Introducing Liquid Lockers & veSDT

Boosted voting, bribing, liquidity, and boosted yield. No trade-offs.

11 min readFeb 9, 2022

Live at https://lockers.stakedao.org

As Stake DAO celebrates its first anniversary, we can look back and see how decentralized finance has evolved over the last year.

If Ethereum is the backbone of DeFi, then Curve has become its heart, with a whole host of yield-boosting protocols using it to offer the highest yields possible to their users (the now-famous ‘Curve Wars’).

However, the goalposts have quickly shifted from the boost to voting rights, from money to power. First, with bribe.finance, and then with Votium and Votemak, various protocols have begun to monetize their governance and transform utility into an additional cash stream.

Now that the market recognises the fundamental value of voting power, this value must be given back to users owning those governance tokens.

The Problem

Currently, if a person or protocol wants to use their lockable tokens (CRV, FXS, etc.) for governance or for boosting yield, they are limited to the following options:

Lock on the native protocol, allowing them to benefit from a small yield and to vote and receive bribes, potentially delegate their boost, but losing liquidity over the asset;
Or use a locker, benefit from boosted yield and yield farming, be able to exit with a limited penalty, but lose their governance power and the bribes corresponding.

By forcing a choice between voting power or yield, these options impose restrictions on users. But what about being able to benefit from the best of both worlds? That’s where Stake DAO’s Liquid Lockers (soon to be released) come into the picture.

1. Yield, Governance, Flexibility — Liquid Lockers

Liquid Lockers unlock ALL the power of lockable tokens, whilst imposing zero restrictions on their use:

Maximised yield
Liquidity
Governance power / access to bribes
Cross-chain accessibility

As veTOKENS become the norm across DeFi, Stake DAO will provide straightforward access to all the powers of every veTOKEN, on every chain.

To be successful, this new architecture will be i) on-chain and decentralised, ii) protocol and chain agnostic, and iii) empowering users who lock their governance token on Stake DAO with all the benefits of locking those tokens in their native locking, plus additional benefits. The first protocols to be integrated will be Angle, Frax and Curve, with a string of others in the pipeline (Qi DAO, Balancer, etc.). This protocol agnostic infrastructure will provide an easily scalable launchpad that is simple to replicate on top of new protocols.

a. How do Liquid Lockers work?

Each Liquid Locker will have a reward contract and a Curve Factory Pool, to ensure high profitability and exit liquidity for all users.
The first Liquid Lockers will be ANGLE, FXS and soon after CRV (current users of the Curve PPS will be part of the CRV locker, with a migration needed). Users will be able to lock the designated token in the Liquid Locker and receive sdTOKEN in return (e.g sdFXS). The initial FXS is then locked on the native protocol, which in this case is Frax, for four years, and perpetually relocked. This locking allows for maximum rewards to be generated which will be the fuel to boost v2 strategies.

Users with sdTOKENs will then be able to stake them on Stake DAO, entitling them to:

Native APR (e.g veFXS APR%)
Share of 8% of all the corresponding boosted strats rewards
The ability to sell voting rights of the underlying asset (in this case veFXS)
The proceeds from selling exceeding boost
Additional SDT incentives (this will be temporary and cease over time)

Alternatively, they will also be able to stake their tokens in the Curve Factory Pool allowing them to earn trading fees, CRV rewards, and added SDT (and potentially FXS) incentives.

Users with sdTOKENs will be able to exit whenever they want through this Curve Factory Pool without affecting the boost of V2 strategies. Conversion rates can/will fluctuate based on demands for either token.

As the ‘Liquid Locker’ vault accumulates governance power, the voting rights will be exercised by those who are deposited in the Liquid Locker. This way, the governance power of the underlying token is never decreased and allows users to maximise their returns while maintaining their voting power.

b. Boosted voting power

Liquid lockers are your key to DeFi governance power. As you may know, this means that you can benefit from additional incentives in the form of bribes. For sdTOKENs this means that any DAO or individual can offer bribes to sdTOKEN holders directly through the Liquid Locker UI. sdTOKEN holders can vote accordingly and claim bribes whenever they please.

On top of this, users that deposit their TOKENs into Liquid Lockers and stake them into the reward contract can vote for gauges and on governance proposals of the underlying protocol but also boost their voting power on gauges and governance proposals if they own veSDT (see primer on veSDT below).

