Addressing the issues with TRU slashing

Problems with the current system

  1. Slashing is vulnerable to front-running as borrowers will generally know more than 14 days in advance if they are likely to default. This gives well-connected insiders a significant advantage in earning staking rewards, which will also gives them more governance power. It is also impossible to prove front-running and sows suspicion in the community when someone withdrawals shortly before a slashing event.

  2. Liquidity on TRU tokens is low, so it is not an efficient way to compensate borrowers. Either we have to find a seller in a bear market, or we give the tokens to borrowers and they will struggle to offload without dumping the price.

Possible Changes

  • Increase the withdrawal cooldown. If we set it to a high enough value(like 90 days), then front-running becomes impractical. The downsides are that this adds significant friction to participating in governance and doesn’t address liquidity issues.

  • Remove slashing entirely. This would simplify governance and eliminate the issues at the source. TRU’s value already depends on the reputation of the protocol, and we could consider alternative systems with a softer touch. We would lose slashing as an incentive to reject bad loans. If slashing is removed, we should consider reducing staking incentives to compensate.

Please suggest other options and I will add them.

My take: I am in favor of removing slashing. It is such a diffuse punishment that it is tempting to rely on other TRU holders to handle the vetting. It is also a significant barrier for new people who may want to stake their TRU. TRU holders have innate incentives to avoid defaults(they hurt the platform’s reputation, and thus the value of TRU tokens). If we do want to include alternatives, I put together a rough idea below.

An alternative incentive alignment mechanism: Direct a percentage of protocol fees into a Protocol Buffer. Once the Protocol Buffer reaches a set amount, those protocol fees would be used to either burn TRU or be paid to stTRU holders. In the event of a default, some of this buffer is used as first loss capital. TRU holders would then stop receiving fees until the buffer is replenished.

This buffer can also serve as a reserve fund for DAO expenses during a bear market.

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Update: Recent discussions in the Discord and Town Hall, along with the actual usage of the pools, has indicated that the pools are trending downs and will potentially be depreciated. In that case, I will hold off on addressing slashing directly.

This does, however, shift TRU towards more of a straightforward governance token and raises questions on the tokenomics of TRU and on TRU staking . Two parameters in particular to consider will be the Cooldown for unstaking and TRU rewards for staking. There are also broader questions on restructuring the system of staking governance(IE use a veTRU type system, similar to Curve and Goldfinch).

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