Liquid Staking Token Vaults (stATOM, stkATOM, qATOM, etc.)

Inter Protocol Discussion
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With Mainnet 1B live and the Inter Vaults release just around the corner, I would like to start the discussion around adding liquid staked tokens, like stATOM, as a collateral type for vaults. While it presents a different risk profile than ATOM, I believe support is necessary for Inter to stay competitive with the market.

Personal Introduction

I am not sure I’ve introduced myself on this forum, but I’m a community member, developer, and ocap maxi. I’ve been using defi protocols for the past 3 years, and was a hedge fund analyst in a past life. My motivations are mainly from a builder’s perspective - I am building on the agoric stack and would like to see the project flourish. You can usually catch me at developer office hours on Wednesdays, or on discord with the same handle.

Motivation

ATOM was the first asset voted in as a vault collateral type prop 32. ATOM is the largest native IBC asset by market capitalization and trades on a multitude of centralized and decentralized exchanges with relatively deep liquidity. Among other factors, these make it a great asset to have in Inter Vaults as the protocol invariants rely on robust price oracles and liquidation auctions.

At the time of writing, however, the current ATOM staking APY is 19.56% mintscan. Prospective ATOM vault holders must weigh this opportunity cost, or dilution risk, against the benefit of borrowing IST.

Luckily, several protocols like Stride, Quicksilver, and pStake offer liquid versions of staked tokens for a small commission. There are tradeoffs of course - smart contract risk, available liquidity, and quality of price feeds - but the projects and asset class seem to be garnering adoption.

Umee users currently seem to have a preference for stATOM — there is currently $2.97M stATOM supplied compared to $1.61M ATOM. And Mars is another protocol that added support for stATOM.

Next Steps

I imagine folks are already discussing this topic, but it’d be great to formalize a discussion here. Some particular areas I think worth discussing are:

1. Oracle Network Data Sources

I previously posited a question along these lines in a different thread, Inter Protocol Vaults: Contract Implementations. It would be great to learn what venues will be used to aggregate quotes for stATOM, and how in general the oracle network operators and econ committee are thinking about aggregating quotes for assets that only trade on decentralized venues. I am thinking things along the line of:

  1. Does a dex need to provide an official oracle (i.e. Osmosis TWAP), or can operators still gather quotes from a dex without one (i.e. Crescent)?

  2. Are there specific liquidity, volume, or depth thresholds that need to be achieved in order for a venue to be quotable? (i.e. Crescent, which only has $34k in the stATOM/IST pool)

Aside from my own personal interest, I think the more transparency we can build around the oracle network and how it works the better. It will increase user confidence and trust.

This may include a dedicated web page that lists information like uptime, quotes, and other key stats like the venues quotes are sourced from. It may also be beneficial to do a write up about why agoric has its own oracle network, versus using something like Band Protocol or the newly minted Ojo Network, and the benefits this provides.

2. Documented Risk Framework

Protocols like Mars and Euler provide risk assessment frameworks to show how they think about asset selection and parameterization. Gauntlet also provides regular commentary and updates in governance forums like Aave.

Taking measures like these not only contribute to the establishment of a secure protocol but, more importantly, build user confidence and trust. If the Econ Committee or other community members have any plans along these lines under way, I think it’d be great to share them!

3. Incentives Framework

It’d be great to gather thoughts on where everyone’s heads are at with incentives - DCF, econ committee, community members. I don’t have too much of an opinion on the matter, but it’s something I’d like to see discussed. Some questions that come to mind:

  1. What are the current incentive programs in place? I am knowledgable of ones for stATOM/IST and bCRE/IST on Crescent and OSMO/IST on Osmosis.

  2. What are the goals of the incentives programs? (Decentralization, building dex liquidity for liquidations, IST adoption). Are there specific milestones we’re trying to achieve? ($xM liquidity on xDex)

  3. Are there any specific marketing initiatives planned with Vaults launching?

  4. Have we done an analysis of past BLD liquidity mining programs and their efficacy? (perhaps, maybe Gauntlet has done some analysis)

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Thought some numbers on ATOM LSTs would help.

