ARB Staking: Unlock ARB Utility and Align Governance

[parkienator]

linking the discussion at ens given there are multiple parallels to the discussion here (liquid staking of governance token) Liquid staking for $ENS - 🗳️ Meta-Governance - ENS DAO Governance Forum

[0xlide]

@Frisson

Forum Activity Score

Hello @Frisson
I don’t know how this score is calculated, but I think there is a high possibility that the quality of the forum will deteriorate.

[dennison]

I think Karma’s scoring works to filter out spam. In either case though it would be pretty easy to build in something like ChatGPT to evaluate quality for forum submissions to screen for low value responses.

[0xlide]

I don’t think it’s a good idea to score actions on forums and link them to rewards. This means that posts on the forum are defined to some extent by how the score is calculated. However, I am very interested in the method of using ChatGPT, could you please tell me more about it?

[KenB]

I’m for this proposal.

[mmurthy]

gm! Founder of Karma here. I’m very excited for this proposal. I see a number of questions/concerns about Karma score I would like to address:

1. Karma score displayed on Tally’s website today is lifetime score (since the delegate started participating in the DAO). However, we also calculate last 30 days, 180 days, 1 year etc. scores too. We can simply configure for any timeframe the DAO wants.

2. We have spent a LOT of time trying to make the score less gameable. A while back we moved away from absolute numbers to percentiles. Example: Someone can not simply spam the forum and increase their forum score. Even if they do it, it will only increase the value by single digit. We also do basic checks for spam but have already started using chatgpt for arbitrum delegate compensation and we will extend it to forum content. I acknowledge some gamification will still happen (Goodhart’s law) but we will continue to improve.

3. Our dashboard shows score breakdown. Click on any score or forum score. Metrics and weights are already open source. If this proposal passes, we will start storing granular raw data that anyone can download and calculate the score and verify themselves.

4. The scoring logic is not set in stone, really the community here has complete say on how scoring should work.

I am happy to answer any other questions.

[cp0x]

Is it possible to try storing this data on a blockchain?
Firstly, it would be impossible to change them (which is important).
Secondly, this data will always be available

[jameskbh]

This is an interesting proposal, but it needs more discussion. In my opinion, the timing is not right yet.

I echo the concern raised by other delegates about this proposal, as this is possibly the only source of revenue for the DAO currently, and the current ETH “warchest” will be depleted by the BoLD validator proposal (if it passes Tally).

@Frisson

We propose that 50% of surplus sequencer fees be allocated to ARB stakers. The existing DAO treasury of ETH from surplus sequencer fees would be unchanged, only future fees would be affected.

As we see increased awareness about having a “DAO Budget” or some type of treasury management, my position is that we should have those initiatives in place before committing to this staking model.

[mmurthy]

It is possible and we have to put it onchain anyway for staking contract to read. We are evaluating various approaches.

[bendi]

Hey all, Ben from ScopeLift here. For context, we built the UniStaker contracts for the Uniswap Foundation and would be involved in bringing this proposal to fruition if it is passed. I love the quality of the discussion we’ve had here so far—really thoughtful and great points raised all around. Unsurprisingly, I’m in favor of this proposal, but several responses have made me think a bit more deeply about my opinion. Allow me to expand a bit on a few points:

On Timing & Attack Incentives

Several responses have indicated the timing doesn’t seem right, and implied the DAO has more time to work out a solution before a governance attack becomes a serious issue. I want to highlight a few reasons I think we should be careful about assuming these kinds of attacks are still far off.

Rapid price changes can swing the incentives quickly. Imagine that, as one thought experiment, ETH price quadruples to ~$13K post ETF launch, while ARB stays the same or drops. It’s not implausible to imagine a scenario where the incentives are 4-8x stronger in only a few months. This isn’t a prediction, but just an example of something that’s well within the realm of possibility and could happen fast.

We also shouldn’t assume an attacker has to buy the ARB they will use to execute the attack. ARB in lending markets can be used for an attack while paying only a few days worth of interest. This means acquiring the ARB needed to execute an attack can be much cheaper than the actual price of the token would imply. (Importantly, offering rewards to users who participate in governance staking, by giving holders a more productive way to get utility from their ARB, will also decrease the amount of ARB available cheaply in these lending pools. This is another way in which staking helps improve governance safety).

Finally, as @Frisson alluded to earlier, looking only at the treasury assets underestimates the upside for an attacker. To a certain degree (with some mitigation from the security council, to be sure) the full TVL of the Arbitrum networks come in to play. An attacker can also gain further upside externally by doing things like shorting ARB, longing assets that stand to benefit from ARB being attacked, draining AMM pools with ARB acquired from the treasury, etc… What this means is that the upside for an attacker is likely to be significantly more than the ETH held in the treasury.

