Objective:
Solana’s native staking has demonstrated that without proper incentives, most liquidity gravitates toward the largest validators, undermining decentralization. This same issue is beginning to surface with Liquid Staking Tokens (LSTs) in Sanctum, where the majority of SOL is concentrated in the largest LSTs like INF and jupSOL.
Background:
The goal of this proposal is to introduce a dynamic rebalancing mechanism within Sanctum that incentivizes users to diversify their LST holdings. The approach will leverage $CLOUD tokens as a reward, but with safeguards to avoid diluting $CLOUD’s value and maintain decentralization as the key focus.
Solution: Dynamic $CLOUD-Based Rebalancing Incentives
1. Dynamic Incentive Multiplier for Underrepresented LSTs
Each LST will have a dynamic reward multiplier based on its representation in the Sanctum ecosystem. The more underrepresented an LST is (determined by a combination of liquidity and user participation), the higher the multiplier for $CLOUD rewards when users hold or stake that LST.
For example:
- If INF and jupSOL represent 60% of total LST liquidity, their $CLOUD multiplier might be set to 0.5x.
- On the other hand, smaller LSTs that are only 2-3% of total liquidity could have a $CLOUD multiplier of 2-3x.
This system will encourage users to spread liquidity across lesser-represented LSTs in pursuit of higher $CLOUD rewards without touching their native APY.
2. Tiered $CLOUD Distribution Model
$CLOUD rewards should be structured in tiers to avoid oversaturating the market with tokens. The distribution can start with a daily cap on total $CLOUD allocated to the rebalancing pool, spread out based on each user’s contribution to decentralization.
For example:
- A user holding 20% INF and 80% in smaller LSTs might earn a higher proportion of the capped rewards compared to someone holding only INF and jupSOL.
- As more users diversify, the distribution tightens, ensuring that only those who meaningfully contribute to decentralization receive rewards.
3. Safeguards to Avoid Over-Incentivization
While incentives are necessary, it’s crucial not to over-reward users in a way that diminishes the value of $CLOUD. The following safeguards can be introduced:
- Decay Mechanism: $CLOUD rewards for underrepresented LSTs could gradually decrease if liquidity becomes too concentrated in those LSTs, ensuring constant rebalancing efforts.
- Capped Rewards: A daily or weekly cap on total $CLOUD distributed ensures that rewards remain sustainable and tied to long-term value.
**4. Post-CLOUD Sustainability Plan **
Once $CLOUD supply is exhausted, Sanctum could shift from token-based incentives to long-term, sustainable rewards through platform fee reduction mechanisms, governance power enhancements.
Time-weighted Governance multipliers that reward users who hold underrepresented LSTs for extended periods. For example, the longer a user holds a smaller LST (without swapping it), the more their multiplier grows based on the size
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Fee reductions or future rewards (in a similar mechanism to yield farming boosts but based on decentralization support).
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Users gain more voting power for protocol decisions based on LST holdings.
Gamification & Points System Instead of $CLOUD, users could earn “decentralization points” for holding and supporting underrepresented LSTs. These points can be exchanged for platform perks like exclusive access to new features, boosts in governance power, or discounted services. The points can also be used to unlock tiered benefits based on their LST holdings and rebalancing efforts.
This approach creates a reason for users to stick with underrepresented LSTs even after $CLOUD is depleted, as they will continue to receive tangible benefits tied to holding the tokens.