LPL Migration Update

On Monday, December 5, we released an update regarding the LPL Migration.

Since then, we’ve received significant feedback from the community about this change. In response to this feedback, we’d like to provide the following update:

• Financial Review
• Financial Decision
• Community Reaction and Protocol Changes
• A Note from the Founder

Financial Review

In December 2021, we identified a plan to expand LinkPool’s product suite in 2022 in support of building platform tools that continue to accelerate the expansion and adoption of the Chainlink ecosystem. In this plan, we positioned our business as a platform developer with roots in Chainlink node operations.

By February 2022, we had conducted an initial Financial Planning and Analysis (FP&A), resulting in a Financial Model detailing a plan for growth with naas.link, market.link, Node Services, and Staking.

In April 2022, with market conditions starting to evolve and in order for us to de-risk the business, we began evaluating a token sale focused on business continuity.

By May 2022, we had performed several iterations on the Financial Model, informed by user and market research. By this point in time, we had aligned on several observations and two clear decisions:

• NaaS would not be a meaningful revenue center for at least 3+ years
• market.link would never be a meaningful revenue center, respective to other revenue channels
• Node Services revenue would remain relatively flat on a rolling twelve month basis
• Liquid staking would be a blue ocean with ample opportunity to add value and secure meaningful revenue
• Decision: Conduct an OTC token sale with KYC’d institutional investors, targeting 5% of total supply (from the LinkPool treasury)
• Decision: Pivot all engineering work towards liquid staking

By June 2022, the Terra fallout had happened, which had a meaningful impact on investor sentiment. Most institutional investors at this point were “pencils down”, pushing initial conversations to late July or early August.

By September 2022, we had been in touch with 44 institutional investors, of which 16 indicated strong interest in participation. With this queue of investors ready to move forward, all that was left was the identification of a lead investor, whose role is to perform the lion’s share of due diligence and anchor the token valuation.

On October 31, 2022, we made this tweet about an operational update, describing the Growth Fund as 25% of total supply (34.99% of the LinkPool treasury). The intention of the growth fund was for staff incentivisation (attracting and retaining) through 2030 and the aforementioned token sale.

By November 2022, we had progressed to the final round of due diligence with a potential lead investor. The last step was a meeting with the partners, and by all accounts, the indication seemed to be a go-forward.

On November 7, 2022, the initial disruption from FTX began spreading through the wider blockchain community.

On November 9, 2022, we posted this tweet announcing the Snapshot to take place on November 25, 2022. On the same day, we were scheduled to meet with the lead investor, but the meeting was postponed to November 16, 2022.

On November 16, 2022 the meeting with the lead investor was postponed without a scheduled followup date.

On November 18, 2022, the lead investor indicated they would not be moving forward with the round. By this time, it was clear investor sentiment overall was bearish due to the FTX contagion, and a token raise would not happen optimistically until, at minimum, Q2–2023.

On November 23, 2022, we laid off 33% of staff, cut salaries of the remaining staff by 30% (set Jonny’s salary to $0) and implemented extreme cost cutting measures on infrastructure (our largest single expense) by 60%.

On November 25, 2022, we posted this tweet confirming we performed the snapshot.

On December 5, 2022, we posted this tweet announcing the LPL Migration.

Financial Decisions

When market conditions began to shift in April 2022, we forecasted a runway into 2022-Q4.

To be clear, a business focused on pure node operations without (a) platform development (b) a token distribution model is healthy and sustainable.

Up until the period between November 18–30, 2022, the plan had been to introduce the SDL token alongside the LPL token as opposed to a migration. We were genuinely excited about what this meant for LPL holders in both the near and long-term, and promoted it as such.

Upon realizing the raise would not happen, it became clear that we would not be able to extend cashflow going into 2023. Without dramatic cuts, node operations would cease to exist, as would LPL revenue. Despite the cost cutting measures, on November 23, we were still forecasted in the red, as follows (approximate monthly averages):

• REVENUE: node operations
• LESS
  - Community distribution: 28.5%
  - Gas cost: ~40%
  - Infrastructure costs: ~25%
  - API subscriptions for node services: 8.5%
• NET INCOME: -2.00%

This excludes any other expenses, such as payroll, tax and benefit, smart contract audits, administrative, general expenses, accounting, corporate, etc. It also excludes any upfront costs for bootstrapping a new product such as stake.link.

It quickly became clear the only viable option for business continuity was to deprecate the LPL token. Based on doing so, we were able to get the forecast in the positive with a buffer of 4.70–5.99% of operating expenses, a buffer which is necessary given the volatility of operating in the blockchain ecosystem (e.g., fiat conversions, spiking gas costs, infrastructure, etc).

The decision to deprecate the LPL token was made in a compressed period of time between November 18 — November 30. Logistically, this change required immense change management from an engineering perspective, operations, and communication. In parallel, we were managing the internal decision to reduce staff whilst also prepping for the launch of stake.link, which required engineering, business development, marketing, and operational work.

