18th Jan 2023

Steelmanning DAI reWARDS:

  1. A part of the LDO LPs receive gets dumped driving negative price action;
  2. Easier to view/account as an expense if in DAI;
  3. The DAO sells LDO to VCs to get DAI to pay LPs — and we’d assume VCs to sell less than LPs (vestings, time-horizons, etc);
  4. As Lido contributors we believe/are bullish on the future of LDO so should try to spend less of it because it will be more valuable in the future.

Pros of LDO reWARDS:

  1. Correlation of incentives and principle denominations:
    1. With reWARDS, we are mostly incentivizing stETH/ETH to be put in pools.
    2. LDO is positively correlated with (st)ETH. As ETH goes up, LPs whose position is in kind see their rewards also going up (and vice versa), smoothing APRs and reducing stETH being heavily removed or LPed into pools from price fluctuation.
    3. In the counterfactual DAI case, as ETH moves in price and reWARDS stay constant, ETH denominated pool TVL would shift much more from ETH price vol than it does now.
  2. Runway of LDO liquidity incentives is very well assured still:
    1. The monthly budget has been getting reduced every month since September, with a ~41% decrease since then (Sep 4.48M → Jan 2.63M).
    2. It is going to continue to get optimized and reduced until march, and crucially, post withdrawals, billion-dollar secondary market liquidity will be less crucial, so we expect overall reWARDS spend to reduce further.
    3. The treasury has 126M LDO, so if we have a couple extra months at 2M spend and following ones at 1M, there doesn’t seem to be a sustainability problem.
  3. The very large majority of the treasury value is in LDO and the current use cases for it are limited (contributors TRP, reWARDS). It is the least liquid part of the treasury and incentivizing liquidity with it seems a perfectly reasonable use case (especially because it is paying stAsset holders).
  4. Distributing LDO from the treasury has advantages beyond the liquidity we get (which is, ofc, the main one): it increases the circulating LDO supply (making itself more liquid), gets more addresses holding it and decentralizes the token.
  5. Paying DAI reWARDS is not a free lunch LDO-saving-wise. It still implies having sold LDO in the past (that has other competing uses), selling now or in the future.
  6. The DAI was raised to assure the Lido DAO can continue operating, for some time, in any market scenario. It is both much more scarce than LDO in the treasury and has more competing, ongoing spend centers such as contibutor pay, referrals and general expenses.

I see the benefits in paying reWARDS in DAI but think it is the wrong move (by quite some margin at the moment) once everything is taken into account.