The Why

The incentives for participating in DAOs are broken. Token holders are asked to actively manage and govern multi-billion dollar protocols at their own expense. Large delegates fund their critical research and operations via inconsistent grants or retroactive funding. Token holders hold illiquid unproductive assets with little or no incentive to participate.

The critical challenges facing DAOs today are directly tied to the inherent dichotomy of governance tokens: they are both assets and voting rights. You cannot fully enjoy the utility of your asset and vote, and you cannot vote and fully enjoy the utility of your asset. DAOs ask their token holders to make an unreasonable choice: forgo the value of their asset to govern or govern without any reward to their asset.

DAOs must return value to token holders to remain viable. Some of the largest DAOs today are exposed to governance attacks due to lack of participation. Uniswap has 158% of its quorum for sale in DeFi and on centralized exchanges, while the market cap of delegated ENS tokens is lower than the value of the accumulated treasury revenue. It is imperative that token holders are properly incentivized to maintain the security of the protocols they govern. (Source)

With the emergence of restaking as a key theme, governance tokens represent additional untapped potential that token holders must forgo in order to operate protocols. The governance tokens on Tally collectively have a market cap over $30 billion. These governance tokens directly control additional value in the form of smart contract TVL (e.g. all the TVL on Arbitrum) and the future value of cash flows (e.g. Arbitrum sequencer revenue and Uniswap fees). Because of their valuable economic properties, it’s likely that restaking systems will attract significant governance token deposits. Restaking activates the economic opportunity of governance tokens, but requires that token holders forgo participation in governance and forgo rewards returned to token holders by the underlying DAO.

The Tally Protocol is the liquidity layer for restaking. The protocol solves the restaking capture problem by separating economic utility of DAO tokens from governance. The system is more efficient as DAOs can return value to token holders proportional to their revenue instead of being forced to attempt to outbid restaking protocols for their own security.

Overview

The Tally Protocol unlocks the economic potential of governance tokens by providing a liquidity layer for governance staking and restaking while reducing the incentive to attack DAO treasuries and optimizing the distribution of voting power.

The protocol is a smart contract layer that creates Liquid Staked Tokens (LSTs) for governance tokens. Tally LSTs (stLSTs) offer token holders a simple and accessible way to take advantage of opportunities to earn staking and restaking rewards, maintain their voting rights, and use the liquid token to participate in DeFi.

Key Features

DAO Alignment: While the Tally Protocol governs the stLST protocol layer, each stLST is owned and controlled by its respective DAO. This allows DAOs to set and adjust key parameters, ensuring alignment between the protocol and the DAO.

Standardized Token Design: The protocol generates uniform, standardized stLSTs that simplify integration for third parties such as exchanges and custodians.

Modularity: The protocol supports various staking mechanisms and abstracts the underlying staking contracts via modules, allowing DAOs to experiment with different designs that suit their specific needs.

Voting Power Redistribution: For stLST token holders that choose not to delegate their voting power, the protocol returns undelegated voting power to the DAO for redistribution to active delegates. Tokens that are locked in DeFi or restaking services automatically return their voting power to the DAO.

Optimized Governance: Token holders have a financial incentive to hold their delegates accountable for high-quality governance.

Fee Distribution: Protocol fees are shared among Tally, DAO delegates, and rebalancers (who manage the interface between stLSTs and underlying staking contracts) in a fair and aligned manner.

Protocol Mechanics

Governance Restaking

The underlying utility of governance tokens is voting on proposals. Similar to how Lido solves for the underlying utility of ETH by maintaining a network of validators that produce blocks for Ethereum, the Tally Protocol solves for the underlying utility of governance tokens by maintaining voting power for delegates who vote on governance proposals. Token holders stake their governance tokens with Tally and receive a liquid staked token in return that can be deposited in restaking systems. The Tally Protocol ensures the voting power associated with restaked governance tokens is delegated to active, DAO-aligned contributors.

Tally-Powered Liquid Staked Governance Tokens (stLSTs)

When a user stakes their token in the Tally Protocol, they receive a stLST token in return that can be used in DeFi or restaking and can be exchanged at any time for the equivalent amount of underlying DAO token plus any accrued rewards. Holders can choose to delegate the voting power of their token to themselves, to someone else, or to allow the Tally DAO to choose a delegate on their behalf.