Using the same boost formula as the Curve’s CRV reward logic, sdTOKEN holders will benefit from boosted voting rights depending on their veSDT balance. At a given point in time, the user voting power is:

The maximum voting right boost users can have is therefore 2.5x compared to users who have no veSDT. Depending on the share of the sdTOKEN in the Curve factory pool, users who don’t own veSDT might be able to vote with c. 1 vote per sdTOKEN, while users owning veSDT could receive 2.5 votes per sdTOKEN or even more. SDT would therefore become a tool to boost your voting power across DeFi.

Example:

Let’s take a simple example where only 3 users (Peter, Paul and Mary) have each locked 500 CRV in the CRV Liquid Locker. They each receive 500 sdCRV.

Peter stakes his sdCRV in the reward contract and has no veSDT
Paul stakes his sdCRV in the reward contract and also holds 100 veSDT, representing one third of the total supply of veSDT which is at that time 300 veSDT
Mary stakes her sdCRV in the Curve Factory pool along with 500 CRV, and owns 100% of the factory pool, benefitting from CRV rewards from the pool

The Liquid Locker governs a total amount of 1,500 veCRV, so on average, Peter and Paul have multiplied their voting power by 1.5x. However, Paul has some veSDT which boosts its voting power over Peter’s.

According to the formulas detailed above, Paul’s adjusted balance is equal to 400 while Peter’s adjusted balance is equal to 200. Therefore, Paul is able to vote with 1,000 veCRV and has multiplied his veCRV vote by 2. He can therefore benefit from twice the same amount of bribes. On the other side, Peter who has no veSDT is able to vote with 500 veCRV, which is what he would have been able to do if he had locked his CRV for four years. Note that this is just an example, and that with different figures, there could have been a situation where Peter would have only been able to vote with between 400 and 500 veCRV.

On top of those boosted voting rights, they are also benefiting from the performance fees coming from all Curve pools, and SDT rewards also boosted with veSDT.

c. Cross-chain Liquid Lockers

Beyond the ability to vote with assets staked in Liquid Lockers, another big innovation will be to build those Liquid Lockers across multiple chains, bringing utilities to governance tokens on new chains. Until now, users farming CRV or FXS, or any other token on Avalanche, Polygon, Harmony, etc. have had no other choice than to sell, hold, or bridge back to mainnet. They weren’t eligible for locking rewards or any kind of voting right. With cross-chain Liquid Lockers, they will be able to stake their CRV or FXS, vote with it, on gauges and governance decisions, receive fees from Stake DAO Liquid Locker strategies, receive bribes for selling their votes, and receive SDT incentives.

2. Strategies

With Liquid Lockers, all existing pools of underlying protocols that have a gauge will be represented by a strategy (including across multiple chains). This means that a whole new series of strategies will be shipped: all Curve pools with gauges, all Frax gauges, all Angle gauges, and more to come as new lockers are shipped. Note that new strategies won’t replace the old ones but rather work in tandem with them. New strategies will be more decentralized and require less manual maintenance than existing ones and provide a better user experience through fewer transactions and gas optimisations.

a. Adoption of a Farm & Stake model

Liquid Locker Strategies (LL Strategies) will move away from the traditional ‘farm & dump’ model. Users are now free to decide what they do with the rewards generated from each strategy. Unlike the current iteration of strategies that automatically compounds, the new strategies let the user decide whether to stake or sell the farmed tokens, with the option to auto-compound set to follow.

b. Optimising the claiming function

With the LL strategies, there will no longer be a need to stake your Stake DAO LP tokens in “LP farming”, as we will direct SDT rewards directly to the strategies. The new Stake DAO rewards tab will allow the user to see all their farmed rewards in one place. They will simultaneously be able to select which rewards they wish to claim, which rewards they wish to ‘claim & stake’ and will also be able to ‘claim & stake’ all with a single transaction.

c. Decentralisation of Earn & Harvest functions

To minimize the manual or off-chain automated work done by the DAO and allow for more user participation in DAO operations, the Earn and Harvest functions will be merged and decentralised. Any user will be able to call the Harvest function directly from the UI, and receive up to 1% of the total claimed rewards. At every harvest, funds from the vault will be sent to the strategy.

d. Fees breakdown

There won’t be any withdrawal fee in LL strategies. There will only be a 15% performance fee and up to 1% harvest fee automatically distributed to various addresses at every harvest as follows:

8% of claimed rewards redistributed to the respective Liquid Locker
5% for veSDT holders
2% to cover DAO costs and sent to DAO treasury
Up to 1% to the harvester

3. veSDT and Curve tokenomics

Liquid Lockers will bring hundreds of strategies to Stake DAO, and the current mechanism of manual adjustment of inflation proportional to DAO earnings will not be sustainable in the long term as it would require too much maintenance. SDT will need to be the master token that decides everything on Stake DAO, particularly on inflation direction.

