receiving their rewards.
- I am in favor of sdgnETH distributions happening every Sunday
- I am not in favor of sdgnETH distributions happening every Sunday and would like to explore other options