TIP-100: The Future of Threshold, Continued

Proposals
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This TIP is a continuation of TIP-98 that expands on the role of tLabs and the expected DAO restructure. Given the meaningful updates and changes from the original TIP, it is re-introduced as TIP-100, rather than an amendment.

tBTC has an opportunity to become the canonical cross-chain liquidity hub for Bitcoin, with >10x today’s TVL and bridge velocity. Threshold can capture value with revamped tokenomics that couple the success of T with the success of tBTC. But achieving this goal requires the DAO to commit and compete: the path to success is narrow and requires immediate action.

Threshold currently lacks strategic focus and the internal structure necessary to successfully execute in an increasingly competitive market. To remedy this, tLabs will lead a DAO reorganization with a singular focus on scaling tBTC TVL and bridge velocity, while pivoting the network to profitability and cutting distractions that don’t directly contribute to winning.

Threshold as a single app network for tBTC
Threshold was originally envisioned as a multi-application threshold cryptography network. Unfortunately, this has introduced a significant amount of complexity, making internal alignment and external messaging around Threshold’s purpose extremely difficult.

To provide clarity of purpose and maximize the likelihood of success for both applications, TACo and tBTC will become separate networks with the end of staking emissions (TIP-92) by February 15 (with a small carveout for TACo). This will allow both tBTC and TACo to clarify messaging, go to market, and scale faster.

TACo as an independent network

TACo is picking up momentum with revenue growth, high-profile partnerships, greater prominence/legitimacy, and a pipeline of credible adopting developers. To preserve this momentum, TACo must have full control over its own destiny and continuity in its existing staker network while minimizing any possible disruption to adopters.

Pending approval of this TIP, the TACo service will migrate away from Threshold to a new home – which will take place over a transition period of approximately six months. The destination and migration process will be determined and proposed by the TACo team prior to the end of the transition period. This autonomy will allow TACo’s new protocol to further prioritize independent stakers, and potentially increase compatibility with other Web3 infrastructure.

This proposal ensures TACo stakers will continue to be compensated for their availability and service provision for at least six months. Importantly, this continued compensation will not require an additional mint, as there are sufficient tokens left over from TIP-94 to cover TACo’s transition period, if the current rewards regime is ended by February 15. This compensation may include an additional subsidy, funded by NuCypher.

Threshold as a tBTC appchain

The tBTC ledger currently resides on ETH L1, resulting in a poor cross-chain UX and making adding support for new chains a significant engineering effort.

Rearchitecting Threshold into a tBTC appchain will flip the integration model by letting new chains integrate with tBTC, rather than tBTC integrating with them. Threshold would effectively become an execution environment capable of accepting light clients from any arbitrary chain, enabling the rapid expansion of tBTC availability and direct minting UX across the entire blockchain ecosystem. An appchain architecture also provides greater flexibility around potential future upgrades like BitVM2.

DAO reorganization and achieving profitability
The DAO currently spends >$1.5M per year across various guilds, committees, and part- or full-time roles without precisely defined objectives, unclear ROI, and a lack of strategic coordination. The majority of these functions need to be removed or reassigned to tLabs in order to achieve network profitability. A handful of functions will likely remain with the DAO including first-line tech support, financial reporting, and foundation coordination (the exact list of functions retained by the DAO will be informed by the work being done by the DAO’s restructuring working group).

The Marketing, Integrations, and Treasury Guilds will sunset with most responsibilities taken on by tLabs. The remaining treasury functions will be rolled into the Threshold Council. Governance should decide if the current configuration of the Council is appropriate or if the seats should be expanded.

The DAO currently spends 30% ($360K per year) of the T liquidity incentives budget on thUSD, which has generated minimal revenue. Without clear market positioning and demand drivers, this spend should be suspended, pending the steering committee’s imminent analysis and recommendation.

The largest network expense, staking emissions, will end after the approval of TIP-92, at which point Threshold will be close to (or in) profitability, as shown below (based on a BTC price of $102,451 and a T price of $0.025 as of January 31.). While this P&L excludes tLabs’ budget requests, it does represent a reasonable approximation of the network’s ability to operate profitably if it reduced all non-critical expenses.

Current and proposed profit and loss
Current and proposed profit and loss852×692 53.5 KB

Tokenomics
With the network on sound financial footing, net profits can be used to buyback and burn T tokens as per TIP-54, making T a deflationary token. The tight coupling of T to the success of tBTC, will create a virtuous flywheel of TVL growth/bridge velocity → T price → attention → TVL growth/bridge velocity.

Additionally, with an increase in TVL to >30K BTC as per TIP-96 and the rapid expansion of tBTC to many other chains, bridge velocity and revenue should increase significantly.

