Trial: Stake reserve $CELO through StakedCelo

Governance Governance Proposals
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Dear Celo community,

I’m Matt, a community member and avid user of Celo stables and StakedCelo. This is a proposal to stake a small amount of the $CELO from the reserve through the StakedCelo protocol.

Proposal

Stake 3 million $CELO from the Mento reserve through the StakedCelo protocol to support the network consensus and participate in the distribution of epoch rewards.

Rationale

From a network perspective, it is desirable that more $CELO are staked and participate in the consensus mechanism: Staking $CELO supports the network consensus by voting for validator groups, thus electing them and governing over who participates in the block production.

From the perspective of the Mento Reserve, it is also beneficial to participate in staking: The reserve assets are used to back the stable value assets cUSD, cEUR and cREAL. However, on a day-to-day basis these assets sit idle and are not used efficiently. Similarly to the Restaking idea from Eigenlayer, the assets of the reserve could be used for more than one purpose at the same time (i.e., for more than backing stable assets). In particular, a small portion of the $CELO from the reserve could be staked, so that these assets are also used to support the network, as well as to grow the reserve itself (as epoch rewards would accrue in the reserve). I believe that both is in the interest of the reserve, namely supporting the overall Celo network, as well as growing the reserve assets.

Regarding the amount of $CELO which should be staked, starting with a small number of 3M seems prudent, which corresponds to ~1.3% of total reserve assets or ~2.2% of all the $CELO of the reserve.

Risks & Mitigation

As with every measure, there are some risks involved in executing this proposal. Specifically, these issues come to mind:

  1. Staked $CELO have a withdrawal period of three days. This means the staked assets are not immediately available to be exchanged against Stable Assets which users want to redeem. This is mitigated by only staking a small portion of the $CELO of the reserve, by the high overcollateralization ratio of over 3, as well as the fact that the stablecoins DAI and USDC amount to roughly the value of all outstanding Celo Stable Assets combined.
  2. As every protocol, StakedCelo has some smart contract risk. It is a potential scenario that an exploit of the protocol could happen. Again, the small amount of $CELO deployed can mitigate some of that risk for the whole reserve. Additionally, the protocol has been professionally audited, with the reports published.

Combined, these risks should not be threatening the core purpose of the reserve and worth the benefit of supporting the overall Celo network as well as the reserve funds.

Implementation

The implementation via a CGP would be pretty straight forward. However, before going into details, I first want to get feedback on the proposal and its rationale.

Please let us know what you think! I’m excited to see the discussion take place!

@matt

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Imo, it would make lot more sense to have CELO that is parked in CommunityFund to be invested in StakedCelo vs stuff from the reserve.

CELO that is in the Reserve isn’t really liquid or usable CELO. Having that CELO participate in ecosystem could have unintended consequences both economically and from network security perspective.

On the other hand, CELO that is in CommunityFund is just regular CELO. Having that be staked in some form seems completely fine. Even when giving out grants, there is really not much difference if they are given out directly as CELO or as StakedCelo. Receiver of the grants can later on decide if they want to keep their CELO staked or unlock it and use it however they want to.

There is currently close to 10MLN CELO in CommunityFund that is just sitting there gathering dust.

5 Likes
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I agree, I would be very wary of treating the reserve as a source of liquidity. Celo Community Fund assets make more sense, and perhaps even there could be a technical proposal to create a smart contract that manages a portion of the CCF in this way.

@matt I’m unclear of the specific problem that is being solved here with your proposal. 3M CELO in the existing validator set is a drop in the ocean, and if it’s spread out among the staked CELO candidate validator groups, probably wont change the elected set much, or at all. Is this proposal just to get some more liquidity into the staked CELO product?

I understand that the staked CELO derivative votes on a performance weighted / semi-random schedule, and I would love to see more CELO voted on high-performing, community-minded, but under capitalised groups (by comparison to the top groups). If this is a side effect of your proposal, could be good to see.

