The third blog in the series on the Community Staking Module (CSM) delves into the intricacies of reward distribution within CSM and between modules, alongside an examination of CSM's strategies in addressing possible MEV stealing. For the previous parts refer to the list below:

What are rewards?

When running validators on Ethereum, operators may receive two types of rewards. The first type is known as Execution Layer (EL) rewards, which encompass priority fees and potential MEV rewards earned as a result of block production. The second one consists of Consensus Layer (CL) rewards, which validators receive upon the correct execution of certain Consensus Layer duties such as attestations, sync committees, and block proposals.

When CSM operators use the Lido protocol to run validators, they accrue two kinds of rewards:

Validator rewards: a share of the total protocol rewards mentioned above (relative to the operator’s share of active validators in the protocol, and multiplied by a module-specific operator rewards share variable), and
Bond rewards: staking rewards generated from the bonded tokens.

The following section explains the first kind of rewards (i.e. validator rewards).

Reward Smoothing Between Modules

Under the Staking Router’s architecture, multiple modules will be present, each having registered different subsets of validators with potentially different performance levels. For example, the Curated Module is generally expected to outperform CSM (as node operators curated operators who validate as a business), thereby contributing more significantly to Consensus Layer rewards. Conversely, an underperforming module may generate a lower reward return.

To minimize the reward disparity, smoothing is employed by the Staking Router. This involves averaging the rewards across different modules, taking into account the number of active validators in each.

When it comes to Execution Layer rewards, the independent operators in CSM do not need to worry about producing a block with a low MEV bonus or proposing a block only once or twice every six months, since EL rewards are part of the protocol-wide rewards smoothing mechanism. This reward smoothing feature ensures that volatile rewards (if an operator is running few validators) are instead consistent and close to the average expected value.

Reward Socialization Inside CSM

Another innovative feature is reward socialization within CSM via the use of a Performance Threshold, which is used to determine reward distribution. Per claim period (frame), validators whose performance exceeds a certain threshold will share the rewards received by CSM (based on their share of active validators).

On the other hand, underperforming validators whose performance falls below the threshold will receive no rewards for the given frame.

Most importantly, since CSM is geared towards community stakers, the idea is to allow for a reasonable performance leeway, ensuring that Node Operators do not receive reduced rewards due to short-term performance dips caused by factors such as internet or power outages. Additionally, the existence of the “bad performers” sub-set actively discourages free-riding behaviors (e.g. not running the validators that have been registered) and poor validator operation.

While the approach has been proposed, the threshold has not yet been determined. As always, feel free to share any ideas or thoughts on the forum proposal.

Penalties & MEV Theft Detection

In the previous section, we mentioned that a Node Operator’s bonds would be penalized if the balance of any of their validators were to fall below the default initial deposit amount at the time of validator withdrawal, or if they are found to be misappropriating MEV rewards.

While the first penalty situation, which involves monitoring validator balances, is straightforward to check, MEV stealing detection can be complex due to the variety of block-building approaches in use and the infeasibility of accounting for all cases.

At this juncture, it’s proposed to follow the current approach for CSM to monitor and assess MEV theft, and form a CSM committee dedicated to temporarily freezing the bond in case of MEV stealing detection. However, the actual penalties would be enforced through on-chain governance (i.e. Easy Track).

Since the proposed approach might be sub-optimal, contributors are looking for community feedback on the alternatives to MEV stealing monitoring & mitigation.

What’s Next?

The next (and final) article in the Lido Community Staking series will discuss stake allocation algorithms and validator exit rules. Stay tuned!

If you would like to continue any topical discussions related to CSM, please join our Discord CS forum - #community-staking-forum.