What is out of scope for tLabs?
tLabs will have minimal involvement in the existing tBTC v2 implementation, with two notable exceptions:

  1. upgrading the signature scheme from threshold ECDSA to Schnorr
  2. expanding canonical support for tBTC to additional chains via third-party bridge provider(s)

tLabs will otherwise not be involved with support for the current tBTC v2 deployment (i.e. technical support on stalled redemptions, unrevealed deposits, bug bounty submissions, etc.). This requires deep expertise and familiarity with the current implementation, which largely resides within Thesis.

T mint no longer necessary
Considering the likely budget of tLabs, a reorganized DAO cost structure, and the current DAO treasury assets, it’s possible to implement the proposed tLabs’ strategy without the requested mint of ~1.12B T tokens in TIP-98.

The DAO currently has ~420M of T (including 90M currently delegated to beta stakers and excluding T in liquidity pools) sitting in Governor Bravo and across various multisigs doing nothing. This is more than enough to cover any tLabs team allocation.

The DAO also has ~$8-9M of reserve assets (tBTC, ETH, and stables), representing at least 2-3 years of tLabs runway, in the worst case.

We’re grateful for the temp check support but we rescind TIP-98’s mint and financing request; at the current T spot price, the DAO should be a buyer, not a seller.

TIP-100 instead requests the provisional approval of the use of the existing treasury assets for the purposes described here and in TIP-98 (with annual tLabs budget requests still subject to DAO approval).

With the approval of this TIP, a new era for Threshold begins.

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Epic, this sounds amazing!

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Fantastic update to TIP-98, thank you! LFG

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I would never expect that what I mentioned about dao was a work in progress. Let’s do it.

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Thanks for the detailed explanation on the updates @maclane.

I anticipate the separation of tBTC and TACo will benefit both protocols. tBTC and TACo are vastly different products that both employ threshold cryptography, but have significantly different needs from node operators. tBTC, in its current form benefits from very large stakers, and many stakers, and best case many large stakers; TACo doesn’t need gigantic stakes to my knowledge, but benefits from many stakers.
I look forward to details becoming available regarding the transition and how I can contribute to TACo’s future staking opportunities.

This is an unfortunate situation, but this is the time to make tough decisions. I like thUSD and think it has great potential, but it would likely require extensive efforts - perhaps this could be an opportunity for someone to draft a thUSD_labs proposal?

This is a very positive development and sure to aid in getting more people excited about tLabs and should convince those still trying to decide.

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Got a few questions…

What is the purpose of the DAO?
This needs to be clearly specified and enshrined in some sort of Constitution, similar to a charity.
If tLabs controls “protocol, product, business development and marketing functions for tBTC”, is the DAO just responsible for budgets and funding?

Could this lead to the DAO becoming disengaged? and does that create a governance risk down the line?
How will the DAO ensure tLabs remains aligned with its goals? and what happens if tLabs’ performance does not meet expectations?

Is spinning off TACo definitely the best course of action?
What other ideas have been considered and dismissed? I’m aware that the merger has created additional complexity, but it has also reduced work in some areas (eg. only one staking dashboard and reward infra). I’m worried that this could kill TACo’s momentum and spook adopters - the tBTC TVL is part of TACo’s evidence of security

How will tBTC compete as a Bitcoin Bridge?
or, What differentiates our strategy from cbBTC/wBTC? following the same playbook as them hasn’t been particularly successful so far.
The tLabs priorities are listed as 1) Increase tBTC TVL and bridge velocity, 2) Upgrade tBTC core technology, 3) Develop tBTC product and usability. What are the specific goals and steps to achieve this? Is there a TVL & Velocity that tLabs is aiming for within 1 year?

Appchain Risk
Building a Threshold appchain is an excellent idea, but it’s also a large undertaking. Does the team have the bandwidth to execute this while also focusing on growing TVL/Velocity? What contingencies exist if the appchain migration takes longer than expected?

I’m overall optimistic - and I’m really pleased that these discussions are being had. However, it feels like just a few months ago we were discussing high inflation, and now that’s suddenly developed into an Unmerge. I would like to be further persuaded that this is the correct course of action!

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Thanks for taking the time to write this proposal Maclane! To me, it does seem like this TIP would be the quickest way to “blue-chip” status for tBTC…if it ends up being successful. With that said, I would appreciate a little deeper explanation on a few assumptions that I am taking from this TIP:

  1. If TaCo leaves the Threshold network, TaCo’s revenue would not go to Threshold. So I’m assuming this TIP “believes” that if 100% focus is turned to tBTC and the above steps are followed, Threshold would have a higher net profit, despite taking away a growing revenue stream, like TaCo? From a revenue point of view, seems like a “step back” to drop a product like TaCo that is already generating revenue?

  2. Was something discovered after TIP 98 was accepted? Dropping a revenue stream is a significant decision, so am assuming that there is a little more to TIP 100 than just complexity of the two DApps working together / marketing?

