Layer 2 (L2) Staking Mechanisms: Review & Recommendations
Introduction
Layer 2 (L2) staking is an essential mechanism for securing networks, incentivizing participation, and distributing rewards. Different L2s use staking for governance, sequencer fee-sharing, and network security—each with its own benefits and trade-offs. This document explores the different L2 staking mechanisms, comparing their approaches and effectiveness. Additionally, it evaluates the most suitable staking model for a new L2 network with low transaction volume and low TVL, ensuring sustainability for existing node operators who receive sequencer fees and rewards.
Existing L2 Staking Mechanisms
1. Arbitrum (ARB) - Upcoming Staking Mechanism
Mechanism: Staking proposal to incentivize governance and token utility.
How It Works:
- Users stake ARB tokens for up to 365 days.
- Rewards increase with longer lock durations.
- Early withdrawals are penalized.
- Rewards come from the Arbitrum DAO treasury.
Key Challenges:
- Reliance on treasury funds for rewards.
- No direct impact on network security.
2. Optimism (OP) - Governance Participation and Staking
Mechanism: Governance-based staking model with potential future fee-sharing.
How It Works:
- OP token holders stake tokens to participate in governance.
- No direct staking rewards currently.
- Liquidity staking options exist within DeFi protocols.
Key Challenges:
- Lacks direct staking incentives beyond governance.
- No clear timeline for revenue-sharing implementation.
3. Metis (METIS) - Sequencer Staking
Mechanism: Validators stake METIS tokens to participate in transaction sequencing.
How It Works:
- Stakers receive a share of transaction fees.
- Validators gain rights to order transactions.
- Aims to decentralize the sequencer role over time.
Key Challenges:
- Requires sufficient network activity to sustain rewards.
- The transition to a fully decentralized sequencer is still in progress.
4. StarkNet (STRK) - Planned Staking Mechanism
Mechanism: STRK token staking with a focus on governance and potential security.
How It Works:
- Users stake STRK for governance participation.
- Potential future use cases in network security.
- No rewards system currently active.
Key Challenges:
- Unclear staking rewards.
- Governance staking has limited economic incentives.
Comparison Table
| L2 Chain | Staking Mechanism | Rewards | Key Challenges |
|---|---|---|---|
| Arbitrum | Governance & staking incentives | ARB token rewards | Treasury dependence, no security impact |
| Optimism | Governance-based | No direct rewards | No clear revenue-sharing model |
| Metis | Sequencer staking | Transaction fees | Low decentralization, relies on network volume |
| StarkNet | Future STRK staking | Potential governance incentives | No active rewards yet |
| Polygon PoS | Delegated staking | MATIC staking rewards | Sidechain rather than true L2 |
| Boba Network | Sequencer staking | Fee-sharing from transactions | Limited adoption & TVL constraints |
Key Takeaways from Current L2 Staking
- L2 staking is still evolving, and true revenue-sharing models remain rare. However, sequencer staking is emerging as the dominant approach, proving more sustainable than governance-only staking.
- Sequencer staking is becoming the dominant model – Metis and Boba already distribute fees to stakers.
- Governance staking alone is insufficient – Optimism and StarkNet struggle to drive participation without clear financial incentives.
- Networks relying on treasury-funded staking are unsustainable – Arbitrum’s model depends on fixed ARB allocations, which may not scale long-term.
Best Staking Model for a New L2 with Low Transaction Volume & Low TVL
To ensure a sustainable, engaging, and scalable staking system for Fuse Ember, we propose a Hybrid Staking Model that integrates multiple reward mechanisms.
For a new L2 network that has:
- Low transaction volume (meaning fee-based rewards may be insufficient early on).
- Low TVL (limiting liquidity incentives).
- Existing node operators receiving sequencer fees (ensuring they remain incentivized).
Recommended Staking Model: Hybrid Yield Booster + Sequencer Fee Redistribution with Locking Periods and Tiered Rewards + Liquid Staking
How It Works:
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Locking Period Determines Base APR. Locking Periods with Tiered Rewards where Longer staking commitments earn higher base APR, with additional boosts for active participation:
- 1 Month Lock: 5% APR.
- 3 Month Lock: 5.5% APR.
- 6 Month Lock: 6.25% APR.
- 12 Month Lock: 7.5% APR.
- 24 Month Lock: 10% APR.
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Tiered Reward System: Stake More, Engage More, Earn More
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Basic Stakers – Earn base APR from staking duration only.
Who? Users who simply stake their tokens without additional network participation. -
Active Participants – Get a +0.5% APR boost for contributing to the ecosystem.
Who? Users who actively engage with the network, such as participating in governance, providing liquidity, or interacting with dApps. -
Power Users – Get a +1% APR boost for being key contributors.
Who? Highly engaged users who drive network growth, aka developers, validators, and large liquidity providers who enhance adoption and infrastructure.
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This system ensures that rewards not only incentivize staking but also encourage deeper engagement, helping the ecosystem grow sustainably.
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Sources of Staking Rewards:
- Sequencer Fee Redistribution: A share of sequencer-generated revenue is allocated to stakers, ensuring rewards are tied to network activity.
