To start things off, we will vote in favor of the proposal.
From its inception the proposal underwent minimal changes, only to the initial parameters suggested by the proposer. Some participants expressed hesitancy around the tax mechanism, and others wondered if it’s too complex. The goal of this article is to clear up our opinion on these two aspects of the proposal.
The Withdrawal Tax
The “tax” pertains to the tax a given user will be subjected to should they choose to withdraw early. This tax would start at an arbitrary value, such as 10%, and gradually decay over time, until reaching its minimum value.
The tax is important for a myriad of reasons, but the main one is because it prevents governance attacks.
Governance Attacks
Consider the following scenario:
- proposal is put up
- malicious actor buys token
- malicious actor votes, representing his voting power at a precise point in time
- malicious actor sells token
In this scenario one can clearly see that incentives are not aligned. A tax that starts high and decays quickly (say, over the course of a month) increases the cost to carry out this attack. There are additional ways to mitigate this attack, though they work best combined together.
Aligning Values
Furthermore, the tax aligns values between long term participants and short term traders. Especially because the tax is given back to other stakers, as well as the DAO. This helps to dampen volatility during times of drawdown and increase your overall stake of the protocol.
Profit Sharing
It was proposed that protocol revenue be shared, 70% to the staking contract, 30% to the DAO. However, stakers would not be entitled to all of the rewards upon staking. Instead, the proposal states that the amount to which a staker is entitled to is inversely proportional to the withdrawal tax. Meaning, one will max out their rewards once they have staked for a long enough time.
Our Opinion
We agree with the withdrawal penalty, and the conditional profit sharing proposal. It is an elegant mechanism that aligns incentives between stakers and the protocol while also protecting the integrity of its governance system.
However, we believe 10% is too low of a starting tax, but parameters can always revisited by the DAO at a later date. The profit split between DAO and staking contract seems good, but again, it too can be iterated upon if the need arises.
It is for these reasons that we will vote in support of this proposal.
Reminder to vote on snapshot.