Appreciate your time and am excited to hopefully see the rapid growth of Threshold!

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Perhaps, although I’m skeptical this would be a reasonable use of time and resources at the moment. If it was clear how to make thUSD successful, we would have included that in the TIP.

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In my view, the DAO simply refers to the network and its token holders. The DAO is the principal and it engages agents to take actions on its behalf. It’s the agent side of the relationship that is changing: tLabs is being engaged as the primary agent to increase accountability and effectiveness.

The DAO will retain tLabs as long as it’s satisfied with the delivered progress and results. The DAO retains sovereign control over the treasury, so if it is unsatisfied it should end the relationship.

Neither TACo nor tBTC are well-served by the multi-application model. The incompatible economics are just the most public symptom. The dilution of external market messaging and internal alignment around a shared purpose, are less obvious issues (but more significant issues) that are preventing both applications from fulfilling their potential.

Specific tLabs’ priorities and estimated timelines will be included in the first budget request. Importantly, tBTC can operate exactly as it does today (permissioned honest majority over the beta staker set), even in the absence of an appchain.

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After evaluating the current state of the network, it became clear to me that the likelihood of success for either application under the current model is essentially nil.

To succeed, both applications need a singular focus on winning; being shackled to the divergent requirements of the other means failure.

Every protocol is in a struggle to the death against entropy and irrelevance. If Threshold wants to win, it must accept this reality and choose to fight.

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Thanks for the effort in putting together this proposal and excited to see this discussion happening!

Upgrading the signature scheme from threshold ECDSA to Schnorr does require deep expertise and familiarity with the current implementation. Golang implementation of FROST and ROAST in BIP-340 compliant form has already been completed, and serious progress was made on porting the existing GJKR scheme for key generation to work with another curve. This, however, is just a part of the story. Smart contracts, the dashboard, and SDK all have to be upgraded to support P2TR. The existing pubsub mechanism used in the client on the network level has to be replaced, and several parts of the client logic supporting the non-attributable nature of threshold ECDSA have to be replaced. Finally, both schemes probably have to be supported at the same time for a couple of months until a migration to a new P2TR multi-wallet set is completed.

I have no concerns about tLabs working on expanding canonical support for tBTC to additional chains.

Athough it is clear staking emissions are the major cost right now, I would like to emphasize rewards for tBTC stakers are not distributed just for staking. Everyone needs to run a node, that node needs to meet certain uptime and performance criteria, and be regularly upgraded. This way, although only selected nodes are selected for a signer set, all of the operators are trained now to perform this duty. I am afraid that if we cut the staking emissions, half of those nodes will disappear, and we will lose the upside of the Schnorr upgrade. What do you think about it and are there any solutions you have in mind?

Last but not least, how are node operators rewarded in the new scheme if there is no inflation? Are they paid from the existing DAO treasury? What happens once we enable Schnorr and end the beta staker period?

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Acknowledged. I’m not suggesting it’s trivial, just that it’s an exception to the v2 deployment where tLabs is willing and able to contribute if helpful. I understand from @mhluongo Thesis has available resources to collaborate with tLabs on this in the near-term.

My expectation is that non beta staker nodes will spin down when rewards stop. The beta staker set will remained permissioned indefinitely and move to DAO provided delegations or, equivalently, a DAO-controlled whitelist.

Most beta stake operators do not receive inflation rewards but instead receive direct payment from the DAO via TIP-67, Parts [1] and [2]. The ~3 operators who are not currently receiving direct payment, should be added to the payment list.

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I agree with the expectation non-beta stakers will shut down their nodes once the rewards stop but I think this defeats the purpose of the Schnorr upgrade. If we can’t afford the 137 nodes running in the network now, what is the purpose of the Schnorr upgrade?

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I’m open to punting on Schnorr if we think the benefits don’t outweigh the costs. But I see two main benefits:

  • Migrating off threshold ECDSA which has historically been plagued with critical vulnerabilities, most recently TSShock and CVE-2023-33241. In contrast, Schnorr is a much simpler scheme.
  • Reducing the operational costs of beta staker nodes by ~90%
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(post deleted by author)

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I believe there are ways to make thUSD successful for the following reasons

  1. Overcollateralized bitcoin loans are on the rise. Coinbase released their partnership with morpho. Blackrock etf major benefit is for borrowing against bitcoin on margin.
  2. Major untapped markets benefit from bitcoin backed loans: Bitcoin/Nicehash miners being the biggest. Other unbanked markets also have shown interest in bitcoin backed loans
  3. Thresholdusd has a major advantage over these markets because they can offer these loans at a 0% interest. This is extremely competitive being that the best bitcoin loan on the market is blackrock at 4% interest

There are some major limitations right now that make it hard to use:

  1. The redemption policy (where if adjusted can be set up in a more beneficial way for all participants)
  2. The thusd liquidity: there is no exit liquidity (thusd → 3crv) for participants. This leaves an incentive to perform redemptions

I believe that thresholdusd, if targeted at the right bitcoin market can be very successful in the long term. I can work with the guild to see what we can come up with. I wanted to know the groups thoughts here.

