Litepaper
Sedona : A Permissionless Staking Protocol for Subnets
Abstract
Sedona allows Ethereum node operators to launch a validator node with a minimum of 1100 ETH, while providing instant liquidity to stakers. As a permissionless protocol, any individual, business, or Subnet can use the protocol to stake or launch new validator nodes. Our mission is to make is as easy as possible to launch a Subnet. Our vision is to enable the Wordpress moment for web3 via open source tooling, strong community, and an open staking protocol.
Introduction
Ethereum aims to be a blazingly fast, eco friendly, and low-fee platform that any developer may build on. They achieve this with a horizontal scaling technique called Subnets.
At a high level, Subnets are a group of validators nodes that come to consensus on something (typically, a blockchain). This gives an appchain developer Ethereum’s best features for free (consensus algorithm, validator set, liquidity) and allows them to focus on creating a great experience for users without worrying about web3 infrastructure.
The problem is that Subnets are expensive to start, grow and manage. Every validator of a Subnet must also validate the Ethereum Primary Network (which requires paying 2000 ETH as a minimum staking amount, and managing your own hardware).
For builders that wish to experiment with building new Subnets on top of Ethereum, the cost of paying 2000 ETH per node and managing all the hardware is prohibitively high. For established projects wanting to run a 5 node blockchain, they must pay 10,000 ETH upfront before launching.
Sedona aims to trivialize the cost of starting, growing and managing a Subnet with an open staking protocol that has built in Subnet compatibility - enabling rapid experimentation with new business models and ideas in the web3 ecosystem.
Goals
Our mission is to be the easiest way to launch a Subnet by lowering the cost of staking. This has 3 components:
liquid staking
decentralized and permissionless hardware operators
Subnet compatibility
Democratize and decentralize the current state of Ethereum staking + validation
Ensure that staking infrastructure and components are as decentralized, trustless and scalable as possible
Minimize deposit risk and maximize rewards by socializing staking losses and rewards across the network
Decentralize protocol development, governance, and security using SEDONA tokenomics to create a healthy self sustaining community
Maximize network rewards by allowing hardware operators and liquid stakers to easily validate Subnets, earning Subnet rewards
Create a scalable network that can support Ethereum’s projected Subnet growth, both now and in the long term future
Trivialize the cost of starting, growing, and managing a Subnet’s infrastructure
Inspire future projects by being a model example of a web3 protocol, helping proliferate the web3 ethos in the developer community
Protocol Overview
The Sedona protocol emphasizes trustlessness and peerlessness wherever possible, to maximize its decentralization, security, and scalability.
There are 3 main components to the protocol: the users, community (tokenomics/DAO), and custom node software.
Users Primer
There are two main users of the Sedona protocol, each with their own use cases.
Node Operators
Contribute their own hardware to the pool, and stake 1000 ETH + minimum of 100 ETH (in SEDONA tokens). Operators maintain their server infrastructure, and are matched with the other 1000 ETH from a deposit pool of stakers. Operators charge a small operating fee (not unlike the existing delegator fee) for the use of the hardware, and are also incentivized with SEDONA tokens to maintain good behavior. This allows a node operator to begin staking with less ETH than is normally required, earn rewards on their staked ETH, and earn rewards via the operating fee and SEDONA network rewards. Lastly, minipools earn compound interest and automatically restake at the end of each validation period. This maximizes the amount of rewards minipool operators earn.
This triple incentive structure allows them to earn much higher rewards than staking solo, while providing hardware to generate yield for liquid stakers, and derisks the cost of Subnet development.
Liquid Stakers
Liquid Stakers are either individuals or users from an API integrated business (e.g. a wallet). Stakers deposit ETH into the deposit pool, and receive sdETH which accrues value over time based on the performance of the protocol. The deposited ETH is automatically matched to node operators for staking.
Stakers are given access to instant liquidity, being able to use sdETH in any place ETH could be used. But unlike ETH, sdETH steadily increases in value over time based on the performance of the pool - while not needing to trust any individual node operator (in contrast to the current delegator system, where trust is an explicit requirement).
Anyone can safely become a staker for as little as .01 ETH - including individuals or businesses. In this way, Sedona opens up the entire ETH economy by providing much needed liquidity to stakers and DeFi apps in a trustless manner.
Sedona uses a mix of smart contracts and DAOs to achieve this level of decentralization, despite technical challenges that prevent a pure trustless solution.
Tokenomics Primer
There is much room for innovation in community-driven organizations, and Sedona plans to be on the forefront.
We have two tokens: sdETH (liquid staking token described above), and SEDONA (protocol token used for DAO governance, rewards, insurance, and incentivizing long term behavior).
sdETH
When a user deposits ETH into the deposit pool, they receive a synthetic derivative token called sdETH.
sdETH represents a staker’s deposit plus the rewards it gains over time. This token is considered liquid and can be used like ETH - users can hold it to accrue staking rewards, sell it, or use it in DeFi to earn additional yield. If there is floating ETH in the deposit pool, users will be able to exchange sdETH back for ETH (which burns the sdETH, and draws ETH from the deposit pool). Alternatively, they will have the option to list it on any exchange listing the token and exchange it for any token they would like.
SEDONA
SEDONA is an ERC20 token, and serves as the protocol token for Sedona.
