The Lido DAO community has put forth a new proposal for a liquidity buyback mechanism. This initiative is designed to reduce the circulating supply of LDO and significantly increase the token's utility within the ecosystem.
Mechanism Details and Expected Operational Timeline
According to the proposal, the LDO/wstETH pair will be structured as a liquidity provider position, mirroring the functionality of Uniswap v2. Ownership of this position will be managed through the Aragon Agent. This setup is intended to facilitate automatic buybacks while simultaneously deepening the liquidity pool, thereby strengthening LDO's market functionality. If the proposal successfully passes the community vote, the new mechanism is anticipated to become operational in the first quarter of 2026.
Addressing Limitations of Standard Buyback Models
The community has observed that in a standard buyback model, LDO could be collected solely through NEST. However, this approach offers limited throughput due to inherent slippage and gas costs associated with transactions. Larger volumes of transactions in such models tend to generate higher price impact, while smaller transactions consume a disproportionate amount of gas. Furthermore, it has been noted that LDO's on-chain and CEX liquidity may pose limitations for buybacks in the long term.
The Proposed Model for Sustainability
To overcome these challenges, the proposed model aims to deepen the order book by creating a dedicated liquidity position. This is expected to make the buyback mechanism more sustainable and efficient. The new framework is specifically designed to ensure that buybacks are activated only during periods when DAO revenues and prevailing market conditions are favorable.
Activation Criteria and Allocation
Accordingly, buybacks will only be activated if the ETH price is above $3,000 and the annual revenue generated exceeds $40 million. A significant portion, specifically 50% of the staking revenue above this established limit, will be allocated for buyback operations. This strategic allocation ensures that buybacks are funded by profitable periods and contribute directly to supply reduction.
Transaction Parameters and Automatic Pausing
To maintain market stability, transactions will be carefully planned to ensure their price impact does not exceed 2%, taking into account current market liquidity. The total buyback amount will be capped at $10 million over a 12-month period, providing a clear limit to the buyback operations. Importantly, the mechanism will automatically pause if the ETH price drops or revenue falls below the specified activation levels, safeguarding against unfavorable market conditions.