Rewards, Fees, & Socialization

The collection and socialization of Ethereum network rewards and Liquid Collective protocol fees

Every 24 hours, Oracles report the new balance of staked ETH from accrued network rewards or fees. The Conversion Rate is computed as the total balance of staked ETH over the total supply of LsETH. If accrued network rewards are greater than penalties and fees, the protocol Conversion Rate increases to reflect the net Ethereum network rewards collected by the protocol.

Because of LsETH's cToken design, the Conversion Rate may fluctuate. In contrast to other token models, such as aTokens, that issue new net network reward tokens on a unit basis, stakers on the Liquid Collective protocol will not receive more or less tokens as they receive network rewards or penalties.

Instead, the Conversion Rate for each unit of LsETH owned by the depositor will increase or decrease (i.e., the LsETH will evidence legal and beneficial ownership of more or less ETH) in an amount that reflects accrued network rewards.

Protocol Service Fee

The Liquid Collective protocol charges a Protocol Service Fee set at 10.0% of network rewards. Liquid Collective’s service fee is split amongst split amongst Node Operators, Platforms, Wallet & Custody Providers, Service Providers, the protocol’s Slashing Coverage Treasury, and the Liquid Collective DAO, which comprises a broad and dispersed community of protocol participants. All service fees are distributed in LsTokens, which are the native receipt tokens of the protocol (e.g. LsETH).

Network reward collection & Conversion Rate variation

Every day the Liquid Collective protocol accounts for Ethereum network rewards including consensus layer network rewards and execution layer fees minus possible penalties, which results in updating the data reflecting the total supply of ETH.

If network rewards have been earned on a given day, then the protocol collects the Protocol Service Fee as a percentage of the earned network rewards. The Protocol Service Fee is collected by minting LsETH, which results in an increase in the total supply of LsETH.

Under normal validator operations, the protocol earns network rewards; as such the total supply of ETH increases and the Conversion Rate increases accordingly.

In a scenario where validators are penalized or slashed, depending on the magnitude of the incurred penalties, the total ETH supply could decrease, and the Conversion Rate would decrease accordingly.

Example

Assuming

• totalETHSupply = 125 ETH

• totalLsETHSupply = 100

• protocolFee = 10%

So conversionRate = 125 / 100 = 1.25

Today the protocol earns 10 ETH thus the protocol fee is 10% * 10 ETH / 1.25 = 0.8 LsETH

And the new conversionRate = (125+10) / (108+0.8) = 1.58

Note: Figures above are just examples and do not reflect reality or projections.

Calculating rewards and fees

Each time the Oracle contract reports consensus layer data to the River contract, the protocol programmatically distributes network rewards including consensus layer network rewards and execution layer fees.

Fees received by validators for the execution of transactions are distributed on the execution layer directly. The Liquid Collective protocol automatically stakes the execution layer fees to increase the protocol’s overall potential reward rate by increasing the number of validators in the protocol's active set.

Network reward computation

Each time the Oracle reports consensus layer data, the River smart contract:

• Pulls execution layer fees from the EL Fee Recipient contract

• Updates consensus layer data including the Liquid Collective active validators count and total Liquid Collective active validators balance

The network reward is computed as:

$$reward = \\(activeValidatorsCount_{old} - activeValidatorsCount_{new})*32 \, ETH \\ + (totalActiveValidatorsBalance_{new} - totalActiveValidatorsBalance_{old}) \\ + pulledExecLayerFees$$

EL Fee Recipient Contract

The EL Fee Recipient Contract receives all of the execution layer fees including transaction fees and MEV priority fees. The River contract periodically pulls that ETH on every Oracle report.

Network reward distribution

If the earned reward is positive, it is distributed between:

• LsETH holders receive 85% of the network rewards, proportional to their LsETH holdings, through an accrual of the Conversion Rate

• Collector that receives the Protocol Service Fee via minting LsETH, which is currently set at 10%

Reward and penalty socialization

Liquid Collective socializes network rewards and penalties between holders proportionally to their LsETH balance. The protocol aims to enforce fairness between participants, making sure that no participant gets treated favorably compared to others.

This means that stakers on Liquid Collective are exposed to the performance of all validators across Liquid Collective as a whole.

Examples:

• If a validator receives a massive MEV network reward, then this network reward is socialized amongst every LsETH holder.

• If a validator gets slashed, then the penalty is socialized amongst every LsETH holder.

This socialization of network rewards and penalties is realized by the LsETH Conversion Rate which applies to every LsETH holder equally. Every 24 hours, Oracle reports the new balance of staked ETH across the protocol accounting for accrued network rewards and penalties, resulting in updating the Conversion Rate, which applies to every LsETH holder.