Liquid delegation & evening the distribution of indexers in the ecosystem

Hi! This is Mona from the Avantgarde Finance team. We’d like to explore bringing in the $GRT delegation functionality into the Asset Management protocol Enzyme. Our company has carried out a lot of the core development work around Enzyme over the last few years and as part of that work we have also developed and maintained one of the first subgraphs in the ecosystem.

Problem:

We see the following frictions with delegation, staking and signalling of $GRT which we think we can address over the short/medium term.

  • We currently see a tendency towards an indexer oligopoly where only a small number of indexers have the most stake and therefore also the biggest delegation capacity. Inexperienced delegators are likely to delegate to the top 10 indexers because it feels safer to do what everyone else is doing. An Enzyme vault managed by a sophisticated fund manager could delegate its entrusted $GRT smarter to smaller indexers which are trustworthy but not so well funded.
  • Today, investors holding $GRT in an Enzyme vault miss out on the yield they could potentially have from delegating their GRT because delegating from the vaults is not possible
  • Today, if you delegate your tokens to an indexer, the minimum lock period is 28 days making delegation illiquid and capital inefficient. Ideally there would be some kind of ERC20 wrapper around delegated $GRT in order to facilitate Liquid Delegating.
  • There is no way today to create any additional yield on top of $GRT whilst they are being delegated.
  • There is potentially a large pool of people who may have the skills to be great indexers but don’t necessarily hold the minimum amount of GRT required to become an indexer. Indexing requires a lot of active management which Enzyme was designed for.
  • Additionally, indexers can only receive delegation up to a maximum of 16x the tokens staked by them. In other words, if they’re doing a very good job and attract a large amount of delegation, the excess delegated tokens are just dead weight. Having a vehicle which they could raise capital to allow for growth in capital relative to growth in delegation will increase capital efficiency and performance of the vaults.

Proposed technical solution:

  • Enabling the delegate functionality for $GRT from an Enzyme vault via writing an external position adapter for the protocol.
  • Write test suite, audit contracts & proceed with integration.
  • Providing an easy UX/UI for both investors and the indexer via our interface.
  • Spec out what would be required to add indexer functionality. If straightforward, implement this functionality too otherwise work towards a phase II proposal depending on initial traction & interest.

What possibilities does this open up?

  • Ability to create a transferable, ERC20 wrapper (the Enzyme vault token) around a delegation pool thus creating further possibilities such as:
    • Better spread of delegation/staking due to sophisticated Vault managers who are knowledgeable about The Graph ecosystem.
    • A secondary marketplace for liquid delegation because the Enzyme Vault holding the delegated tokens acts as an ERC20 wrapper and is transferable.
    • The possibility of creating incentivized liquid delegation pools on say Curve or Uniswap.
    • Possible gas savings and simplifications for people. Eg. Easier to buy ERC20 Liquid delegation tokens on a DEX rather than having to buy the token $GRT and then delegate it and then wait 28 days plus before being able to undelegate and transfer/sell/ etc.
  • Empowering more indexers and reducing barriers to entry thus paving the way for broader decentralisation.
  • Higher capital efficiency for indexers and their delegators and better overall returns as a result.
    • Other things we probably haven’t thought of!

Curious to hear your thoughts on this and discuss…

10 Likes

Hi, I don’t see the 28 day lock in when undelegating as a bad thing. Could this wrapped token etc be maliciously used to jump in/out etc ahead of payouts (front running I think is what the graph calls it)?

If anyone wraps delegation using an ERC20 they could exchange them without waiting the 28 day lock period, but whoever owns those tokens will need to wait for the period whenever they want to redeem them.

The token would have some value because it is backed by deposited delegations + future rewards flow. Then the market would decide how much to pay the seller, probably discounting the time value of providing that liquidity immediately.

The tricky thing is that not all delegation is the same. Delegations are indexer-specific; they have different risk/reward profiles depending on how the indexer operates in the network. The risk is not about slashing but not meeting expectations (bad strategy, changing delegation parameters, etc.)

