Lido participates in the Interchain competition for liquid staking
Defi Summer 2021 has marked the great development of the crypto market and is the motivation for 2021. In the DeFi segment, users are familiar with AMM, the Lending protocol, and liquid staking products. However, Defi development in the Cosmos system has not developed as strongly as in other ecosystems such as ETH, BSC, SOL, and AVAX, …
We can see liquid staking is about to make a significant step forward for Cosmos DeFi. Money markets will emerge, liquidity pools will be larger, and decentralized stablecoins will be more viable. Liquid staking will push Cosmos DeFi to higher levels, improving yields and TVL.
Currently, liquid staking on Cosmos has prominent projects such as Stride, Persistence, and Quicksilver. And today, a big player in the ETH system, Lido Finance, has proposed to expand multichain and participate in Liquid Staking on Cosmos.
Lido presents a framework for project implementation as a specialized implementation created to meet the liquid staking requirements of the entire IBC ecosystem.
Initiating a discussion on the suggested design is the goal of this proposal.
Main motivation
Staking has become profitable thanks to high inflation rates and growing APRs across the Cosmos ecosystem, but this has also raised the productivity threshold and stunted the development of the DeFi industry. This causes a sizable amount of each zone’s supply to be bonded and illiquid. The use of Lido’s liquid staking technology will lessen the rivalry for profits for the new protocol and release a sizable sum of money that can be moved about the ecosystem, driving the development of the Cosmos system.
A positive feedback loop that benefits the entire Cosmos DeFi ecosystem might be initiated by liquid staking if there are enough incentives.
Lido anticipates that liquid staking derivatives will quickly become well-known in the Cosmos community because of their high APR and staking rates.
With a properly-designed implementation, Interchain has the potential to be one of the greatest ecosystems after Ethereum, giving the DAO access to Cosmos’ success as well as a variety of revenue streams.
Persistence, Quicksilver, StaFi, Stride, and Supernova have all announced Interchain Liquid Staking products, indicating how competitive the market for this service is growing.
Why did Lido choose Cosmos?
DeFi Cosmos Context
While compared to other L1 contexts, DeFi activity has been rather subdued, underlying technologies and fundamentals have been fast advancing. Hundreds of developers and protocols are moving to their own app chain or to other Cosmos smart-contract platforms, which is one way in which the loss of Terra has a silver lining. The Cosmos ecosystem, which includes Interchain Security, Accounts, and Queries, and modular blockchain primitives like Celestia, appears ready for long-term expansion.
Most Interchain participants do not now have access to liquid staking. The limits of conventional LS design, which frequently depends on the deployment of smart contracts on each new network, can be used to explain this. Such a solution is frequently either impractical or impossible to implement in the Interchain scenario since app chains can choose to forego smart-contract support in favor of building code straight into modularized binaries.
Quicksilveris most likely Lido’s major rival when it comes to the Interchain. The protocol is currently operational on the testnet and enjoys a respectable level of popularity among Cosmos users. Quicksilver is aiming to switch to Interchain Security once the feature is made available in early 2023, with a launch date of Q3/2022. Additionally, Persistence is actively growing within the BNB chain and is increasingly branching out to other chains. It already has a significant quantity of TVL. Stride recently debuted on September 6 and is progressively accelerating rivalry in this liquid staking market.
Metrics
There are around 45 interconnecting zones in the Interchain. The many chains’ capitalizations, staking ratios, and activity are all well-represented by Mintscan
The Interchain’s central and most financially stable zone is the Cosmos Hub. Despite not supporting smart contracts, it strives to become the primary Interchain Service Provider (routing IBC transactions, offering security, etc.). According to CoinMarketCap, the market cap of ATOM tokens is over $3.6 billion with a circulating supply of about 290 million and no maximum supply. The high staking APR (18.89%) and the Hub’s emphasis on staking and security can be used to explain why around 66% of the current circulating supply is currently bonded, according to Mintscan. ATOMS can be used as collateral on Umee, in a variety of liquidity pools on Osmosis and other DEXs, etc.
Revenue simulation
All information was obtained from Mintscan on June 22, 2022, when prices were substantially depressed. The simulations following are therefore probably fairly conservative.
Lido starts by concentrating on the Cosmos Hub, which is probably going to be the first zone added and should provide most of the protocol’s initial revenue.
