Proposal: Pooled staking rewards & staking limits

There seems to be a lot of confusion among members of the Mutual regarding their staking returns. They see that a lot of cover is being purchased for a few contracts and start to stake for them in order to reap the cover premiums.

This won’t work of course, because the system is currently only distributing premiums to the stakers at the moment of purchase and therefore anyone staking into the pool after the covers have been purchased will only receive rewards going forward. In certain cases when the cover is maxed out (20% of capital pool is the maximum) these stakers will not be able to receive any rewards at all, because the Mutual cannot handle more risk.

In any case though, whenever you stake towards a contract, no matter if you are earning premiums or not, you will be subject to potential claims.

There is a reason though for rewarding only stakers at the moment of cover purchase and that is to incentivize early staking towards smart contracts with little stake.

I am suggesting the following to address these issues:

  1. Collect all premiums per contract in a pool and pay them out proportionally over the duration of cover.

    Staking returns will be easier to calculate this way and newcomers will not fall into a hype trap and stake towards certain smart contracts that are at their maximum already.
    I would also argue that the incentive to stake early towards new smart contracts would still be high enough, as staking returns would quickly reach very high levels when there is barely any stake. Additionally, the 10x use of pooled staking capital makes this much easier from the user perspective.

  2. Limit new staking towards smart contracts that have received too much stake already.

    I am proposing 1% of all NXM per contract as the limit. This would correspond to 48,000 NXM per contract in maximum stake at the current supply level of NXM of 4.8m.
    This is also to ensure that staking yields stay at a solid level and don’t reach <1% APY. A basic calculation of 1.3% premium at maxed cover for a year and maxed staking would result in an APY of 2.2% that way. Still not great for the amount of risk one is taking on, but at least we could establish a floor for the return there.
    One effect would be that 1% of all NXM would not cover 20% of the capital pool, but I don’t see any other major downsides to this yet.

Appreciate any feedback. :turtle::turtle::turtle:

Update: The new pricing formula going live tomorrow requires 200k NXM of stake to achieve the minimum price. Therefore instead of 1%, I’d propose to take 200k NXM as a maximum.

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Thanks @HeyChristopher

My general response on this is that both the MCR increment change and simplified pricing will increase staking rewards, so we should probably wait to get some real experience on how it works before deciding what to do next. Rewards should be higher because MCR increment is opening up capacity regularly for more cover purchases and simplified pricing will result in higher prices on average.

I do like both of the mechanisms you suggested, I just think we should wait for more data before making further changes.

A few specific comments for further background:

re 1 - Ongoing rewards

  • We thought about this when building pooled staking. It’s more technically challenging to implement and we were unsure of how much it would be required.
  • we have plans to turn cover into an NFT with one element being the expiry date, this would allow easy renewals and pay-by-the-month or similar. So while it’s not exactly the same, and wouldn’t spread rewards as much as your suggestion, it’s moving in a similar direction.

re 2 - Staking Limit

  • I like this idea and it helps cap reward payouts which can get gas intensive. From a technical perspective we should cap set the cap to be Net Staked Amount = 200,000 NXM, where Net Staked Amount = Current Stake - Pending Withdrawals. As Net Staked Amount is what drives pricing.
  • It also has the effect of discouraging withdrawals as the staker may not be able to get back in which is an added bonus
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How would capping staking effect capacity since capacity is driven by staking?