Liquidity

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Liquidity Incentive APRs

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Just some thoughts on ATOM LSTs…

RE stATOM

  • Stride has the highest fees: Stride - 10% vs Persistence - 5% vs Quicksilver 3.5%

*~0.07% of OSMO liquidity incentives are currently exclusively reserved for the stATOM:ATOM pool as stATOM is the only collateralized asset that is being used as leverage from apps deployed on Osmosis. Osmosis stATOM Liquidity Incentive Carve Out

RE stkATOM

  • I have wondered whether a stkATOM:IST pool on Crescent would be more successful (as measured by liquidity) since the stkATOM:ATOM pool is significantly larger than the stATOM:ATOM pool.

  • Could a stkATOM IST vault pave the way for a IST:stkATOM pool on Dexter and or Crescent? Could it pave the way for IST being an acceptable transaction fee token on Persistence?

  • IST could perhaps differentiate itself from CMST, SILK, and USK by being the first to allow stkATOM as a collateral asset.

  • The Dexter DEX Trading Rebate Program that providers stkATOM-ATOM traders a rebate on swap fees in XPRT tokens, perhaps makes stkATOM a bit more appealing.

  • As does the pStake stkATOM Instant Unstake feature. (The question of whether the 0.5% fee should be raised was brought up on the pStake governance forum)

RE qATOM

  • Quicksilver allows liquid stakers to signal which validator they wish their ATOM to be staked with, and also plan on providing the ability to still participate in governance via proxy. I would imagine these features would are rather valuable to IST users who want to ensure the interests of IST and BLD are well represented in Cosmos governance.

RE Incentives Framework

With SFS enabled on both the IST:OSMO and BLD:OSMO pools, if there are any plans to extend BLD incentives for the IST:OSMO pool, since they will be ending in 14 days, it perhaps it may now be easier to crowd source the proposal deposit amount and get an external incentives matching passed. I imagine OSMO holders that would like to be able to use their OSMO to mint IST would be supportive of this

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Thanks for your thoughts @RedRabbit, the case for stkATOM is definitely interesting. I imagine Inter will support multiple issuers over time, so I am interested to hear thoughts on this from others. Perhaps from a community alignment perspective it may make most sense to support several issuers in one go with different caps. A risk framework really helps with these decisions, and communication around them.

Related to all of this, but not spelled out directly in Incentives Framework, is thoughts on Exchange Liquidity Strategy for $IST. This is probably more important to discuss than the incentives themselves.

  • What is the ideal mix of liquidity for IST?

    • Stableswap pairs vs vault collateral type pairs. Liquidity at many venues vs deep liquidity at strategic venues.
    • The large level of liquidity on ATOM/OSMO provides ATOM/IST at 2 hops for 0.20%. stATOM/IST trades require 3 hops and a 0.70% fee (see screenshots below). IST/OSMO LP’s most likely suffered ~25% IL unless they were able to hedge OSMO exposure, but incentives have seemed to keep many around. Osmosis is definitely a strategic venue, but it’s interesting to watch the progression of dex design coverge towards more capital efficient mechanisms.
    • Aside from the pools listed in OP, there is a DAI/CMST/IST stableswap pool on Osmosis with ~$250k of liquidity and a SILK/IST stableswap pool on ShadeSwap with a similar level of liquidity ($280k). Shadeswap has a 0.31% fee on the stATOM/IST path and a 0.36% fee on the ATOM/IST path and provides slightly deeper quotes than Osmosis. It’s great to see stableswap pools as they provide deeper quotes with less liquidity, but these pools need to build significantly more liquidity to be meaningful. Below are some screenshots showing the max amounts tradeable at ~0.30% and ~3% slippage.
    • Inter’s PSM currently provides the deepest $IST liquidity for stable pairs. Liquidators can bring 1 of 6 stablecoins and swap an amount >1M IST for 4 issuers Inter Protocol Stats. This is very efficient, but currently doesn’t provide much liquidity going the other way (selling IST).

  • Strategic Partnerships and Launches

    • Astroport dex plans to launch on Neutron, an ICS network in the ATOM economic zone; Stride has a proposal in place that will allocate 450k ATOM / ~$4.5m from the ATOM community dao for initial liquidity in a stATOM/ATOM pool on this dex. This is worth noting since it seems like a place we want to have IST liquidity, and I’d also like to encourage similar strategic efforts from our community once it seems Vaults are in a good place.
    • In the near term, it could be great to see IST/USDC (native from noble) and IST/ATOM liquidity pools on Neutron or other ICS chains. Duality docs, website is another planned appchain dex that seems promising and worth connecting with. These decisions probably require more thoughtful analysis around “the ideal mix of liquidity”, which I haven’t really provided, but hoping folks who are thinking about this can chime in.