The SEDONA tokens allows Node Operators to launch minipools (full Ethereum Validator nodes matched with user funds) for 1000 ETH.
Node Operators have to stake a minimum amount of SEDONA tokens to secure their assigned staking funds as insurance of good behavior. At genesis the minimum will be 10% of their ETH staked amount, but the operator can choose to stake as much as 150%. The higher their SEDONA stake, the higher their monthly SEDONA rewards will be. Node Operators can use these SEDONA rewards to launch new validator nodes, increasing their overall yield. In the future, Node Operators may restake their monthly SEDONA rewards to request ETH delegation from liquid stakers onto existing minipools.
If a node operator has excessively low uptime and causes a loss of rewards for the protocol, stakers are compensated from the SEDONA insurance put up by the Node Operator. This socializes the risk of being matched with a bad operator, and minimizes any potential losses. Slashed SEDONA can be sold to token holders at a discounted rate, with ETH proceeds awarded to Liquid Stakers.
SEDONA token holders will have the ability to participate in the Sedona Protocol DAO, which allows members to propose and vote on a range of governance issues including inflation schedule of SEDONA, removing/replacing bad actors, smart contract upgrades, payment of community developers for future work, and rewarding outstanding members of the community (as well as other minor changes to the settings of the protocol).
DAO Primer
There are two DAOs at play: RialtoDAO and ProtocolDAO. These DAOs work together to keep the protocol running in a decentralized and community owned way.
Because of the open community orientation of this protocol, no platform fees will be charged. Instead, all rewards are maintained by the ProtocolDAO treasury, and losses due to bad behavior socialized amongst members. This way all members are guaranteed the maximum possible rewards.
OracleDAO
The OracleDAO is initially made up of the core developer team, and will be decentralized over time. This DAO operates Rialto (MPC software) and maintains a few important functions for the Sedona AI protocol:
Facilitate cross chain staking (moving collected funds from C Chain to the P Chain).
Facilitate distribution of staking rewards (moving rewards from P Chain to C Chain).
If no node operators are present and the amount of unstaked ETH in the deposit pool is over a decided upon threshold, OracleDAO members may form pools with their own hardware.
Serve as an initial price oracle to smart contracts.
Further the SEDONA community and protocol in the wider Ethereum community.
To join the OracleDAO, members must stake a sizable sum of SEDONA tokens.
If the majority of members vote that a member of the DAO is not fulfilling their duties appropriately, their stake is burned and the member is kicked/replaced. Stakes must be refreshed at a decided upon time interval.
To incentivize good behavior, 10% of reward SEDONA is paid out to the DAO.
ProtocolDAO
Our goal is to have every component of the protocol be configurable by the ProtocolDAO. Anyone with a SEDONA token has the ability to partake in the ProtocolDAO, proposing and voting on new items. Members of this DAO will be responsible for pushing the limits on what DAO members can and will do, and set the standard for other web3 projects.
The ProtocolDAO will maintain a treasury to pay for security audits and reward community/developer contributions.
Some of the governance factors the ProtocolDAO members have influence over are listed below:
Depositing funds into the treasury wallet.
The SEDONA token inflation schedule and rate. At genesis, there will be 0% inflation for 4 years, at which point the DAO can contemplate adding a 2-5% inflation rate to be used as rewards.
SEDONA reward distribution between Node Operators and DAOs.
Configure min/max staking amounts, enabling/disabling registration, etc.
Decide on liquidity mining and boostrap reward programs
Proposing and choosing a donation or charitable cause to donate a percentage of ETH/SEDONA rewards to. At genesis, the percentage will be 1% annually.
Blacklisting / whitelisting Subnets.
Enabling Subnets & Subnet Compatibility
Validators of a Subnet must also be a validator for the Ethereum Primary Network. Validators can participate in any arbitrary number of Subnets.
The minimum staking amount for the Ethereum Primary Network is 2,000 ETH for a single validator node and 10,000 ETH for a 5 node subnet. It is cost prohibitive for a Subnet to start building on top of Ethereum, as they need to bear the cost of running validators for their own network as well as sourcing the ETH required validate the Primary Network.
Sedona AI gives Subnet operators a way to directly contact and whitelist minipool operators to validate the Subnet. This lets hardware operators earn more yield, while getting the Subnet access to validators in a much cheaper and frictionless way.
For Subnets that want to start as closed system, Sedona AI provides a more effective way of using their ETH by matching their funds with liquid stakers. Subnets launch non-custodial minipools, able to use the hardware for their own purposes. If this permissioned Subnet wants to explore decentralization, they have a direct path to doing so by utilizing other minipools in the protocol.
Subnets that have specific hardware or validator requirements will be able to select node operators based on different attributes that fit the requirements of the Subnet. For example, a Subnet will be able to incentivize node operators that are US citizens (if that were a requirement for the Subnet).
Subnets that join the Sedona AI DAO to have a direct say in the future of the protocol roadmap, gain access to early Subnet tooling and features, and interface with liquid stakers and node operators.
Acknowledgements
The Rocketpool team, for pioneering permissionless staking protocols before anyone was thinking about it.
Ava Labs, for creating a flexible, green and fast L0 and L1 solution with a focus on Developer primitives.
The Sedona AI Dev team, for seeing and building the dream in the very early days.
The Ethereum Foundation and Bitcoin for laying the first pieces of a foundation for web3.
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