In short, while a naive calculation of treasury assets vs. cost of the ARB token might imply a certain cushion of economic security in the short term, the reality is likely worse, and could become much worse much quicker than one might expect.

Impacts on Token Valuation

I think @swmartin made a really interesting point here that’s worth considering:

If we tie the token to insignificant revenue values, we introduce the risk of people valuing ARB relative to its revenue generation and could face compression of multiples.

What’s implied is that the current value of the ARB token enjoys a speculative premium that might erode if investors have “real” numbers to do calculations on. It’s possible this could play out to a certain extent, but I think it actually highlights why moving in this direction is so needed.

Right now the incentives to hold ARB are purely speculative. As such, they are also fickle. A shift in the narrative around Arbitrum—or even just around crypto or L2s in general—could crater the token price, exacerbating the security issues as discussed above. Rather than fearing providing preliminary rewards to ARB holders will erode the speculative premium, we should be concerned that speculative premium is the only thing providing ARB with value today.

In the long run, this is just not sustainable. I think there are enough investors sophisticated enough to understand that traditional multiple calculations will not look great at first. However, demonstrating that ARB is a productive asset, one that will reward holders for their participation in governance stewardship, anchors ARB’s value in something real and tangible. If we shake out unsophisticated holders expecting short term gains, in exchange for sophisticated investors who can recognize the longer term potential, I would consider that a win.

Defining “active participation” and Gameability

I share a lot of the concerns voiced by others about the difficultly of defining “active participation” in a way that isn’t gameable or ineffective. What’s important here is that the system be designed in such a way as to allow this to evolve over time. I don’t expect we’ll get it 100% right on the first swing. That said, the work Karma is doing here seems like a solid starting point.

[naan]

To defend against an attack, can we reuse this idea from ENS? Control could be given to the security council.

Introducing veto.ensdao.eth

[jengajojo]

Thanks for the proposal tally team. Generally I do believe that this is a great way to align incentives between all stakeholders.

I want to reflag the concerns highlighted by @tane. UI games will be insufficient to align short term APY seeking behaviour from stakers towards long term decentralisation maximising goal of the DAO. Many delegation UI solutions have tried and failed at incentivising decentralisation with simple UI games.

@Frisson

introduce smart contract mechanisms that amplify or reduce rewards based on voting power concentration

This is a great solution and should definitely be implemented from the get go. Another way is to identify a max. cap for a delegate and all excess VP can automatically be redelegated to a pool controlled by a DAO led delegation program.

[EzR3aL]

I agree here, having it onchain makes most sense.
Right now I am not sure if it can be played somehow.

[Englandzz_Curia]

Thanks for coming up with this proposal, I’m a big fan of your work! However, I still have a concern about the karma points, similar to JoJo’s concern:

@JoJo

I see a potential fringe case: there is a delegate with a maximum karma score who goes away from their delegate duties without returning. They will likely have a score above 80 for a while, and so people would delegate to them based on this score. How long does this while last?

I would like to learn more about what could be the best scenario for this issue, and why 80? How did you come up with this number?

Additionally, I noticed that we also have a staking proposal on Arbitrum: Activate ARB Staking. There haven’t been any updates on their side recently. Does anyone know what’s happening with this proposal?

[EzR3aL]

Plutus abandoned their project after they messed up with their PLSARB asset. They switched their project to a DAO and now nobody is really taking care. Maybe some community member will pick it up though. But the proposal is definitely dead now.

[DisruptionJoe]

This is my favorite proposal. I’m ecstatic to see ARB utility taken seriously, but especially to see it for this use case. Similar to my Timeboost comment, I’d like to see the option for the DAO to regularly vote to update how much is paid out.

I also see the potential to update our governor to decay voting power if it isn’t redelegated at least once every x months or years. Really any creative solution to get people into a regular cadence ritual of updating their delegation.

I realize that some would argue that you would like to delegate and forget it. You trust that person you delegated to and don’t expect that to change. And you don’t want to have to pay attention. In that case, even as a holder, wouldn’t you want people actively involved to be driving the ship of your investment 3 years later? You could always reactivate your delegation if a hot topic came up.

[Mehdi_eth]

This is a great proposal, and the subsequent discussion was also insightful.

The benefits I see here are:

• Increased incentives to engage more in the DAO governance. I personally consider myself an example of this. (You will see me more engaged in the DAO discussions.)
• Adding utility for the $ARB token and joining the revenue-sharing narratives in the bull market. However, as others have mentioned, the DAO revenue is currently insufficient in Which I am Fine with This.

However, I want to express my concern regarding the Karma calculations of 80, as others have mentioned this. There is a risk of voting power centralization tied to a small number of delegates. Clearly, just a UI warning would not be enough to help with VP decentralization. There need to be incentives to delegate VP to smaller delegates at the smart contract level. As a small delegate, I would be more incentivized to participate in the DAO discussions then.

