Implement SYN staking in preparation of PoS Synapse Chain launch

aurelius

Summary

While the Synapse Chain remains in development, implement a temporary SYN token staking program on Ethereum that emulates what the Synapse Chain's Proof of Stake architecture will look like. This will help incentivize all token holders & network participants to encourage participation of staking SYN to network validators upon launch of the Synapse Chain mainnet.

Enable SYN staking Allocate 4.5 million SYN to be used over a 3 month period as staking rewards Smilar to other DPoS L1s, to unstake SYN, a 7 day "undelegate" period must be undergone. During this 7d period, rewards will not be earned. Once the 7d period is over, a user then has full access to SYN has they typically would. SYN rewards will auto-compound Background

As described in the docs, the Synapse Protocol launch is split into three main phases:

The Hadean Phase: A time of growth and rapid development, while having numerous guardrails ensuring safe deployment of new features. Validators are selected based on community governance and consensus. This is the current phase of the Synapse Protocol.

The Archean Phase: Further validator decentralization is introduced, primarily via the launch of the Synapse Chain, economically secured via Delegated Proof of Stake (DPoS). Validators and delegators are incentivized via SYN rewards and protocol fees. In order to maintain honesty of individual validators, and thus the security of the network, they will be subject to slashing of their staked SYN upon engaging in either negligent or malicious behavior. Delegators will be subject to the same slashing as their chosen validator. The Synapse Chain will create a cross-chain interoperable ecosystem, secured by SYN, connecting all chains.

The Proterozoic Phase: The Synapse DPoS Chain continues to grow and harden. The network is further decentralized by integrating Zero Knowledge Proofs allowing anyone to relay and settle cross-chain transactions.

While the network should always strive for as many individual validators as possible, allowing delegation is a crucial component to kickstarting network growth while involving a large base of tokenholders into the network validator process. Striving for pure PoS launch is unfeasible, as is shown by the launch of ETH2 resulting into a variety of either centralized or decentralized delegated staking alternatives via liquid derivatives.

As such, it's important to begin to increase network involvement now, ahead of the mainnet launch.

Proposal

The Synapse Chain remains in active development. In the interim, the Synapse DAO should initiate a 3 month single-sided staking program, that best emulates what prospective economic security of what the Synapse Chain would look like.

Allocate 4.5M SYN to be distributed to SYN stakers over 3 months. Each month, the Synapse DAO should review & evaluate progress of the Synapse Chain development to, if necessary, pause the program and migrate into staking on the Synapse chain. A 7 day "undelegate" period is initiated upon unstaking. Undelegated SYN will not participate in staking, and remains locked for 7 days. After 7d passes, users can then fully claim their original SYN + SYN staking rewards. This is necessary to protect the network against a mass unstaking event, which would result in lowered economic security. To save on ETH gas fees, rewards will auto-compound. On the mainnet Synapse Chain, it's more optimal to not auto-compound rewards, so as to have a 'proof of life' signal on delegators activity. Protocol fees will continue to accrue to the DAO treasury during this temporary staking program. Reasoning

The SYN staking program should be used to evaluate what future network participation would like given certain economic incentives. While currently the program would only involve SYN, in the future this inflation can be reduced via other mechanisms by future DAO proposals. Assuming a target 60% of SYN circulating supply participates in this staking program, this would result in roughly 18% APR / 20% APY. This is in line with similar DPoS networks, in terms of the staking yield and network participation of holders.

EnigmaFund

@Aurelius,

This is an elegant solution IMHO. Any view on how the rewards for $NRV 6 month vesters will be resolved?

Thank you for the amazing work you're doing!

Pv3

The proposal is perfect. Will there be any issues with single sided staking and governance voting?

AngryKatniss

Very excited to learn of Synapse chain. I've been bullish from the beginning. Thank you for continuing to spread your wings-we need other humans (like you) with that kind of future pacing growth orientation in real time reflexiveness. I can't wait to see what evolves. Bravo

brucey

Terrific to see this proposal.

A few questions come up:

Where are the SYN rewards coming from; are we redirecting any existing emissions, using treasury funds or issuing more? For the unstaking period, will people remain eligible for rewards? I saw you noted in Discord they wouldn't be eligible since they aren't validating anymore upon unstaking, but per mkickoutm's comment, perhaps that unstaking period can be used as a signal so that people remain eligible for rewards? Would you mind elaborating on what the complications would be to pick a different chain than ETH for the staking contract? While the auto-compounding is great, it still makes it more attractive for larger wallets. Is there going to be any floor amount necessary for people to delegate their SYN for validation? If so, it may be helpful to indicate that already so that people can accumulate enough.

Thanks.

socrates

Thank you for the post Aurelius. I'll try to quickly lay out why I think SYN staking is a bad idea for SYN holders and the future development of the protocol.

1. Exclusion from indices and punishing institutional holders - Punishing passive holders will make us less likely to be included in indices. Taking the DPI index, in their methodology they state, "The token’s economics must not have locking, minting or other patterns that would significantly disadvantage passive holders". In the future, as we try to get added to exchange-traded indices(like Grayscale's DeFi fund), including mechanisms to disadvantage passive holders could be a disqualifying factor. Additionally, when we had NRV and xNRV, I remember some large crypto funds were unable to stake their NRV for the single sided rewards for compliance and tax reasons.

