Wintermute DeFi Governance Digest: June 2024 | Week 4

25 JUNE 2024 | RESEARCH | AUTHORED BY CALLEN

This week’s proposals include Pyth discussing a staking mechanism to improve the security of its price feeds, EtherFi buying back ETHFI with protocol revenue, Synthetix deploying segregated long-tail asset pools and perp markets, Arbitrum launching a staking mechanism to improve governance with sequencer revenue; along with votes from Aave to list sUSDe on Ethereum and CoW DAO establishing a strategic partnership with Balancer to launch LVR-resistant AMM pools.

Proposals

Pyth (PYTH)

Proposal: Community Proposal for the Design of the Community Integrity Pool (CIP)

Author: CMS

Summary:  This proposal requests to introduce a PYTH staking mechanism with slashing controls to improve the security of Pyth’s price feeds.

Key Points:  

• Currently, Pyth price feed publishers receive rewards for publishing price updates across various price feeds. However, there has been no real mechanism to enforce penalties for adverse price prints.


• This proposal requests to introduce a PYTH staking mechanism with a slashing function to further protect Pyth’s price feeds.

• The staking function will be open to both price publishers and tokenholders who will earn rewards in exchange for securing price feeds.


• Publishers will be required to stake PYTH on each symbol they publish to be eligible for rewards, making them susceptible to slashing.


• Tokenholders can then delegate their staked PYTH to publishers to earn rewards in exchange for helping secure Pyth’s price feeds.


• Each publisher will have a “stake cap” which limits the amount of PYTH that can be staked/delegated to them which subsequently determines their rewards.


• Publishers can increase their stake cap by publishing data to more price feeds and/or by increasing the amount of PYTH they stake.


• Publishers can also charge a delegation fee similar to DPoS systems where they can earn a portion of their delegator’s rewards.


• The total amount of rewards for the staking mechanism will be bounded by the number of symbols and the target stake per symbol.


• Lastly, the total slashable amount for a publisher is capped per slashable event with conditions for slashing to be determined by the DAO.

Our Take: The proposed staking mechanism is well thought out and creates strong alignment between publishers, tokenholders, and the robustness of the Pyth network.

EtherFi (ETHFI)

Proposal: ETHFI Buyback and Liquidity Pool Seeding

Author: Etherfi.admin

Summary:  This proposal requests to purchase ETHFI on the open market with up to 50% of protocol revenue. 

Key Points:  

• EtherFi currently earns protocol revenue through a 5% fee on rewards for ETH Staking and a 2% platform fee on Liquid Vaults.


• This proposal requests to use up to 50% of protocol revenue to buy back ETHFI from the open market, initially starting with 5% of monthly revenue.

• Purchased ETHFI will be used to build the treasury and a portion of the bought ETHFI will be used to seed a liquidity pool on Curve to boost on-chain liquidity.

Our Take: This is arguably a good use of funds and something similar to MakerDAO’s buyback model where they increase MKR’s onchain liquidity.

Arbitrum (ARB)

Proposal: ARB Staking: Use Surplus Fees to Align Governance

Author: Frisson

Summary:  This proposal requests to implement an ARB staking mechanism that uses 50% of future surplus sequencer fees to reward ARB holders who stake and delegate their governance power to active governance participants.

Key Points:  

• The Arbitrum DAO currently has no native mechanism/utility for ARB outside of its regular governance powers.


• Currently, only 10% of the circulating ARB supply (~$324M of ARB) is actively used in governance alongside declining voter participation; making the DAO more susceptible to governance attacks.

• To solve this, this proposal requests to implement an ARB staking mechanism to incentivise ARB holders to be actively engaged in governance through 50% of future surplus sequencer revenue.


• Based on historical data the current annual surplus in sequencer revenue is estimated to be $22.8M.


• Tally has developed a staking contract for the DAO based on Uniswap’s UniStaker contract, requiring users who stake their ARB to delegate their tokens in exchange for receiving staking rewards.


• Furthermore, the contract will direct 1% of surplus fees proportionally to delegates who reach a Karma score over 80.


• Lastly, users will be able to stake ARB on the Tally Protocol to receive a liquid staked version of the token that auto-compound rewards.

Our Take: This is an interesting proposal that has a lot of good properties, however, given Arbitrum’s consistent ongoing costs and lack of treasury diversification we are unsure if allocating such a large amount of revenue to ARB staking is most optimal. Furthermore, there are other vectors to defend against governance attacks that don’t require staking rewards.

Synthetix (SNX)

Proposal: SIP-393: Launch Degenthetix on Base 

Author: Westie

Summary:  This proposal requests to add a new Pool and Perps market to V3 on Base to allow for experimentation with long-tail assets for perps trading.

Key Points:  

• This proposal requests to create a new Synthetix V3 pool on Base called “Degenthetix Pool” that backs a new market called “Degenthetix Perps Market”.


• This new experimental market will allow for the trading of long-tail assets with a large demand for peps trading with separate liquidity from the primary pool.


• The pool and market will be owned by the Spartan Council.


• USDC will be accepted as collateral to trade perpetual markets for AERO, VELO, PRIME, MAGA, BODEN.

Our Take: Memcoins have proven to generate a significant amount of trading volume across various exchanges, thus, they would be a great addition to Synthetix.

Votes

EtherFi (ETHFI)

Proposal: ETHFI DAO Proposal: ETHFI Buyback and Liquidity Pool Seeding

Status: Live.

Created: Jun 20, 2024.

Ends: Jun 25, 2024.

Leading Consensus: For – 2M ETHFI (99.85% of total votes).

Summary: This proposal requests to direct up to 50% of protocol revenue towards buying back ETHFI on the open market and seeding liquidity on Curve Finance.

Aave (AAVE)

Proposal: Onboard sUSDe to Aave V3 on Ethereum

Status: Live.

Created: Jun 23, 2024.

Ends: Jun 27, 2024.

Leading Consensus: For – 145 AAVE (81% of total votes).

Summary: This vote ratifies adding sUSDe to Aave V3 on Ethereum as collateral with a supply cap of 85M sUSDe.

CoW DAO (COW)

Proposal: CIP-45: Balancer & Cow Protocol Strategic Partnership – Launching CoWAMM Pools

Status: Live.

Created: Jun 18, 2024.

Ends: Jun 25, 2024.

Leading Consensus: For – 46M vCOW (98.71% of total votes).

Summary: This vote ratifies a partnership between Balancer and CoW Protocol to create Balancer liquidity pools (CoWAMM) that are LVR resistant. This will force arbitrageurs to bid for the right to swap on balancer pools, closing the arbitrage gap and returning a portion of this surplus to liquidity providers.