Regarding timing and attack incentives, @bendi raised great points. Things can change quickly, especially after ETH ETF approvals. Generally, asset prices move sideways 80% of the times and form strong trends 20% of the time. A rising trend in $ETH prices could justify an attack on Arbitrum DAO now that there is a clear conviction that ETH is long-term bullish due to the ETF. Attackers can also be sophisticated actors by borrowing some ARB tokens on DeFi protocols and hedging their position on PERP markets, making it easier to attack the DAO than we might think. Therefore, we need a plan to avoid possible black swan events.

I also want to point out some positive effects and sentiment around $ARB holders when Arbitrum chains get congested and fees start to increase due to a Most anticipated event such as LayerZero TGE. In such events, $ARB holders will feel more satisfaction as they benefit directly from the earned revenue. I experienced the same feelings after the implementation of EIP-1559 when the $Shiba memecoin congested the Ethereum network and burned a notable amount of ETH.

[Englandzz_Curia]

Hey @Frisson ,After discussing with you on the governance call, here are the full details of what I’m thinking:

I suggest that the yield for delegates with a lower number of ARB but meeting the active delegate criteria should be higher than for those with many delegates. Currently, there’s an incentive program for those with at least 50k ARB. This adjustment will support active delegates who contribute meaningfully to Arbitrum and encourage low ARB delegates to be active. It would also help distribute voting power more fairly and enhance DAO security. The proposal mainly benefits delegators, so this change would also compensate active delegates.

Here is an example of categorized model that I could think of right now:

Tier-based Approach

The Tier-based approach divides delegates with Karma scores above 80 into tiers based on their ARB delegates. The highest yield is given to those with the lowest ARB delegates. This method is fair because it rewards active delegates, even if they hold fewer ARB. It encourages smaller delegates to participate more in the DAO to build a reputation and have a chance to participate in the delegate incentive program. It is also simple and easy to understand. However, defining tiers can be difficult and may lead to disagreements. Additionally, some delegates might try to adjust their ARB holdings to fit into a more favorable tier.

Example:

Tier delegate Criteria: Delegate with the lowest amount of ARB holdings with a Karma Score > 80.

• Tier 1 (lowest ARB delegate/highest yield)
• Tier 2
• Tier 3
• Tier 4…

Voting Power Ranges

The Voting Power Ranges approach groups delegates based on their ARB holdings. Lower ARB ranges receive a higher yield. This method provides more detail by dividing delegates into different groups, ensuring fair distribution. It balances rewards between active participants with a low number of delegates and those with a larger number of delegates. However, this approach is more complex and involves more calculations. Determining the exact ranges can also be contentious.

Example:

Voting Power Ranges:

• 0-1000 ARB
• 1001-10,000 ARB
• 10,001-50,000 ARB
• 50,001-100,000 ARB
• 100,001-500,000 ARB
• More than 500,000 ARB

Weight Distribution

The Weight Distribution method assigns weights to different ARB holding ranges. Yield is distributed based on these weights, with lower ARB ranges having higher base weights. This ensures a proportional distribution. This method is flexible and easy to adjust. Smaller ones receive a higher yield. However, the calculations are more complex and require precise formulas.

Example:

Weight Distribution

• 0-1000 ARB: Base weight 3.0
• 1001-10,000 ARB: Base weight 2.5
• 10,001-50,000 ARB: Base weight 2.0
• 50,001-100,000 ARB: Base weight 1.5
• 100,001-500,000 ARB: Base weight 1.0
• More than 500,000 ARB: Base weight 0.5

[imort]

It is nice to have thoughtful discussion. But.
As we notice 4th July 2024 has come and arb had terrible price action. I believe, flexible enough to tune later implementation should be pushed asap.
We cant afford to make mistake, proper development and audit is a must. But. Investors took a hit, running incetives got devalued. It is shaking people’s confidence in the whole ecosystem.
I am sorry that I cant add something meaningful to the proposal itself, only expressing urgency.
WAGMI

[san]

The following comment represent the views of @SavvyDAO as I’m part of their team as Governance Analyst:

Thanks for this proposal @Frisson! It’s a great way to boost security and get more people involved in the DAO governance. Redirecting surplus ETH to active ARB holders is a smart move. The use of Karma Scores is interesting, but it could be improve adjusting it to focus on recent activity to avoid concentrating power among older delegates. Adding measures to balance voting power would also be beneficial.

The introduction of liquid staked ARB tokens and a fair cost structure are strong points. Address the concerns about timing and power concentration, and this proposal could significantly strengthen the DAO by keeping things secure and ensuring ongoing participation.