• stLSTs are liquid, auto-compounding ERC20 tokens.

• stLSTs accrue value in the underlying governance token, with their exchange value increasing over time as staking rewards compound.

• The protocol supports various delegation strategies for staked but undelegated tokens, including a default metagovernance strategy where the Tally DAO selects trusted delegates, and modular third-party strategies.

• The Tally DAO selects the default delegation strategy but the underlying DAO is free to choose their own strategy as well.

• stLST holders govern the LST contract in a dual governance model with the Tally DAO. The underlying DAO token holders are free to move in and out of the stLST contract at any time, and as such stLST token holders effectively represent the underlying DAO’s wishes.

Rewards and Staking Types

stLSTs automate the process of accessing rewards for token holders by automatically claiming staking rewards and redepositing them back into the staking contract. This enables growth of the underlying position without manual intervention. Holders benefit from convenience and maximized earning potential.

• The protocol includes initial staking contract support for Uniswap Unistaker and Tally Staker: an improved version of Unistaker that incorporates delegate compensation, thereby incentivizing active participation in governance.

• The Tally Protocol is designed to be compatible with future staking designs.

Voting Passthrough

stLSTs enable voting passthrough, allowing token holders to maintain their governance rights while holding the LST.

• Delegated stLST holders are able to vote in underlying DAO proposals as they normally would via the Tally interface.

• The protocol initially supports two designs for implementing voting passthrough:

  • OpenZeppelin Governor with Flexible Voting: Enables pooled tokens to cast partial votes with 1:1 precision.

  • Older versions of Governor: Pools tokens to achieve 0.39% voting precision using 8 pools, minimizing gas costs for rebalancing operations.

• The protocol will be modular and support adding new designs at a later date.

Protocol Fees & Rewards

The Tally Protocol implements a fee structure and reward system to ensure sustainability and align stakeholder interests. The fees are decided by the Tally DAO and are charged on the accrued rewards of the protocol. Delegate rewards are calculated by revenue from the Tally Protocol. The underlying DAO can add additional incentives to delegate rewards to incentivize high-quality governance.

• Rebalancing Fees

  • The Tally DAO sets rebalancing fees on a per-LST basis to cover operational costs and contribute to the protocol's long-term sustainability. Rebalancing is the operation whereby the Tally DAO claims underlying staked rewards and compounds the staked position. Tally amortizes the gas cost of the operation across the entire pool.

• Delegate Rewards

  • The Tally DAO controls a delegate fee switch, toggled per-LST, to determine rewards for delegates who actively contribute to governance.

• Maximum Fee Limit

  • The protocol sets a maximum fee limit to prevent excessive charges and ensure the majority of the yield is distributed to stLST holders.

Benefits for DAOs

DAOs struggle with setting security parameters, which affects their long-term safety and viability, especially when treasuries become honeypots for malicious actors. The increase in returned voting power allows the DAO to choose security parameters closer to outstanding token supply instead of outstanding delegated token supply.

Alignment with the underlying DAO is a critical component to Tally’s protocol design. In a world of competing LST standards, having a version explicitly aligned with the DAO significantly increases its adoption.

To ensure maximum alignment with the underlying DAO, the protocol:

• Activates undelegated voting power by redistributing it to active delegates according to strategies chosen by stLST holders. This increases governance participation and enhances DAO security. If underlying DAO token holders wish to change the redistribution strategy, they can move into the stLST and alter the redistribution strategies, ensuring that the underlying DAO is always in control.

• Creates a revenue stream for delegates that can be used to build feedback mechanisms for effective governance. This aligns delegates with the success of the stLST and encourages the DAO to endorse the stLST as their canonical solution.

• Empowers DAOs with control over the critical stLST parameters to align stakeholders with protocol and DAO success.

Unlocking Liquidity for Restaking

Restaking systems pose an existential threat to protocol DAOs. As the business model of restaking necessitates the pursuit and capture of economic security at all cost, once the available ETH supply for restaking is exhausted, restaking systems will be forced to turn to protocol tokens to continue growing their economic security.

