Summary
This proposal aims to onboard stATOM as collateral for IST. stATOM is a liquid staked token (LST) of ATOM, issued by the Stride blockchain.
Throughout DeFi, it is becoming very popular to back decentralized stablecoins with LSTs. When unstaked tokens are used as collateral, such as ETH or ATOM, users effectively forfeit their staking rewards. But when using an LST as collateral, users get to keep their staking rewards. This increased capital efficiency makes it much more attractive to mint stablecoins with LSTs.
Stride’s stATOM has the most users, most integrations, and deepest onchain liquidity out of all the ATOM LSTs. Furthermore, the Stride blockchain has numerous advanced security features, such as interchain security (ICS). Adding stATOM as collateral for IST would be a good next step for Inter Protocol.
This proposal is being put forward by the Stride Association.
Introduction
History
The collateral in question, stATOM, is issued by the Stride blockchain. The Stride blockchain has been processing blocks since September 2022, which is also when the first stATOM was minted. stATOM is a liquid staked token representing staked ATOM, and is fully backed by ATOM at all times.
The first Stride testnet was launched in July 2022, and mainnet followed shortly after. As the first ATOM LST native to the Cosmos, stATOM quickly became a popular and trusted Cosmos token. Today, stATOM is integrated on nearly every major Cosmos DeFi chain, and represents over 85% of ATOM LST market share. In July 2023, the Stride blockchain transitioned to interchain security (ICS). Through this security arrangement, the Stride chain now has over $2 billion of economic security - which is an extraordinarily high level of economic security.
stATOM on Agoric
As an ICS-20 token minted on Stride chain, stATOM can be bridged to Agoric through IBC. The transfer channels are: Stride channel-110, and Agoric channel-48.
Token Economics
Supply
The supply of stATOM is currently 2.8M. There is no supply schedule and no allocations; rather, stATOM is minted and burned by users - similar to IST. In order to mint stATOM, users must deposit ATOM. When stATOM is burned, users redeem the underlying ATOM. As such, stATOM is fully backed by ATOM at all times.
Functionality
The staking rewards earned by the staked ATOM underlying stATOM are auto-compounded and accrue to the value of stATOM. Due to this feature, the amount of ATOM redeemable by burning one stATOM constantly increases. And so the value of stATOM against ATOM continually rises. At genesis, 1 stATOM could be used to redeem 1 ATOM. But due to the aforementioned auto-compounding staking rewards, today 1 stATOM can be used to redeem 1.193 ATOM. Handling staking rewards this way makes it easy for applications to integrate stATOM.
The way stATOM works has never changed. As a crucial building block of Cosmos DeFi, it’s likely stATOM never will change.
As a representation of ATOM, stATOM inherits the properties of ATOM. Since ATOM is a top-thirty cryptocurrency with high confidence and minimal volatility, these properties are passed down to stATOM, making stATOM likewise very suitable for collateral.
stATOM control
The Stride blockchain - and by extension the stATOM token - is controlled by the STRD governance token. Any changes to the current functionality of the Stride blockchain must be proposed in an open and transparent manner, and STRD holders must vote in favor.
In addition to this standard governance process, as an ICS chain Stride is run by the Cosmos Hub validator set. If STRD holders pass obviously malicious code, validators can choose not to run that code. (Of course, the Cosmos Hub validators that run the Stride chain are constrained by Tendermint Consensus. If a small group of validators attempted to act maliciously, its ATOM stake would be slashed.)
stATOM documents
Stride Documents: Stride: The Liquid Staking Zone
Stride Audits: GitHub - Stride-Labs/audits
Stride Labs Github project: GitHub - Stride-Labs/stride: Stride: Multichain Liquid Staking
Oracle
Currently, Inter Protocol uses a custom oracle implementation for the price of ATOM. That solution is described on the Inter Protocol website, here.
It is recommended that Inter Protocol use this existing oracle implementation to retrieve the price of stATOM, pulling stATOM price data from the Osmosis stATOM pool and the Neutron stATOM pool.
Specifically, the oracle flow should follow these three steps. First, Inter Protocol’s Oracle Network Operators should each provide an average stATOM price in ATOM drawn from the Osmosis and Neutron stATOM pools (for example - here). Second, Agoric’s Fluxaggregator smart contract should average out the price feeds and calculate a thirty-minute TWAP. Third, the Fluxaggregator should multiply the price of stATOM in ATOM by the dollar price of ATOM, which is already available on the Agoric chain. This process would provide a continuous dollar value for stATOM, which could be used for stATOM liquidations.
Note that this is merely one recommendation. It is a starting point. If the Economic Community and the Agoric community are broadly in favour of stATOM as collateral, then Stride devs, Agoric devs, and EC members can discuss this recommended oracle implementation in more detail.