As we considered the deprecation of the LPL token, it was important to offset this with a value add to protect the interest of token holders. The first draft economics for stake.link included an 8% core contributor fee, 15% delegation fee, and 10MM SDL tokens minted to LinkPool, the same as other node operators, distributed pro rata to LPL holders per the snapshot on November 25. With the revised plan to deprecate the LPL token, we increased the allotment for LinkPool as the founding member from 10MM to 50MM as a means to increase the overall concentration for LPL holders. To counterbalance this, we increased the delegation fee from 15% to 20%, benefiting all SDL holders (node operators and LPL holders), which was made possible by reducing the core contributor fee (which initially was directed at LinkPool, to be distributed through the LPL token) from 8% to 3% (we also received feedback from node operators that 8% may be too high). The overall thinking was this was a net positive for LPL holders who would now hold 5X the SDL they otherwise would have held, while also increasing the long-term value proposition for node operators and retail stakers.

These changes were made in good faith, to protect the future of LinkPool, LPL holders, and stake.link.

Community Reaction and Protocol Changes

It is now abundantly clear the community at large was disappointed in aspects of these changes.

While we are highly optimistic about SDL and the stake.link platform, we see and value the community’s perspective in this regard. We are addressing this in a few ways:

Transparency: provide clear, transparent backdrop to the nature and intent of decisions, starting with this article

Resources: provide additional content and tools to understand in specific terms and numbers the vision and value proposition for SDL

• stake.link Documentation
• LINK
  - Staking Reward Calculator
  - Reward Rate
  - Distribution History
• SDL
  - Staking Reward Calculator

Governance: Propose formalized governance process (target: mid-January 2023)

Proposed Protocol Changes: The community has already provided recommendations and proposals, which we are carefully reviewing. In addition, we have laid out the following proposals in response to concerns raised by community members, which will be presented for vote as soon as governance is established (which we expect to be ready as early as January):

• Community SDL Airdrop: Perform SDL Airdrop as detailed in the below “Community SDL Airdrop” section
• SDL Token Restrictions: Node operators who want to withdraw SDL after their vesting schedule can only do so after raising a proposal that contains the proposed usage for the SDL. This will promote SDL only being used for good use cases.
• Burn token capability: In the unlikely event a node operator leaves the protocol in the future, a proposal would be raised and voted on. If passed, all of their allocated SDL that is locked within the pool will be burned.
• Elimination of SDL DAO Treasury: Burn the SDL DAO treasury, and instead only mint SDL on demand per governance approved proposals for specific initiatives. Note: estimate 370,000 SDL minted for governance approved specific initiatives, such as liquidity incentives for a curve pool, and for 3rd parties to advise on governance formation

Additional Considerations:

• Curve Pool: This week, we stood up a curve pool for stLINK/LINK to enable further DeFI composability, increasing the utility of stLINK.
• Enable ETH Staking: Propose a roadmap for releasing ETH liquid staking on stake.link, detailing how that benefits current SDL holders; the contracts are built and require moderate operational, business development and engineering work for go-to-market
• Node Operator SDL Mints: Some community members have speculated that future node operators will receive the same SDL allocation as the first cohort of node operators (10MM each), resulting in amplified dilution irrespective of increased rewards. This is not the case. The expectation is less SDL will be minted for future node operators, who must submit a proposal, subject to governance, outlining how the net-economics of the platform will increase based on the staking allocation they are bringing to the protocol. The node operator council will propose an amount of SDL to mint based on the expected reward increase, accounting for dilution, and this will also be subject to voting.
• Early Access Staking Capacity: We received feedback that the LINK staking capacity per one SDL was initially too low, and the process and communication around increasing the multiplier was inconsistent, resulting in uncertainty around knowing when to be able to check on capacity increases for staking more LINK. We’re reviewing this and will raise a proposal for an improved process on future pool size increases. Community suggestions welcomed.

Community SDL Airdrop

Subject to governance approval, we propose to increase the SDL allocation for stake.link community members as a means to address concerns regarding community governance weight.

Eligibility Requirements

We envision an airdrop of 14,339,796 SDL tokens divided into equal thirds for the following three groups:

Minting Mechanics

• Perform an SDL, stSDL, and SDL/LINK snapshot using the datetime stamp of the publication of this article, for the purpose of identifying eligible wallets per the foregoing eligibility criteria
• LinkPool to burn 9,339,796 SDL tokens, reducing allocation from 34,339,796 to 25,000,000
• DAO Multisig to mint 14,339,796 SDL tokens with a 180 day claim period
• Eligible wallets can claim corresponding SDL airdrop
• After the claim period, the DAO Multi-sig withdraws and burns unclaimed tokens

Resulting SDL Allocations

Assuming the DAO treasury supply is burned (per the aforementioned proposal):

A Personal Note

I hope with the outlined timelines and new proposal for the SDL tokenomics, it helps restore faith from the community, who has backed us for many years. I’m committed to ensuring the messaging from LinkPool is drastically improved, while the open governance with community involvement will allow us all to shape stake.link into a protocol that works for all participants.

I understand the amount of frustration and disappointment we’ve seen from the community, and I want to apologise for the poor communication up to this point. I hope the transparency laid out in this article gives some context to why certain decisions were made on such a tight timeline and also gives confidence for our continued dedication to push boundaries in what we build in this ecosystem.

This marks a new chapter for us as we look to rebuild the confidence within our community. I understand it may be a long process, but we hope the end result of what we’re building speaks for itself. I look forward to starting that process and seeing the community involved in the stake.link protocol governance. I’ve put my heart and soul into building within the Chainlink ecosystem over the past five years, and I’ll continue for many more to come.