- Protocol Revenue Sharing: Stakers earn rewards from DeFi swaps, lending fees, and other on-chain activities, reducing reliance on inflation.
- Governance-based incentives: Stakers receive enhanced governance influence and access to fee-sharing mechanisms.
- MEV Revenue Sharing: A portion of Maximal Extractable Value (MEV) profits will be distributed to stakers, adding another revenue stream.
- Liquid Staking: Stakers can receive liquid staking tokens (LSTs) representing their staked assets, allowing them to retain liquidity, participate in DeFi, or use them as collateral while still earning rewards.
Updated Example Calculations
Scenario 1: A Power User Staking for 12 Months
- Base APR from 12-month lock: 7.5%.
- Power User Boost: +1%.
- Final APR: 8.5% APR.
Scenario 2: An Active Participant Staking for 6 Months
- Base APR from 6-month lock: 6.25%.
- Active Participant Boost: +0.5%.
- Final APR: 6.75% APR.
Scenario 3: A Basic Staker Staking for 24 Months
- Base APR from 24-month lock: 10%.
- No extra boost (Basic Staker).
- Final APR: 10% APR.
Why This Model Works Best
- Sustainable: Avoids inflation by relying on real revenue streams rather than new token issuance.
- Accessible: Allows both short-term and long-term stakers to participate.
- Encourages Adoption: Attracts liquidity by rewarding usage, not just passive staking.
- Maintains Node Operator Incentives: Sequencer operators still earn the majority of fees but contribute a fraction to ecosystem growth.
- Scales with Network Growth: As TVL and transactions increase, staking rewards naturally become more competitive.
- Composability-Friendly – Liquid staking enhances DeFi integrations
By implementing this model, Fuse Ember creates a more dynamic and rewarding staking experience, driving adoption while maintaining long-term network security and economic sustainability
Detailed Model Plan with Numbers & Scenarios
Initial Staking Pool Setup:
- Total Initial Staking Pool: 10M tokens allocated for staking rewards.
- Initial Staking APR: 5% for the minimum locking period (1 month).
- Allocation of Fees:
- Sequencer Fee Redistribution → 10% of sequencer fees will be redirected to stakers, while 90% remains with node operators.
- Protocol-Generated Fees → A portion of DeFi swap fees, lending protocol revenue, and other on-chain activities will be allocated to staking rewards.
- MEV Revenue Sharing → As the network grows, a portion of MEV (Maximal Extractable Value) profits from transaction ordering will be redistributed to stakers, creating an additional incentive layer.
- Governance-Controlled Incentives → An initial allocation of $6,000 per month will support staking rewards, with the amount scaling as network adoption increases.
Example Scenario (Year 1):
- Assumptions:
- Network processes 1M EOA transactions per month.
- Average fee per transaction: $0.001.
- Monthly sequencer revenue: $1,000 (90% to node operators, 10% to stakers).
- Protocol-generated fees: $1,000 (from swaps, lending, etc.).
- Governance incentives: $6,000 per month.
- Total Staking Reward Pool: $8000 per month distributed to stakers.
Projected Growth & Adjustments:
- Phase 1 (Launch - 0 to 6 months)
- Introduce staking with basic APR structure (5%-10%).
- 10M tokens from the treasury allocated to staking rewards.
- Begin sequencer fee redistribution to stakers.
- Phase 2 (Growth - 6 to 18 months)
- Reduce reliance on governance incentives, increase protocol revenue contributions.
- Increase TVL and dApp engagement to raise protocol-generated staking rewards.
- Expected monthly staking rewards increase to $20,000 as TVL grows.
- Phase 3 (Maturity - 18+ months)
- Staking APR dynamically adjusts based on network activity.
- Governance takes over reward distribution through proposals.
- Majority of rewards come from network fees and organic activity.
Implementation Roadmap
- Phase 1 (Launch) – Introduce basic staking & sequencer fee-sharing..
- Phase 2 (Growth) – Add DeFi-integrated yield boosting.
- Phase 3 (Maturity) – Expand governance control & liquidity incentives..
Conclusion
With the introduction of Fuse Ember’s new Layer 2 staking mechanism, we are taking a significant step towards a more sustainable and reward-driven staking system. This shift comes as part of Fuse’s broader evolution, including the phasing out of the old L1 staking mechanism and the inflation adjustments introduced in FRC02.
For more details on the L1 inflation changes, read the FRC02 proposal here: FRC02: Setting a Max Supply, Introducing Fee Burn, and Transitioning to a Deflationary Model - #23 by emmanuel
The New Layer 2 Staking Model: Sustainable & Scalable
Our proposed Hybrid Yield Booster + Sequencer Fee Redistribution model is designed to:
Align incentives between stakers, node operators, and network participants
Reduce reliance on inflationary rewards, replacing them with real revenue-sharing
Encourage deeper participation through tiered staking rewards based on engagement
By leveraging sequencer fees, protocol revenue-sharing, and governance incentives, this model ensures that staking remains valuable even at low transaction volume & TVL, while also scaling effectively as Fuse Ember grows.
As we move forward, we invite community feedback to fine-tune this model and ensure it serves the long-term sustainability of the network.