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If these nodes spin down, did you happen to have an approximation of how many “staked T” tokens this would free up? If the other TIP is approved and the 45-day wind-down period is waived, I’m guessing there would be a sizable amount of T simultaneously dropped on the market that may be sold by current stakers. Not sure how that would effect the T price if that happens, but wondering if some sort of wind-down might actually be better?

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I’m skeptical there is a large demographic of T stakers whose only interest in the project is the 15% staking rewards on an asset that’s down ~90%. If this demographic does exist, then I prefer for them to exit now as Threshold pivots rather than slowly bleeding out over an extended period of time.

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Agreed. Makes sense.

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A new home for TACo means self-determination – an opportunity to restructure the protocol, further create conditions for independent stakers to thrive, increase compatibility with other Web3 infrastructure, and prioritize the service’s stability, reliability and longevity.

Although TACo has asked for very little from Threshold – particularly in relation to the spend on non-active tBTC stakers and DAO bandwidth – Threshold has nonetheless given TACo a great deal; community, prominence, mindshare, ideas, enthusiasm, reputation, token liquidity, subsidies, the list goes on. None of this is taken for granted, and migrating elsewhere will be a complex undertaking.

There’s also no perfect moment for an uncoupling of this significance. We’re right in the middle of TACo’s go-to-market epoch, when external perception of service stability is absolutely vital. That is why I’ve historically attempted to protect TACo’s promising customer/partner growth by fending off proposals that would modify the protocol governing TACo nodes, and undermine said stability. This state-of-affairs – regularly needing to insulate TACo from the impact of network-level modifications designed for tBTC’s problems – has itself become an issue. Customer acquisition for Web3 infrastructure is difficult enough without a turbulent backdrop in which TACo’s product needs are a secondary concern.

So, TACo’s destination will be researched, designed and presented over the coming months. The utmost priority today is setting up a transitional scheme for TACo that guarantees service continuity, minimally impacts our adopter pipeline, and lays the groundwork for a successful migration. At the center of this are TACo nodes – many of which are in live DKG cohorts, actively managing real-world customer data. Therefore, TIP-100 involves the following:

  • TACo nodes will continue to earn the same yield (3.75%) for the entire transition period, on tokens still authorized to TACo. To fund this, all already-minted T will be allocated to the TACo transition period and migration.
  • TACo nodes which remain active and reliable over the course of the transition period will likely accumulate a larger ownership share of the new TACo network, relative to those who do not.
  • TACo nodes may be eligible for a fixed, stables-denominated subsidy during the transition period, funded by NuCypher.
  • TACo nodes that are active during the transition period and migrate to the new network will also be distributed fees, once it reaches a milestone sum.

In order to achieve this – without a further T mint – the following changes to TACo’s protocol are included as part of TIP-100, should it pass:

  • All TACo nodes will be regularly tested for availability and correct configuration with ‘dummy’ DKG rituals. This monitoring will directly impact reward and subsidy eligibility.
  • Nodes deemed to be inactive or unreachable will not receive rewards or subsidies.
  • Beta stakers will not receive any rewards, but will continue to run TACo nodes as per their agreement with the DAO under TIP-67.
  • All TACo authorized stakes will be subject to a rewards cap, where up to 15m T will earn rewards at 3.75%, and all T above this threshold will not earn any rewards, but will be deauthorized and withdrawable shortly after this proposal passes.
  • All stakers will have the option to fast-forward the 6-month deauthorization delay and deauthorize + withdraw up to half of their stake immediately. The remainder will be subject to the previously agreed 6-month deauthorization delay – that is, it will remain locked until a deauthorization is initiated and the delay completes as normal. Note this partial deauthorization is opt-in, so if the staker takes no action, all T will remain authorized until they do (and will continue to earn 3.75% yield). There is no deadline for this partial deauthorization. This will similarly be deployed shortly after the proposal passes.
  • TACo authorizations with new accounts will not be possible during the transition period.

TACo has many dedicated stakers, some of whom have operated nodes since the NuCypher Worklock era. In the same way we don’t take Threshold for granted, we don’t take our stakers’ trust and commitment for granted. We’ve tried over previous months to minimize disruption so we can focus on making TACo stakers profitable. Now when disruption is unavoidable, we’ve secured a properly funded transition scheme/period to minimize the risks and maximize the upside – i.e. a new protocol designed entirely around TACo’s needs.

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