Ouroboros Governance Review #2: ARB Staking, LayerZero / Lido wstETH OFT, Uniswap's Ekubo investment
Welcome to Ouroboros Governance Review where we share interesting governance actions and their respective implications. This week, we will be covering:
Arbitrum's staking proposal
LayerZero / Lido OFT controversy
Uniswap investment into Ekubo
None of the following is financial advice.
Governance Action #1: ARB staking
Governance proposal: Plutus DAO has posted a proposal to create a native staking model. The staking mechanism allows ARB holders to lock their ARB for up to one year in exchange for ARB emissions. Rewards will be distributed based on the weight in proportion to their lock time. An early exit penalty of 0-60% will also be enabled depending on duration till unlock date.
The objective of the proposal is to increase interest in the ARB token and reward long-term aligned stakers with yield while penalizing mercenary capital and short-term actors.
Current options include: funding the staking rewards with 100m/125m/150m/175m ARB (1.0% to 1.75% of total supply) from the Arbitrum DAO treasury or do not fund. Staking rewards will be distributed over a 12 month period. The following table shows the estimated APR based on the total circulating ARB supply:
Implications: We think the estimated APRs are attractive for a one year lock. We expect locked ARB % to settle somewhere around 50% (CRV lock rates are ~50%), implying 16% to 27% APR. DAO airdrop recipients, who collectively received 113m ARB and have ~70m ARB undistributed, will likely lock their ARB for governance purposes.
The introduction of a lock mechanism benefits PlutusDAO as well as plsARB (a ARB liquid locker). PlutusDAO had introduced plsARB when the ARB token was first launched which attracted ~9.5m ARB of TVL. As there was no ARB staking available (no APR) and locking ARB was one-way, plsARB had since been sold to a 53% discount.
If the proposal were to pass, the utility of plsARB as a liquid locker will likely increase and we expect to see the discount reduce to ~30% (CRV lockers are all at sub 10% discount).
Likelihood of passing: Medium to high. Snapshot vote has 175m ARB leading with 53.5% of the votes, this is followed by 21.6% for 125m ARB, 19.0% for 100m ARB, 5.4% for no staking, and 0.5% for 150m ARB. Around 67m ARB votes have been casted, and we believe the current result could be quite easily swung as large delegators vote. The vote ends on 6 Nov'23.
Governance Action #2: LayerZero / Lido OFT controversy
Controversy around an unauthorized bridge created by LayerZero for Lido's staked Ether (stETH) token: On 26 Oct'23, LayerZero publicized a Omnichain Fungible Token (OFT) standard for wrapped staked Ethereum (wstETH) between Ethereum, BNB Chain, Avalanche.
This was launched into production without express approval from Lido and caused controversy as LayerZero did not have Lido DAO's permission to deploy. A proposal was concurrently posted for Lido DAO to accept wstETH on Avalanche and BNB as native.
This unilateral action sparked backlash from the community, including Hasu. Arguments centered around LayerZero applying inappropriate pressure on Lido, and marketing the bridge as though it was official, thereby making it difficult for Lido to fairly consider alternative bridge solutions given that LayerZero has already directed users to their offering. Other concerns include advertising an OFT standard not audited by the DAO.
Implications: While the forum discussion is centered around marketing the OFT product as official, we have also seen other bridge providers chiming in and proposing their own solutions. In our view, this should accelerate the adoption of native wstETH on alternative chains, thereby reducing liquidity fragmentation.
Likelihood of passing: Low. The proposal is unlikely to move to snapshot in its current form.
Governance Action #3: Uniswap investment into Ekubo
Governance Proposal: In a temperature check, Uniswap DAO has voted to invest $12m worth of UNI tokens from its treasury to support Ekubo (an AMM on Starknet) in exchange for 20% share of the Ekubo token which implies a $60m FDV. Ekubo will create a governance token within one month of the proposal. The founder of Ekubo had previously joined Uniswap Labs in Apr'20 and was an engineer lead and later an advisor to the team.
Implications: The UNI tokens will likely be used to fund operations for Ekubo operations, leading to selling pressure. The implied valuation of 60m FDV which seems rich considering that Ekubo only has $2.9m in TVL and Starknet has a TVL of $127m.
Results: While a majority of forum participants were against the proposal (including Wintermute, StableLab, KeyRock, L2BEAT), the temperature snapshot vote saw 64% (of 33m participating UNI votes) voting for the proposal. Separately, Uniswap recently moved to add a 0.15% fee to its frontend which will accrue value for Uniswap Labs (equity, not tokenholders).
These debates call into question of equity vs. tokenholders (especially when incentives are misaligned). We think if tokenholders do not benefit from the protocol (via fees or governance), then the value of such tokens will eventually trend towards only mimetic value (which can be low or zero).
Other governance actions
Protocol / tokenomics changes
Aave forum discussion by Gauntlet to find solutions to strengthen the GHO peg, which now trades at 0.97c. Separate proposal by TokenLogic to increase the GHO borrow rate from 3.00% to 4.72%.
dYdX proposal by Stride protocol proposal to implement stDYDX. Stride is the leading liquid staking provider in the Cosmos ecosystem.
Redacted Protocol proposal to build Marionette, a “voting optimizer for bribe markets” that helps users earn optimized rewards, and helps partners get an efficient and fair bribe market.
Sushiswap proposal to cease Kanpai 2.0 and revert to the prior model of 100% of fees accruing to xSUSHI holders, and elect a governing council.
Capital deployment
AavegotchiDAO proposal to convert the 6.5m DAI held in its treasury into 3m sDAI and 3.5m sFRAX.
Stargate proposal to extend its incentive program on Velodrome by deploying $25K worth of STG weekly as voter incentives on Velodrome's STG-USDC pool, maintaining $5m of STG-USDC POL to farm VELO rewards, locking 50% of VELO as veVELO and compounding 50% into STG-USDC POL. veVELO will be used to vote for the STG-USDC pool.
Notional has been running a series of votes in preparation for its v3 launch. They have approved its incentive program as well as obtained approval to list cbETH, GMX, RDNT and ARB on Notional v3.
Aura proposal to collaborate with Aave and swap 238,544 AURA (~$200k) for 2,965.35 AAVE. Aura will then convert the AAVE into stkAAVE and delegate any voting power to Karpatkey.
Osmosis proposal to request for community pool funds to incentivise liquidity on Osmosis for the DYDX token from the new dYdX chain. A total of 200,050 OSMO ($83k) is requested. Broken down, 200,000 OSMO is for the DYDX / USDC pool over 50 days, and 50 OSMO is for the gauge creation fee.
Paraswap proposal to enable the Foundation to allocate the remaining portion of the OP grants for the uses initially assigned in the Grant Application, as well as using the ARB grant for the uses of Research and Development.