🧮 **Cosmos Hub revenue simulation formula:
Protocol Revenue = Total Stake * Market Share * Staking APY * Protocol Fee * Atom Price
DAO Revenue = Total Stake * Market Share * Staking APY * DAO Fee * Atom Price
It is more difficult to simulate income for an Interchain Liquid Staking Protocol. The market share of Lido across zones is unlikely to be uniform, each network has its unique set of characteristics, zones may not want to be onboarded, and the sequence and speed at which interested zones will be onboarded are unclear.
However, this protocol is made to function on several networks. The protocol’s potential would be reductively represented if all of this data were ignored.
Therefore, for the purpose of example, below is a simulation of revenue based on the following basic hypotheses: market share is homogenous across all onboarded zones, and all 28 zones for which Mintscan has Market Cap data are onboarded.
🧮 **Interchain Simulation:**
Protocol Revenue = Market Cap * Bonded Ratio * Staking APY * Market Share * Protocol Fee
DAO Revenue = Market Cap * Bonded Ratio * Staking APY * Market Share * DAO Fee
Solution conception
Interchain Liquid Staking
Interchain Accounts (ICA), Interchain Queries (ICQ), and IBC can be used to create a system that can onboard any ICA-enabled blockchain with as few as one relayer and one transaction:
Interchain stAssets
Interchain Liquid Staking works in the same way as a native liquid staking solution from the user’s perspective. It mints liquid staking derivatives that generate staking yield and receives and stakes native tokens (such as ABC tokens) directly from the user’s zone (e.g. stABC).
Users now have the choice to deposit tokenized delegations rather than liquid tokens thanks to Iqlusion’s third-generation liquidity staking module. Users don’t need to wait an entire unbonding period with this strategy to receive liquid staking derivatives against existing delegates.
The protocol repeatedly claims and re-stakes stake rewards since stAssets automatically compound rather than rebase. They are thus ideal for DeFi purposes like liquidity pools, interchain transfers, and other uses. In comparison to native assets, the value of stAssets rises over time.
Semi-Permissioned Validator Set
On Cosmos, a novel validator set and stake distribution approach can be used. Lido advises implementing a permissioned and a permission-less list rather than a single list of authorized validators:
- The Lido DAO approves the permissioned list after it has been examined and created by the LNOSG. Whitelisted validators receive delegations in accordance with weights determined by an algorithm using both on-chain and off-chain parameters. This information may include current delegates, general performance, decentralized infrastructure, commission rate, and community service (such as operating IBC relayers), among other things.
- Any validator that meets a set of fundamental performance requirements that can be verified on-chain can join the permission-less list. Existing delegates, commission rates, and other factors may be among these criteria. The permission-less set is divided up into delegations according to weights generated automatically from on-chain data. A validator on the permission-less list may only get a portion of the delegations granted by the protocol.
The DAO determines the percentage of delegations assigned to each list. Validators from the permission-less list that perform exceptionally well can be chosen to join the permissioned set after launch.
Underlying Zone
A zone must fulfill the following criteria in order to be acceptable for the protocol’s release:
- High Economic Security: e.g. Interchain Secured by the Cosmos Hub,
- Interchain-Interoperable Smart-Contracts: CosmWasm, IBC, ICA & ICQ enabled with smart-contract support.
Lido suggests launching Lido for the Interchain on Neutron, a CosmWasm permission-free smart-contract platform that has all of the aforementioned functionalities.
P2P, a key Lido contributor with an extensive understanding of the Cosmos tech stack, is the incubator of Neutron. The Cosmos Hub has provided support and money for Neutron to make it one of the first Interchain Secured zones.
See more Proposal
Neutron will have its own coin and plans to use gauge voting and veTokenomics to distribute rewards and incentives for mining liquidity.
This might work in Lido’s favor because Neutron incentives might close the incentive gap that separates Lido from other liquid staking protocols that are emerging as app chains. These LS app chains enjoy complete control over the initial distribution of their tokens and can allocate substantial amounts of their supply to boosting yield or expanding their user base.
On the other hand, Lido should be able to connect with other DeFi primitives more quickly and synchronously if it starts out on a smart-contract platform as opposed to an app chain (which is not possible over IBC). This makes Lido’s liquid staking derivatives more appealing to Interchain users thanks to a number of advantages, including improved utility and composability, better control over stAsset liquidity, and more.
Reference:
https://research.lido.fi/t/lido-for-the-interchain/2886
Proposal: Bringing Liquid Staking and DeFi to the Cosmos Hub with Interchain Security
