# FRC03: Layer 2 (L2) Staking Mechanisms: Review & Recommendations for Fuse Ember L2 **URL:** \ **Category:** Governance\ **Created:** [March 17, 2025, 5:06pm UTC](https://forum.fuse.io/t/frc03-layer-2-l2-staking-mechanisms-review-recommendations-for-fuse-ember-l2/782 "2025-03-17T17:06:29Z")\ **Posts on this page:** 4\ **Page:** 1
**Author:** ![Misha](https://dub1.discourse-cdn.com/flex005/user_avatar/forum.fuse.io/misha/32/202_2.png) [@Misha](https://forum.fuse.io/u/Misha)\ **Post date:** [March 17, 2025, 5:06pm UTC](https://forum.fuse.io/t/frc03-layer-2-l2-staking-mechanisms-review-recommendations-for-fuse-ember-l2/782/1 "2025-03-17T17:06:29Z")
# 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 1. 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. 2. Sequencer staking is becoming the dominant model – Metis and Boba already distribute fees to stakers. 3. Governance staking alone is insufficient – Optimism and StarkNet struggle to drive participation without clear financial incentives. 4. 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: - Locking Period Determines Base APR. Locking Periods with Tiered Rewards where Longer staking commitments earn higher base APR, with additional boosts for active participation: - Tiered Reward System: Stake More, Engage More, Earn More This system ensures that rewards not only incentivize staking but also encourage deeper engagement, helping the ecosystem grow sustainably. - Sources of Staking 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: 1. 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. 1. 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. 1. 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](https://forum.fuse.io/t/frc02-setting-a-max-supply-introducing-fee-burn-and-transitioning-to-a-deflationary-model/633/23) ### 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. ---
**Author:** ![RB\_1010](https://dub1.discourse-cdn.com/flex005/user_avatar/forum.fuse.io/rb_1010/32/43_2.png) [@RB\_1010](https://forum.fuse.io/u/RB_1010)\ **Post date:** [March 24, 2025, 6:02pm UTC](https://forum.fuse.io/t/frc03-layer-2-l2-staking-mechanisms-review-recommendations-for-fuse-ember-l2/782/2 "2025-03-24T18:02:08Z")
There’s currently 100m Fuse staked on the L1. If that was locked for 2 years at 10%APR on the L2 it would equal 20m Fuse rewards (10m per year). But only 10m Fuse has been designated for rewards. Apart from assuming that all the 100m wont be locked for 2 years - what contingencies are there to support the APR for the minimum periods (i.e. if someone locks for 2 years, what are the guarantees they will get that APR for the full 2 years before the 10m treasury funds run out) * * * Regarding the above, the below quote implies that APRs are variable after 18months, so there’s no guarantee that staking for 24months will achieve the full 10% APR over the term of the lock. It also implies that staking APR comes from some other source than the Treasury funds as these would possibly be exhausted here. > [@Misha](#): > > 1. Phase 3 (Maturity - 18+ months) > > - Staking APR dynamically adjusts based on network activity. ---
**Author:** ![RB\_1010](https://dub1.discourse-cdn.com/flex005/user_avatar/forum.fuse.io/rb_1010/32/43_2.png) [@RB\_1010](https://forum.fuse.io/u/RB_1010)\ **Post date:** [March 24, 2025, 6:07pm UTC](https://forum.fuse.io/t/frc03-layer-2-l2-staking-mechanisms-review-recommendations-for-fuse-ember-l2/782/3 "2025-03-24T18:07:09Z")
I’m understanding the rewards as: 1. Fixed staking lock APR - an APR plus some boosted component to a max of +1% 2. Variable network fee share from tx fees, DeFi fees etc. I’m assuming the Staking rewards are in Fuse token. Are the network fees distributed in $USDC or is the $ amount use to buy Fuse off the market before distribution to stakers. ---
**Author:** ![RB\_1010](https://dub1.discourse-cdn.com/flex005/user_avatar/forum.fuse.io/rb_1010/32/43_2.png) [@RB\_1010](https://forum.fuse.io/u/RB_1010)\ **Post date:** [March 24, 2025, 6:08pm UTC](https://forum.fuse.io/t/frc03-layer-2-l2-staking-mechanisms-review-recommendations-for-fuse-ember-l2/782/4 "2025-03-24T18:08:34Z")
Please explain where the Governance rewards come from and what one has to do to earn them > [@Misha](#): > > Governance-Controlled Incentives → An initial allocation of $6,000 per month will support staking rewards, with the amount scaling as network adoption increases