Community Staking Module v2. Architecture and Fee Structure

Description

This proposal outlines the architecture description and staking rewards allocation (fee structure) for the proposed major upgrade of the Lido Community Staking Module called CSM v2.

Motivation

The current version of CSM has been immensely successful in pushing the decentralization of Lido on Ethereum. It allows Node Operators to join the Lido on Ethereum protocol permissionlessly and receive Node Operator rewards without needing to put up the entire 32 ETH minimum of a validator. However, some limitations and challenges remain that need to be addressed to make CSM more robust, flexible, and competitive.

One of the main challenges is the need to support different types of Node Operators, such as permissionless operators, identified community stakers, professional Node Operators, etc to allow for an incentive separation between these groups. One of the main incentives that CSM offers to Node Operators is Node Operator rewards. Currently, CSM allocates 6% of the staking rewards (pro-rata based on the share of active validators operated by each Node Operator within the module) to Node Operators. These conditions make the CSM reward structure way above the current permissionless staking solutions in terms of the bond required to rewards ratio and should be adjusted to fit the market.

CSM v2 Architecture

CSM v2 is a major upgrade of the currently operational CSM v1 aimed at making CSM more robust, flexible, and user-friendly. A detailed description of CSM v2 architecture and features can be found in LIP-29 and the corresponding landscape document.

The main changes and new features of CSM v2 are:

• Introduction of Node Operator types defined by the bond curve. With the addition of the CSParametersRegistry.sol contract, most of the Node-Operator-related parameters (bond curve, rewards curve, performance threshold, ad hoc charges, penalty amounts, etc.) in CSM can now be individually configured for each Node Operator type for further usage by on and off-chain components of CSM;
• Entry gates and extensions allow for customizable entry conditions for Node Operators. While maintaining permissionless entry via PermissionlessGate.sol, CSM will now be able to have customizable VettedGates deployed via VettedGateFactory.sol, which will essentially be responsible for assigning Node Operator types, and attached to the module based on the Lido DAO decision;
• Improved Performance Oracle algorithm allows for more precise accounting of CSM validators' performance. In CSM v2, the Performance Oracle now features accounting for block proposals and sync committee participation with customizable weight coefficients for each duty in the overall performance score;
• A strikes system is added to CSM v2 to protect CSM and the overall protocol from systematic bad performers (CSStrikes.sol). Simply put, in cases where CSM validators show sub-par performance over a sufficient period, it will be possible to eject them permissionlessly;
• EIP-7002 support in CSM v2 serves as a technical enabler for the Strikes System while also allowing Node Operators to voluntarily eject their validators using EL-initiated triggerable withdrawals mechanism (CSEjector.sol);
• Several improvements and clean-ups have been made in CSM v2 to further improve operational efficiency and extend possible use cases of CSM.

CSM v2 Fee Structure

The introduction of the Node Operator types will allow CSM v2 to offer differentiated protocol interactions between Identified Community Stakers and other permissionless participants, and other possible types in the future as well if the DAO chooses to enable them.

To keep CSM competitive with the permissionless staking market and continue enfranchising community stakers' participation in Lido on Ethereum protocol, it is proposed to:

• Set the default Node Operator reward share to 3.5% while keeping bond requirements unchanged, fulfilling the goals set out in the CSM Evolution post, allowing CSM to scale while enabling competitive rewards with other modules and the rest of the market. This would result in a default maximum CSM v2 capital multiplier of 1.76, which is still market-leading but not overly unbalanced compared to other modules (where node operator share of rewards may also be reconsidered in the future).
• Maintain the current Node Operator reward share (6%) for the first 16 validators (21 ETH worth of bond) while keeping bond requirements unchanged, for Identified Community Stakers in CSM v2.

A detailed description and motivation for the proposed changes are reflected in the following post and discussion on the Lido Research Forum.

Next Steps

If the proposed changes are supported by the Lido DAO:

• Lido contributors working on CSM will proceed with the development, testing, and preparation of the CSM v2 mainnet release, adhering to the approved design.
• The approved fee structure will be applied for CSM alongside testnet and mainnet releases.
• CSM v2, together with the new fee structure, will be proposed for the final DAO approval through one of the upcoming Aragon on-chain votes.