We therefore introduce veSDT, (same mechanics as veCRV), which will be the new governance token of the DAO, replacing xSDT. It will also provide a boost on SDT incentives, and on Liquid Lockers’ voting power. xSDT rewards will be deprecated, and we will ask users that have xSDT to unstake back to SDT before locking and receiving veSDT. veSDT will also generate points for Stake DAO NFTs, but will no longer require users to stake into a separate contract.

veSDT = indicative token that represents having locked your SDT for a set amount of time. The longer you lock (up to 4 years), the greater your boost and benefits across the platform.

a. Governance

veSDT will become our new governance token, with holders being the only ones allowed to vote on governance proposals that will notably decide the inflation and reward allocation between different strategies.

Furthermore, as explained above, veSDT will provide a boost on Liquid Lockers’ governance power, allowing users to multiply their voting power on Frax, Curve, Angle, etc.

Inflation

SDT inflation will follow a fixed schedule, in order to provide clear visibility on the long term yields that users will be able to achieve.

Daily inflation will be defined and automatically adjusted on a daily basis with the following formula:

As Liquid Lockers are just one side of Stake DAO’s vision, which is to become a decentralised platform providing a fair gateway to DeFi for retail users, this new framework is designed to not consume the full 100m SDT total supply and leave a remaining 10m SDT for future use cases.

After the 0.2 SDT per block for existing Stake DAO strategies (i.e. keeping flat current strategies incentives, a part from Frax and ETH put strategies where incentives are moved to Stake DAO Locker Room), the inflation will be split as follows:

55% for Liquid Locker strategies;
10% for Liquid Lockers;
10% for Liquidity (ideally not used but kept as a security measure and bootstrapping tool);
25% for the DAO treasury, to be used with flexibility for NFTs, partnerships, bounties, bribes, protocol incentivisation, etc. and would require a DAO vote before they are used.

b. Boosted SDT rewards

Similar to Curve pools, veSDT holders will get boosted rewards on their stakes in Liquid Locker strategies, which would go up to 2.5x the base SDT reward. This way, users in strategies are always incentivised to lock their SDT reward to increase their future APY. veSDT holders who don’t have any stake in strategies will be able to delegate their boost (veBoost mechanism).

c. Vote-selling

Our new tokenomics will also allow veSDT holders to on-sell their voting power and/or their boost to other users in order to enable SDT holders to unlock the full power of SDT even with no stake in Liquid Locker strategies, thanks to a native bribing and boost delegation system.

While at first, the bribing mechanism will be comparable to what already exists in the industry, in the long-run an optimal auction mechanism will allow users to sell their vote at the best price while providing the best user experience to both sellers and bribers.
A book building algorithm will be used to provide clarity to buyers on the amount of votes they are able to buy, and more importantly, the price per vote they achieve if auction is to settle. Users who are selling their vote will then be able to see the APY achieved from selling, so that all potential gain is understandable in advance.

SDT inflation will be directed by veSDT through two gauge proxy contracts: one for all strategies and one for all lockers.

d. Fee rewards

Finally, 5% of strategies’ revenues generated during harvests will be automatically transferred to veSDT holders, in the form of a USD stablecoin LP token.

4. Liquidity

Liquidity is one of the main costs of the DAO. In this architecture, the DAO will aim to reduce that cost by taking control of its liquidity. It will stop the Uniswap and Sushiswap pools’ incentives and migrate its liquidity to a single ETH/SDT pair using Curve v2. This pair will be incentivised by CRV and Stake DAO will be able to vote for it.

Migration from Sanctuary and Palace

As explained, Sanctuary rewards will be deprecated, as will be the Palace. However, users won’t lose their Palace points. When the Palace points stop, a snapshot will be taken and the point system will be migrated to veSDT holders. More information will come in due course. Liquid lockers will also bring many more opportunities for new use cases for Stake DAO NFTs.

The Roll-Out

The work mentioned above has been the result of extensive effort and many long hours over the last several months. We hope that you guys will like it and look forward to your feedback!