In the course of human events there are times when it is important to notice that unequal work and unequal risk do not deserve equal pay.
In my fairly deep analysis, I vibe that liquid staking is like this:
Overall good
A side effect of how ica is built
Not as valuable to the network as native staking
I find the point of view that liquid staking is inherently bad to be incorrect, if we look at the various services that have grown up around liquid staking, they’re good.
In fact there’s really just one problem, They pay somehow the same as native staking.
But native staking has two risks:
Immobility
Slashing
Liquid staking using an ICA has only one risk:
Slashing
For the purposes of brevity, we’re not going to even get into the protocol fees for liquid staking, let’s pretend that they do not exist here.
Basically we should implement something that ensures that liquid stakers earn less than native stakers. The end.
I think this also matches with the views of for example Dev.
It is correct that only slashing is the risk for the chain in question, whereas the immobility is fully taken by the liquid staking protocol itself.
There is of course also the risk in the protocol being relatively new in the cosmos ecosystem where it might include some additional risk due to being this novel.
Regarding the payment, if I heard correctly there is also a LST-cap being worked on to limit more risks. Would that change this proposal?
The proposals are complimentary in my opinion and 100% behind both.
LST Cap would be to ensure that liquid staking can never exceed a certain percentage of stake and so cannot cause stake to be controlled by a coalition of LST providers.
LST Tax is to make Liquid Staking cheaper for the chain, and to encourage normal staking by putting a premium on the immobile stake. There is already a premium in place, the 10% taken by Stride on all staked assets. A native LST tax would retain similar value by reducing costs/realigning them.
I like the idea of an LST “tax “ primarily bc I believe there are mutually beneficial priority items beyond risk management, that could be funded from revenue generated.
How does a “tax” get implemented though?
is it a tax on staking income/revenue (staking rewards + share of revenue from taker & transaction fees) at distribution or at time of collection?
-is it a tax on liquid staking (eg it costs 0.01 OSMO to liquid stake 1 OSMO). This would need buy in from providers? Could revenue could be used for mutually beneficial purpose such as an pooled emergency reserve, user support, analytics/research, etc.?
-is it a tax on trading LSTs? (eg a 0.05% protocol level LST taker fee?)
-is it a tax on LST liquidIty providers? (eg a tax to enter or exit a LST liquidity pool?)
-is it a tax on borrowing LST?
-is it a tax on decentralized stablecoin minting with LSTs?
A tax is beneficial bc it generates revenue to fund things. Risks can be managed without a tax though, such as a cap on the amount of OSMO liquidity incentives that LST pools receive (or an APR cap not to exceed the staking APR), a disabling and blocking SFS for any and all OSMO paired LST pools that receive internal or external incentives, etc.
The externalities that a tax on liquid staking would help “correct” for though can be more easily and immediately addressed via changes to liquidity incentive spending in my opinion.
Tax is probably the wrong word now I think about it.
The way this had been discussed before was a modifier on the staking income of LST tokens at distribution. i.e. Commissions would be impacted also.
I think that should only apply to the inflationary security payment, not additional revenues.
Whether that reduction goes to non-LST stakers (which would incentivise them to increase the LST cap) or elsewhere is a question to explore.
Ahhh. Ok. I think I get what you mean. I think calling it a “tax” is still appropriate if I am understanding things correctly here.
Conceptually, would the “tax” or modifier on staking income work like the SFS discount factor? Or in other words would 1 liquid staked OSMO be treated as 0.75 staked OSMO when it comes to distributing staking revenue?
I think taking into consideration what the future is for SFS is something that is important to consider here as well as I see the principle logic behind SFS - making liquidity providers stakers and stakers liquidity providers - as something that perhaps should be more attractive than both regular and liquid staking. The cap and modifier should perhaps be benchmarked more to the amount of OSMO being SFS or are in liquidity pools on Osmosis than that being staked?
Conceptually, would the “tax” or modifier on staking income work like the SFS discount factor? Or in other words would 1 liquid staked OSMO be treated as 0.75 staked OSMO when it comes to distributing staking revenue?
With respect to the cap; SFS or “normal” staked are both native to the chain and can be treated equally imo. Whereas SFS might be indeed be more attractive in the long run, but there will always be people who don’t want the risk of impermanent loss with their stake and will be happy with a slightly lower APR.
Very true regarding impermanent loss. But with swap fees, a share of tx fees and soon to be taker fees, that is reduced. ProtoRev OSMO revenue should perhaps be distributed to SFS stakers, if that is possible, to make SFS more attractive though and reduce the threat Impermanent loss.
The idea of a tiered SFS program separate from the liquidity incentive program and based purely on paired token market cap has always appealed to me to make liquidity incentive and staking reward spending more efficient and effective, better align the interests of competing stakeholders such as liquidity providers, stakers, and protocols/developers. Such an organizational structure I think could really compete with CEXs for liquidity, trading volume.
A tiered SFS program with a discount factors for stablecoin pools like Usdc, Usdt, and ist (eg 85%), another discount factor for large cap token pools like ATOM, BTC, ETH, BNB and MATIC (eg 75%), another for medium cap token pools (eg 65%) like AXL, FET, and AKT, another for small cap token pools (eg 50%), and a final one for microcap token pools (eg 25%) would be an attractive and sustainable market based liquidity incentive system and organizational structure.
I do like the idea of a tax very much though, particularly as revenue could be used for things that benefit all stakeholder, like directly subsidize things like bridge costs that would ideally have a positive effect on liquidity, trading volume, and users.
Very true regarding impermanent loss. But with swap fees, a share of tx fees and soon to be taker fees, that is reduced. ProtoRev OSMO revenue should perhaps be distributed to SFS stakers, if that is possible, to make SFS more attractive though and reduce the threat Impermanent loss.
I don’t know what the average percentual risk of impernanent loss is tbh to determine if the swap fees, tx fees, taker fee and possibly ProtoRev revenue outweighs this %.
I would just say that Osmosis has it’s own existing way of “liquid staking” by the user of superfluid staking and its 75% risk factor. The overall LST critics are mostly fears. The reality is that it also offers a lot of positives. Of course some people won’t see them as such and will only account for the risk added. Well to me it’s not adding any risk above those already existing. The only viable argument is that LST externalize the surface area to another chain (instead of superfuild that keeps it internal).
So my hunch is that the question of LST or no LST is actually deriving from the more trivial discussion about cosmos collaboration or competition. If you see others as risks & competitors, well, you’ll do everything on your own and try to create your own ecosystem around you. Not so different from the other L1s in that case and far away from the initial cosmos vision of cooperation (infringed by strict consensus of course).
Anyway on my humble opinion, LST will have usecases, probably less demanded here on osmosis than in the Hub. But fostering innovations & potential cooperation on the face of fears, not the wisest choice imho. My advice would be to play it safe, with a lower cap than the up (somwhere like 15% would do it I guess) and see where it all goes.
Regarding LST taxation… well… it will just push that demand elsewhere. But frankly, others like Duality would be happy to see this !