  • What folks/groups are currently leading the charge on these efforts?

    • It was also great to see the efforts from @RedRabbit to have IST and BLD added to superfluid staking. Aside from the economic incentive, it makes the pools pretty prominent in the web interface :clap:. It seems like having more coordination on this topic from key stakeholders would be beneficial, especially as it closely relates to collateral type selection and protocol risk management for vaults.

  • What is the temperature check on protocol owned liquidity. Is this something we should be thinking about in these conversations?

    • I am perhaps running before walking by bringing this up, but closely related to these discussions is the notion of protocol owned liquidity. For stablecoin protocols, this could involve something like the D3M module from Maker DAO. In the context of this conversation, it could involve the Inter Reserve, or a different module, holding LP tokens for strategic pairs to help ensure sufficient market liquidity. An ATOM/IST pair may not make sense as it’s a directional asset, but perhaps a stablecoin pair might. There is more nuance to this than I’m suggesting in a few words here, but I am curious what others think on this topic over a longer-term horizon. If it’s not suitable for the protocol to hold these, perhaps the discussion could be around LP tokens as a collateral type and what oracles would look like for that.

Osmosis Quotes: Osmosis IST* Quotes at 0.30% and 3% slippage - Album on Imgur
ShadeSwap Quotes: ShadeSwap IST* Quotes at 0.30% and 3% slippage - Album on Imgur

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As a Stride contributor, I’m happy to see the Agoric community beginning to think about stATOM as a possible collateral type for IST. Though I’m clearly biased, hopefully I can provide some helpful input.

Currently, it is very expensive to mint IST with ATOM. Since at least $2.5 of ATOM is needed to mint 1 IST, every IST minted costs ~50% APR in forfeiting staking rewards. That’s prohibitively expensive for the majority of IST use-cases. But by using stATOM to mint IST, users would be able to keep their staking rewards. Much more efficient, and much more likely to get adoption.

With regard to your questions…

  1. The Mars / Delphi team has very rigorous safety standards for oracles and money market parameters. If you haven’t already done so, you should check out their research, posted on the Mars governance forum.

The ideal oracle solution for Mars is a combination of the stATOM redemption rate and the price of ATOM sourced from a CEX. Specifically, the stATOM redemption rate is the rate at which stATOM can be used to redeem ATOM from the Stride liquid staking protocol. The rate is currently about 1 stATOM = 1.15 ATOM. So by multiplying the ATOM CEX price by the stATOM redemption rate, you get the exact price of stATOM.

This solution is still under development. In order to be implemented, a smart contract has to be written to provide the redemption rate from the Stride blockchain to the Osmosis and Neutron blockchains. In the meantime, Mars simply uses the price of stATOM sourced from the stATOM Osmosis pool. Until the stATOM redemption rate can be provided natively on Agoric, it should be safe for the Agoric community to rely on an stATOM oracle using the pools on Osmosis and Neutron. Just set a relatively low stATOM collateral cap - maybe 150K stATOM.

  1. Agreed. Would be great to see a formal risk framework for IST, if there isn’t already one avaliable.

  2. Don’t have anything to add about IST incentives (:

Currently, stATOM is the most popular decentralized collateral for both the USK and SILK stablecoins. stATOM has by far the deepest liquidity on DEXes, and Stride arguably has better security features than other liquid staking chains, those features being IBC rate-limiting, chain minimalism, and of course interchain security.

Looking forward to seeing more Cosmos stablecoins backed by stATOM!

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Partnerships: It would be great to know which chains IST leadership is currently having conversations with to have IST as a payment token on their chains as it seems like IST could gain a strong user base by aligning collateral assets with which chains IST can be used as a payment token. If I remember correctly, Dean mentioned conversations are occurring with Omniflix and Akash in his Gateway to the Cosmos presentation.

A decentralized stablecoin like IST also seems like it would be popular among decentralized application business partners and their users, particularly those reaching into real world markets like computing (akash and cudos), storage (jackal), vpn (dvpn), carbon trading (regen), legal cannabis (bitcanna-cosmos pay), and healthcare solutions (medibloc).