5 Likes

I think this is where it gets interesting combining it with Enzyme. The vault manager can delegate to one or a combination of indexer(s) and build a track record at doing this. So for example, manager might not initially have a lot of backers in the early months but if he/she is consistently posting good returns over time they will build a strong reputation at being good at delegating to indexers and start to attract more interest. Because enzyme tracks the historical price of the vault on chain overtime you can start to see who is good at delegating and who isn’t over time like with any other product.

1 Like

I really like the sound of this pending more details on technical implementation and impact on economic design.

I am an active curator and the experience has always felt :100: like trading on a dex. So exposing curation and other functionality through the UX of a trading platform sounds super interesting.

@elisafly I assume it would be usable by other products that want to expose similar functions on their own UI right?

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@xarborial can you give me an example by what you mean there? not sure if i understood the question. thx!

Yes, that is the power of using a vault, you can abstract a number of different strategies on top of the different risk/reward profiles of indexers making it easier for those that will not hand pick them individually.

1 Like

I like it, obviously a good idea, but I can’t understand why we need to create a wheel every time. We already have a lot of services proven by time and results with a good track record, speaking about liquidity. One good example - Lido.fi, this DAO already working with Ethereum (#1 by staking volume) and Solana. They provide good liquidity and eventually, it’s the main point, the technical side of liquidity staking it’s just a small piece and could be realised based on any platform.
So, the main concern here is “why do you think that this technical solution will provide actual liquidity on the top platforms like Curve and Uniswap?”

I don’t think the most exciting bit about the proposal is the liquidity alone. I think its the combination of factors it opens up towards experimenting and building new types of products which are not just limited to delegating GRT but can interact with everything else in DeFi too. The Enzyme vaults are also interoperable with idle, curve, yearn, dex’s, uniswap pools, etc etc…

The amount of opportunity for innovation this opens up is huge.

Furthermore, i think another really big key point to the proposal is that it “empowers more indexers and reducing barriers to entry thus paving the way for broader decentralisation.”

For example, a lot of delegators are not fully utilising the GRT delegated to them today because their own GRT stake is not big enough. If they could raise capital into a vehicle to increase their own GRT stake (essentially exactly what enzyme vaults were designed for initially), then they can overcome this problem and increase rewards for everyone.

1 Like

This opens up a significant option for new delegators. Traditionally, new delegators are most likely to select a large (safe) indexer, which contributes to stake centralization. Your proposal would allow them to stake with a single safe entity that would then assume the responsibility of decentralizing the stake.
This would also be a good gateway introducing delegators to the process and encouraging them to research it further.
It would lock a large amount of GRT in delegation and would secure an additional amount necessary to maintain liquidity for the delegated tokens.
It would provide a huge lift to smaller indexers looking to attract new delegators.
I love the concept, and it’s definitely worth exploring.

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I really like the idea of getting rid of the 28 day thaw for delegating. I think it may cause some investors to refrain from delegating. The current process of selecting an indexer is a bit daunting and if your indexer doesn’t seem good and you want to switch, you loose a month of rewards. I understand it helps people from jumping ship and protects the indexers but the gas costs are a pretty big deterrent. I also agree with even indexer share to make it fair.

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Whatever mechanism they utilize for selecting which indexers receive delegations should consider indexer performance. All indexers are not created equal, and some merely collect rewards without configuring their systems to serve queries. Some are inattentive to their allocations and allow them to run past the 28 day mark, costing their delegators. Some are very attentive to their allocations and the queries generated by certain subgraphs. Indexing is a complicated job that requires a high level of technical skill and an understanding of the protocol economics.
28 days is an acceptable time frame for those who are serious in their investment decisions. Those who disregard community advice and instead chase high APY bear the risk associated with that decision. If GRT moved around the protocol with high velocity, it would create a scenario where indexers would need to reallocate more frequently, costing them more in gas fees and making the overall protocol less economically viable.

1 Like