We propose to create a staking module for NOTE holders that will enable NOTE holders to earn returns on their tokens while simultaneously providing value to the protocol by way of providing liquidity for NOTE and insurance for funds on the protocol. This NIP includes the following changes from the earlier NRC:
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Stakers will stake 80/20 NOTE/WETH Balancer lp tokens instead of NOTE tokens.
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sNOTE holders will earn rewards denominated in these Balancer LP tokens. One sNOTE will be redeemable for an ever-increasing number of Balancer LP tokens.
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Staking will be open-ended. There won’t be any fixed term lengths with the exception of a mandatory 15 day cool-down period upon redemption.
We explain below the rationale behind these changes as well as other relevant details of this proposal.
Staking LP tokens:
We believe that staking 80/20 NOTE/WETH LP tokens instead of NOTE tokens will provide more value to the Notional protocol and NOTE token holders for the following reasons:
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80/20 LP tokens ensure liquidity for NOTE. Strong NOTE liquidity is critical for a healthy ecosystem and strongly beneficial for all NOTE holders. Protocol tokens that have staking options can run into the problem where token holders would rather stake than provide liquidity. This can lead to low liquidity for the token to the detriment of the ecosystem and token holders as a whole. Staking LP tokens instead of NOTE tokens obviates this issue.
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80/20 LP tokens generate trading fees and BAL rewards with limited impermanent loss. These revenue streams provide additional earnings to stakers on top of buybacks with limited downside.
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80/20 LP tokens ensure that the staking pool holds a material amount of ETH. This is important in the event that there is a protocol hack or insolvency and the assets in the staking pool are used to cover that shortfall. Holding ETH limits the amount of NOTE that the protocol will be forced to sell during a crisis at fire-sale prices.
Open-ended staking:
NOTE holders will be able to stake without a fixed lockup term, and there will be no option to stake for a fixed term. sNOTE holders will be subject to a 15-day cooldown period upon redemption. We believe that removing fixed lockup term options is preferable for the following reasons:
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Requiring fixed terms would likely result in less overall take-up of the staking program. Providing multiple fixed terms would involve directing the majority of the economic value generated to stakers in the long terms to account for their opportunity cost. The net result of this might be that staking NOTE is only sufficiently attractive for a small number of holders and so we wind up with a small overall amount of NOTE staked. Ultimately, we believe that both the protocol and NOTE holders as a whole are best served with a maximal take-up of this program. Providing open-ended staking means that we don’t need to compensate stakers for opportunity cost and should result in a significantly larger aggregate take-up of the program.
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Fixed term lockups are very risky for the staker. A staker may lock up their NOTE assuming a certain APY only to get progressively diluted by new stakers and be unable to unstake until the end of the term. This risk decreases the potential attractiveness of a long-term staking option and could further reduce the amount of take-up of the program.
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Open-ended staking is simpler. Multiple terms/options adds substantial complexity which would increase resource cost, time to production, and risk of bugs.
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Open-ended staking preserves sNOTE fungibility, transferability, and compliance with the ERC20 standard. Fixed terms would result in non-compliance with the ERC20 standard and would obstruct the potential for sNOTE to be integrated elsewhere in the DeFi ecosystem.
Treasury manager:
Buybacks will be effected by a treasury manager. This manager will be able to take a prescribed, limited set of actions and will not be able to access any assets in Notional beyond the assets in Notional’s reserve. The manager will process the purchases manually and opportunistically so as to mitigate front-running risks. Treasury manager appointments will be decided upon by NOTE holders through the normal governance process.