As for ATOM LSTs, I think partnerships should lead the way over popularity. Finding LST provider partners that will be IST allies and advocates, (and vice versa) and open to coordinating risk management efforts and share in the cost of analyzing risks for new LST collateral assets (perhaps done through opening up non-voting seats on the Econ Committee?) are a few things I think are well worth looking into.

Diversifying the collateral assets that back IST beyond ATOM though, whether they be nonLSTs or LSTs, seems like a priority from a risk management and user growth perspective. That being said, I do wonder how useful a AXL IST vault would be to the ecosystem, particularly for decentralized apps where Axelar bridged tokens can be used, and particularly for those that but don’t have their own native stablecoin like Kujira with USK and Shade with SILK, to bridge over wBTC, wETH, etc.

Oh…and still trying to get IST listed as a tx fee payment token on Osmosis. Osmosis is looking to add USDT as a tx fee payment token and I don’t see why IST shouldn’t be added at the same time given the IST/OSMO pool is larger than the USDT/OSMO pool and other reasons that I mentioned in my post on Osmosis CommonWealth. (See: Commonwealth) Anyone that would like to use IST as a tx fee payment token on Osmosis, please feel free to chime in. I’m sure Johnny Wiles would love to hear from other people besides just me. lol. :smiley:

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I agree with @John_Galt that the most accurate source for the stATOM price is the Stride redemption rate multiplied by the ATOM USD price.

As one of the team members working on oracle data sourcing, we’ve already added the ability to query the Stride redemption rate and multiply by a secure ATOM USD price. Each individual Agoric Oracle provider will be able to query their Stride nodes individually and also use their own ATOM USD price, to finalise a stable stATOM price and submit on chain.

We’re also finalising DEX integrations to query the price of stATOM and are scoping out the whether there’s any possibility of also using these sources for the data feed. If DEX pricing is not used, this infra will now be ready for further data feeds that will require such sources.

We’ll soon start testing on an internal testnet, and will also share our conclusions / recommendations to the Economic committee.

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I suppose many/most readers have already seen this post from the Economic Committee, but just in case:

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Hi @francescoSimply, thank you for sharing!

Very cool! I gather this means we can source prices from DEX’s that do not have an oracle. Can you elaborate on how it works? Are you looking at liquidity pool balances to derive a price, observing recent trades, requesting quotes at $x depth, or perhaps something else?

Also, are there specific DEX integrations that you could point to? For stATOM, some relevant ones that come to mind are Osmosis, ShadeSwap, and Crescent.

Can you help everyone understand how this works a bit more? I looked at the Redemption Rate documentation, and it seems to count all of the ATOM (staked, in flight, and in queue), and come up with an ATOM/stATOM conversion rate:

(undelegated record balance + module account balance + staked balance)/(st-token supply)

Does it account for the unbonding period? I see this is advertised as 21-24 days on the Stride dApp for stATOM. In the event of a black swan, I wonder if this oracle will be as strong as a DEX quote.

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Some more thoughtful comments on this vs my initial take -

Two of the main concerns here I think are -

  1. cost of oracle manipulation

  2. oracle correctness for liquidations and minting IST

Oracle Correctness

Let’s take a hypothetical scenario:

$ATOM is trading at $10 and the redemption rate is 1.2stATOM/ATOM. stATOM is trading at par, $12. A bug is exploited in the Stride contracts and users flood to redeem stATOM for ATOM and sell on exchanges. The redemption rate is still quoting 1.2stATOM/ATOM but the market is quoting 0.6stATOM/ATOM.

  • Oracles that should be forcing liquidations will not be, as the 1.2stATOM/ATOM quote does not breach the threshold. :x:
  • If ATOM/USD also drops, and vaults were already set to liquidate at say $11 stATOM, the auctions might go below par. Vaults may be on the losing end, depending on the discount, but overall the descending price auction mechanism should still allow the collateral to safely liquidate. :white_check_mark: (a fixed liquidation discount rate would not have this benefit)
  • A user buys a bunch of $6 stATOM, and mints $IST at an $11 rate. When they need to pay back their debt, the oracle is still quoting $11 so there is no loss for the protocol. :white_check_mark: If they abandon the vault, and the max LTV is 60%, the depeg needs be to greater than 40% (6.6 IST per stATOM) to be profitable for the attacker (assuming IST holds its peg). :x:

In a less severe scenario, the ~20 day unbonding period may cause a delta between the market price and redemption oracle. This may create some arbitrage opportunities when opening and closing vaults, but the spread may not be materially significant. The main concern really just seems to be a prolonged/permanent depeg from the underlying.