2. Downward trend in price action & dis-incentivizing liquidity - 1.5M SYN/mo in new emissions means we'll need to absorb roughly $5.25M(at the current price of $3.5/SYN) in market cap every month to maintain the same price. DeFi markets are extremely reflexive and most users are looking at the price chart(and comparing to other coins), and not taking into consideration the yield that comes with it. New emissions will stunt token growth for no net economic gain to token holders. It will also discourage SYN/ETH liquidity since the "risk free" rate for SYN staking without IL risk has now increased. Additionally, users hoping to use SYN in lending protocols as collateral will be effectively paying the roughly 20%/year dilution since lending protocols can't allow stakedSYN as collateral with the 7 day locking period currently proposed.

3. Preparing for POS validation - I'm beyond excited for the launch of Synapse chain and POS nodes. For me, the strongest point of this proposal is getting users ready for this behavioral shift. That said, I don't think we'll learn much in terms of the objective of the proposal. In the post it says, "The SYN staking program should be used to evaluate what future network participation would like given certain economic incentives". Giving free yield on otherwise idle assets will of course attract a large % of the network to stake, that isn't very indicative of future economic security. When the POS chain is launched users will consider the risk of getting slashed and the efficiency of each node provider.

Sidenote: For the US and many other jurisdictions trading staking yields for token price through dilution simply means shifting taxes from capital gains which are taxed at lower rates to income taxes at higher rates. Not to mention, realizing income through staking could cause selling pressure since those taxes are due every year while unrealized capital gains can be postponed while users are holding the token.

If the community deems single sided staking to be necessary I hope we choose a lower emission rate as to not punish indices, institutional holders, using SYN as collateral and SYN/ETH LPs in such a big way. That said, I think this is a small decision in the grand scheme of things and the whole team has been killing it with pushing new features quickly. However this decision goes, WAGMI.

Googly

I must admit that for once, I disagree with the points made above for the following reasons

1/ Exclusion from indices and punish institutional holders
Grayscale Defi fund does include many tokens which "disadvantage" passive holders i.e. holders whcih are holding the token in their wallet without doing anything. It has tokens with single type staking (e.g. Aave or Sushi through xSushi) or high inflationnary tokens (e.g. Curve esp. until the recent fall in emission rates), so shouldn't be a massive problem here. And even if this was the case, the single staking we are talking about is pretty much a bridge until DPoS launches and, while I am a massive SYN bull, I don't unfortunately expect Grayscale to include SYN in the index next month.

Not sure about how funds approach it (not my area of expertise tbh so can't say albeit mindful that some may not stake for tax reasons) but imo it shouldn't be that different than for those tokens

2. Downward trend in price action & dis-incentivizing liquidity
Before SIP-05 comes into force, we are spending, around $11m per month into Pool 1 liquidity. This relatively high inflation rate is multiple highers than single staking and benefits liquidity providers (which are obv key to the protocol, don't get me wrong!). All that inflation comes with no restraint and liquidity providers are allowed to enjoy their rewards in the way they want. This means that compared to single-staking, (i) inflation is multiple times higher and (ii) comes with no constraints and can be sold the second it is generated. When we are now looking at a framework such as single staking, the reflexivity coming from those rewards should be significantly lower as until the launch of the chain, the rewards would be autocompounding and as such, in order to sell them, an delegate would first have to unstake and wait for the cool-off period. This means that in practice, the inflation from single-staking will be quite sticky and reflexivity here will be limited. You could even make the argument that a large portion of the supply would end up being locked (for at least 7 days) which is obviously price positive (but imo its not that much of a valid argument so won't go there, albeit its a key consideration when looking at L1). Obviously not what Synapse is aiming for, but high inflation protocols with autocompouding staking features (e.g. OHM) have shown an interesting dynamic here from a game theory standpoint and shown that inflation can be successful.
I think the comparison with LP though is a valid one and one we need to cleary think about. However, if I look at the APY right now on SYN LP, I note that it is (i) around 80% of SYN/AVAX, (ii) around 110% for SYN/ETH on Sushi, (iii) around 195% for SYN/ETH on Synapse. The delta here is extremely high (way too high for my liking tbh as it means we are overpaying SYN/ETH right now unfortunately) and I thereby don't foresee any scenario whereby an LP would remove their liquidity at 195% to get sub 20% on single staking (which carries also comes with an isolated position which has disadvantages from a risk management perspective). Additionally one of the stated aims here if for the protocol to own its liquidity, not to earn it, and over time reliance on liquidity providers should reduce as a function of ohm pro (aaaah i am booonding). For reference, somewhat of a shocking stat, but we spent in two months 25% of size of SYN/ETH in SYN rewards... (ie over $5m) + obv at one point cex listing which would reduce our reliance on a thick LP in Sushi

When it comes to lending protocols, I think this is a fair consideration. However, I note that most protocols have some sort of single staking inflation and are still included in lending protocols. For example, yield on Sushi (through xSushi) oscillates between 10% and 15% a year (was obviously higher before). Cosmos is around 10%-12% on staking if I remember well. Solana is 8% but there are ways to get much higher (you can get to 15%+ with a couple of extra steps btw, DM for more info :)). All of them are subject to the same situation. This could however suggest a slightly lower yield than 18-20% if this is a key point here.

3. Preparing for POS validation
My gut feel is that participation in single staking will actually be slightly lower than once DPoS launches, just a function of ETH gas fees being a higher disincentive than slashing.

Re: tax, I get your point on income vs. capital gains tax but imo US tax considerations shouldn't be the main consideration here (probably easier if you are non-US based).

As such, I think implemented single staking would be EV+ for the protocol