The Stroom protocol's staking rewards system operates through a series of interconnected mechanisms designed to incentivize participation and reward stakeholders.

BTC Deposits for Minting: BTC deposited during the minting of stBTC or bstBTC is placed into LN channels by Stroom-enabled hubs.

Revenue Monitoring and Distribution: Hub balances are monitored, and revenues are redistributed to token holders daily, subject to service fees.

Primary Yield Sources: Protocol users earn yields from LN routing fees (65%) and participation in the DeFi ecosystem through derivative tokens.

Node Operator Incentives: LN node operators receive 15% of the LN yield generated by their nodes, with this percentage adjustable through governance.

Validating Nodes Rewards: Federation signature holders, or validating nodes, earn 10% of the routing fees.

DAO Treasury Allocation: 10% of the revenue is allocated to the DAO treasury, potentially providing incentives for long-term STROOM token holders.

Token Issuance Programs: Various incentivization programs for STROOM token issuance will be implemented based on user analysis to identify the need for incentives.

stBTC staking involves several risks.

Smart Contract Security Risks: Bugs in smart contracts could lead to fund loss, but Stroom mitigates this by collaborating with specialized companies for security audits and a bug bounty program.

LN Software Security Risks: The LN technology is experimental and evolving, and bugs in the software could result in fund loss. Stroom uses the widely adopted and tested lnd implementation to minimize these risks.

LN Slashing Risk: The LN protocol's disincentive mechanism may slash stakes if nodes broadcast incorrect channel closure transactions. To mitigate this, Stroom employs a DAO approval mechanism and a DAO-run watchtower.

LN Adoption Risk: Low adoption of the LN protocol could diminish Stroom's value proposition. Stroom aims to boost LN adoption through the introduction of stablecoins via the Taro Asset Protocol.

Validating Nodes Threshold Signature Risks: The DAO approval mechanism is at risk of validator compromise or collusion. Trusted, professional validators with a slashable stake in the protocol are selected to mitigate this.

stBTC/bstBTC Price Risk: There is a risk of these derivative tokens deviating from their peg to BTC. Stroom addresses this with a secure minting and redemption process, allowing swaps at a 1:1 ratio, though fund availability and channel closure capabilities are crucial to facilitate full redemptions. In extreme cases, Stroom can close channels to process redemptions.

Stroom DAO is the governing structure of the Stroom protocol, operating across Bitcoin, Ethereum, and the Lightning Network. To ensure secure and trustless operations, Stroom leverages reliable communication between these protocols. While some Bitcoin-Ethereum bridges, like RenBTC, are organized as multisig DAOs, others, like wBTC, rely on multisig vaults among centralized custodians. Stroom employs a distributed governance model through a DAO structure to enhance transparency and community input in decision-making processes. The community can establish and modify incentives for signature holders, replace validating nodes, propose and adopt changes in underlying protocols, fund protocol development from the DAO treasury, and govern funds from collected service fees.

Stroom uses FROST, a Schnorr threshold signing algorithm used by validating nodes within the Stroom protocol to approve various operations. Notably, each validating node autonomously validates events requiring approval, independent of other nodes. To finalize an approval, a minimum of 2/3 + 1 votes from validating nodes is needed. Stroom processes involve storing channel states, revocation keys, and updating LN state signatures. Multi-party signatures for minting and redemption are generated and stored locally by validating nodes, allowing LN-enabled hubs prompt access. Nodes synchronize their databases akin to a pBFT-style consensus blockchain, ensuring censorship resistance. Additionally, each full node integrates Bitcoin and Ethereum nodes, collectively serving as a DAO-managed LN watchtower. Validating full nodes monitor LN channels through Bitcoin nodes and store necessary revocation keys locally.