Restaking protocols will compete to consume the economic security of DAO protocol tokens as protocol tokens represent the natural expansion to their TVL.

For DAOs, this poses an incredible challenge and existential danger because restaking services like Eigenlayer and Symbiotic can always outbid DAO protocols for their own security. DAO protocols can pay token holders either inflationary rewards or as a percentage of DAO revenue. Restaking systems, however, can pay token holders as a percentage of DAO revenue plus the total TVL (economic security) locked in the underlying DAO protocol and/or as a percentage of the DAO protocols token market cap.

This means that DAO protocols should expect to lose control over their security to restaking services. Eventually, every DAO protocol will be consumed by restaking services.

As the underlying DAO becomes inoperable, the economic security it provides to restaking decreases, but there is no incentive structure that allows DAOs to recapture their own security. This leads to the collapse of the underlying DAO, while restaking systems continue to pursue greater TVL opportunities elsewhere.

The Tally Protocol is the liquidity layer for restaking. The protocol solves the restaking capture problem by separating economic utility of DAO tokens from governance. The system is more efficient as DAOs can return value to token holders proportional to their revenue instead of being forced to attempt to outbid restaking protocols for their own security.

Ecosystem

The Tally Protocol is designed to be modular and open such that there are multiple opportunities for third parties to build profitable businesses on top of the protocol.

• Professional delegates can build large businesses by getting compensated with a predictable income stream that is linked to their performance.

• Solvers and market infrastructure firms can build rebalancing mechanisms for claiming and compounding staked returns. Note: this area is currently being researched.

Market Size

The market size for governance LSTs is very large. The protocol is designed to serve all DeFi protocols, L2 protocol tokens, interoperability protocols, liquid staking tokens (such as the Lido governance tokens), and tokens created by restaking AVSs (Actively Validated Services).

The market will choose LSTs for security, economic utility, and alignment between DAOs and token holders. The Tally Protocol’s design will drive DAOs to choose Tally LSTs as their de facto LST, ensuring a TVL and liquidity advantage over any competitors.

Go-to-market

Tally is the right team to build this protocol. Since 2020, Tally has been the leading champion and infrastructure provider for DAOs in the Ethereum ecosystem. Tally supports hundreds of DAOs across more than 60 EVM networks. Nearly half a billion dollars has been processed via proposals created using Tally. Hundreds of thousands of users depend on Tally and thousands use our platform each day. The most valuable DAO protocols on Ethereum run on Tally. Tally’s category leadership allows it to:

• Build the best in class experience for safe and easy staking.

• Distribute staking across the entire ecosystem all at once.

• Continue to build relationships with key DAO stakeholders and delegates across the ecosystem.

• Build on its trust and respect as a DAO-aligned partner committed to DAO success.

Tally is working with leading L2s and interoperability protocols to build their staking systems and has several hundred million in TVL commitments.

Roadmap

The Tally Protocol is currently under development with Testnet to be deployed in the summer of 2024. Our roadmap includes a number of potential improvements to increase alignment with DAOs, and maximize token holder rewards and system efficiency:

• The ability for individual LST token holders to override the vote of their delegate in cases where there is a disagreement on a proposal.

• Creation of the Tally DAO, which will become the custodian of the Tally Protocol and recipient of the protocol fees.

• Expansion to Solana via the Tally-Wormhole MultiGov partnership.

Looking Ahead

The Tally Protocol represents a significant step forward in the evolution of decentralized governance and the alignment of stakeholder interests within the DAO ecosystem. By providing a simple, accessible, and yield-generating staking mechanism through Tally Liquid Staked Tokens (stLSTs), the protocol offers a powerful solution for DAOs seeking to engage and incentivize their token holders while ensuring the long-term sustainability of their communities.

The protocol's modular design and open architecture creates a strong foundation for future growth and innovation. As the DAO landscape continues to mature and new staking designs emerge, the Tally Protocol is well-positioned to adapt and evolve, offering a flexible and robust infrastructure for a wide range of governance use cases.

Welcome to the future of decentralization.

Interested? Reach out to us at hello@tally.xyz or on Twitter @tallyxyz