Oracle Manipulation

Alternatively, one could consider the risk of depeg to be lower and instead find oracle manipulation risk to be a greater concern. Here, potential attack vectors open when pools do not have a lot of liquidity. Euler has a tool for quantifying the cost of manipulating the Uniswap TWAP oracle which is interesting for those intereseted.

If we are able to quote the more widely available ATOM, there will be less oracle manipulation risk. It also seems like it may allow for a higher deposit cap.

Harbor Protocol Oracle Incident

Two weeks ago there was an issue with the stATOM price oracle on the Comdex Harbor Protocol. The incident report states an average of prices from three sources - Coingecko, Osmosis, and cSwap - and an incorrect data pull from ShadeSwap caused the Coingecko price to drop to $0.02.

This is worth noting since we may also come to leverage the Coingecko oracle. ShadeSwap seems to have caused 3 big blips on the stATOM price on Coingecko. They are not currently listed as a source in Markets, but may come online again and further affect the oracle.

More notably, @dtribble joined us at developer office hours last week and explained how this would work with Agoric’s implementation of the Chainlink FluxAggregator design. This takes the median of values, instead of the simple average, so 10+10+0.02 would result in a quote of 10 instead of 6.67. This was great to hear, and worth sharing for folks who may not be aware.

Takeaway & Next Steps

These are some tradeoffs I see, but it seems like there are viable solutions for quoting stATOM. I am curious to hear back from @francescoSimply or other oracle network providers on venue capabilities and any visibility we can provide to protocol users about the composition of our final price quotes.

Some more discussion may need to take place, but I wanted to touch on next steps for when it’s time.

I imagine we should have some sort of signaling - perhaps a poll in this thread will suffice if we can get a high enough turnout. And if that’s successful, we will need to fill out the onboarding template. @John_Galt - if you’re open to taking the lead on this as a Stride community member, that would be greatly appreciated. I am also willing to help compile answers for some of the questions and imagine @RedRabbit would be happy to pitch in as well!

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Hello from the the Economic Committee! We wanted to inform the BLD community that following the strong appetite for LSD seen on this very topic, the EC has officially commissioned Gauntlet with the assessment of stATOM (st as Stride) as a new collateral to mint IST, in addition to providing recommendation for new risk parameters for ATOM.

The EC has been closely following the development in Cosmos of the liquid staking market and the fast rise of stATOM as a prime collateral in DeFi.

Important to note here that the EC is not bound by any recommendations offered by Gauntlet.

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Curious how much more it would cost for Gauntlet to provide an assessment for stkATOM and qATOM? I would imagine a comparison of all three options would be highly valuable and a slightly better deal could be negotiated than if individual assessments were commissioned for stkATOM and qATOM as well.

There are value alignment and qualitative features I strongly believe stkATOM and qATOM provide. stkATOM/ATOM liquidity on Crescent Hub and its instant redemption feature, and the ability for qATOM users to designate which validators they wish their ATOM to be staked with.

Because both the Persistence and Quicksilver networks do charge tx fees, unlike Stride, it seems like there is a growth opportunity to get IST recognized as acceptable tx fee payment tokens on both networks with stkATOM and qATOM vaults.

Will Gauntlet be conducting some sort of market demand survey as part of its assessment? With there being competition already for stATOM among other decentralized stablecoins like USK, CMST, & SILK is there more market demand among stkATOM and qATOM holders to be able to use their ATOM LSTs to mint a stablecoin than their is currently for stATOM holders?

Also, what is the general direction the EC is heading out on regarding other tokens, partnerships, getting IST listed on other networks like REGEN’s carbon market or BCNA’s Cosmos Pay app? Is there perhaps a need for some sort of ad hoc unofficial strategy committee that can work with the EC on these things?

Also as native IBC USDC and USDT seems imminent, is there anything the IST community should expect in regards how their launch will effect the PSM?

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