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@thezviad agree that this would make a lot of sense for the community fund reserves

regarding the mento reserve: I agree, as soon as the % of the funds becomes large which is deposited as stCELO liquidity management and ensuring that there is always enough collateral could become an issue, which is also discussed in the risks part of the original post. However, currently the reserve is 3x+ overcollateralized, and the proposal is to only use a small amount of the CELO to stake, so I think this should be more than fine from a liquidtiy management perspective

Having that CELO participate in ecosystem could have unintended consequences both economically and from network security perspective.

Can you elaborate a bit more on that?

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Understood that the requested amount is small in comparison to the overall reserve size, but what is the goal of this entire proposal in general? What problem is it solving?

I’m not against this or variations of this proposal, just trying to understand the base motivation. Adding 3M CELO to the staked total will hardly have any long-term security or economic effects (I would guess, although I haven’t modeled it).

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Hi @matt, if you’d like to discuss this in the governance call tomorrow, let me know

Here are the details: Celo Governance Call #26 | February 28th, 2023 · Issue #212 · celo-org/governance · GitHub

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I totally agree with @thezviad. Using illiquid assets in the reserve will change all tokenomics.

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hi @Thylacine,

Fully agree, simply staking 3M CELO of the reserve will not change anything directly. Let me try to disscet better what goals (or problems) can be addressed by the proposal, and why adding this relatively small amount 3M CELO can develop a relevant impact.

1) View of Mento reserve

Goal a): Use reserve assets productively. Obviously, the reserve needs to be able to guarantee value for all outstanding Celo stable value assets at all times. This is its core purpose and there should be no compromise on that. In the current situation where the reserve is 3x overcollateralized and about 1x is of very stable nature (i.e., USDC, DAI), I think there is some flexibility around using some of those resources productively. This could help the reserve grow its overcollateralization over time and pay some of the expenses it incurs (e.g., custody).
Goal b): Additionally, depending on how the assets are used porudctively (e.g., in the case of staking CELO), there could be an additional benefit for the broader Celo network too (besides generating returns for the Mento reserve). For the case of staking Celo, see the discussion below.
Impact: Adding 3M CELO is too small to move the needle re Goal a). However, the decision if 100% of the reserve needs to be kept in simple assets or if a part of it can be used in other ways is rather relevant. If the trial goes well, I’d imagine the number could be increased or other assets could be deployed productively as well.

2) View of Celo network

Goal a): Decentralize consensus. The core feature of our network is its decentralization, particularly concerning the validators and consensus. This can be achieved by increasing the number of Celo staked via the StakedCelo protocol, which favours the decentralization of validator groups.
Goal b): Grow StakedCelo protocol. Besides Goal a), there are other reasons why the overall network might benefit from growth in the StakedCelo protocol. It is table stakes by now for POS networks that one can stake assets easily (e.g., no knowledge about validator groups, health monitoring, etc. required) and keep the liquidity of deployed assets at the same time. StakedCelo serves as a primitive for other DApps to be built on top (e.g., Spirals). Decentralized liquid stkaing protocols might become even more relevant for L1s if centralized staking providers run into regulatory problems with their offers. To increase the utility of StakedCelo for all these use cases, particularly increase liquidity of stCELO, the protocol needs more growth.

Impact: Why is adding 3M even relevant? 3M is too small to have an impact on the consensus instantly. However, adopting a longer time horizon, this could help a lot, specifically in two ways:
a) “Brand value”: The more large entities or DApps adopt the StakedCelo protocol, the more realistic it is that other large (institutional) players adopt it. I do consider the Mento reserve such a brand. This in turn could lead to growth in the StakedCelo protocol which is actually relevant from a network perspective.
b) *StakedCelo TVL”: 3M is not a lot for the Celo network. For the StakedCelo protocol, 3M is a lot given it has currently around ~1.4M. And growing TVL will help to attract more TVL, attract attention and adoption of the primitive and help making stCELO actually liquid (which it is currently in theory, but not in practice)

I hope this helps understanding the problems and goals addressed? What do you think about the rationale?