Financial characteristics
Distribution
To reiterate, stATOM is a liquid staked token with an indeterminate supply. Users may mint or burn stATOM at will. All stATOM in existence has been created in the same way, namely through users minting it by depositing ATOM with Stride. The entire stATOM supply is circulating.
Trading venues
As the most popular ATOM LST in the Cosmos, stATOM is traded on DEXes throughout the Cosmos. All of the following DEXes are hosted on IBC-enabled chains within the Cosmos ecosystem.
*The listed stATOM/ATOM liquidity on Neutron will be available in approximately one week, pending the passing of this Cosmos Hub governance proposal.
stATOM history
Below is a chart of stATOM denominated in ATOM. As you can see, stATOM gradually appreciates against ATOM at the staking reward rate - due to auto-compounded staking rewards accruing to the value of stATOM:
And below is a chart of the stATOM supply, denominated in dollars. Note that stATOM’s dollar market cap has been relatively stable despite ATOM’s softening price this summer, showing that the amount of stATOM in circulation has been increasing (indeed, as of August 3rd it is at an all time high).
Legal characteristics
As a Cosmos SDK blockchain, the Stride blockchain has a governance system whereby the chain is effectively a DAO. This DAO has no legal dimension and is completely autonomous.
The Stride Protocol Association, a Swiss entity, received an allocation of STRD at genesis.
Portfolio characteristics
stATOM makes sense for Inter Protocol
There is a strong business case to be made for adding stATOM as collateral.
It boils down to this: stATOM is the best collateral available in Cosmos that does not 1) forfeit staking rewards and does not 2) entail bridge risk.
Unstaked ATOM itself is of course the best collateral native to the Cosmos, having a large and stable market cap and Cosmos Hub being considered a serious and resilient blockchain. And this is why Inter Protocol’s first vault was for ATOM. But the downside to using unstaked ATOM as collateral is the forfeited staking rewards. Given ATOM’s 20% APR staking the current 250% collateralization ratio for the ATOM vault, $1 of IST minted with ATOM results in over $0.50 of forfeited staking rewards per year. In other words, a hidden fee of 50% APR. The lackluster usage of the ATOM vault so far can perhaps be attributed to this high cost of forfeited staking rewards.
As much bigger tokens, BTC and ETH are of course preferable to ATOM as collateral. However, neither of these tokens are available natively within the Cosmos ecosystem, meaning that bridged BTC or ETH would be required. Regardless of the considerable security improvements that bridges have made in the past year, it remains a fact that hundreds of millions of dollars worth of crypto was hacked from bridges last year. To pick an example close to home, the Nomad bridge hack last year devastated the burgeoning Evmos DeFi ecosystem, as Nomad was the canonical Ethereum <> Evmos bridge.
This is why stATOM is such a popular collateral token in the Cosmos - neither does it require users forfeit their staking rewards nor does it entail bridge risk. And stATOM inherits the properties of ATOM that make it good collateral.
stATOM backing other Cosmos stablecoins
Notably, of the largest Cosmos CDP stablecoins are significantly backed by stATOM. This shows that there is strong product-market-fit for backing Cosmos CDP stablecoins with stATOM. This data strongly suggests that the supply of IST would meaningfully increase if stATOM were introduced as a collateral option.
On Ethereum
As a relevant data point, consider that MakerDAO accepts the premier LST of ETH, Lido’s wstETH. Marker issues DAI, Ethereum’s premier CDP stablecoin. In fact, just recently wstETH collateral backing DAI eclipsed ETH collateral. See the blow chart:
For Inter Protocol, the example of Marker and wstETH can be considered a proof of concept. Clearly, users have a strong desire to back CDP stablecoins with LSTs, due to the increase in capital efficiency. And just as on Ethereum, in the Cosmos it makes sense for IST to be backed by the premier LST of the main store of value token - stATOM.
stATOM collateral parameters across Cosmos
With regard to the proposed parameters for the Inter Protocol stATOM vault, it is useful to refer to the existing Cosmos DeFi landscape. Multiple different leverage applications operated by different teams have been facilitating stATOM collateralization for over nine months. So far, none of these applications have suffered bad debt due to suboptimal parameters - which is very reassuring. See the following table.
Proposed parameters for stATOM on Inter Protocol
Given this context, it is proposed that Inter Protocol implement these parameters for its stATOM vault:
- Collateralization ratio: 180%
- Mint fee: 0%
- Stability fee: 1%
- Initial IST cap: 500,000
These parameters would be very safe relative to the existing Cosmos DeFi landscape. Moreover, these parameters would still be competitive. With no mint fee and a stability fee of just 1%, Inter Protocol would have a relatively low rate for stATOM. Combined with Agoric’s / Inter Protocol’s strong reputation and well-known professionalism, this could make Inter Protocol one of the most popular applications for leveraging stATOM, expanding the supply of IST greatly.
stATOM risks
All DeFi entails risk. It is the job of DeFi applications to mitigate these risks as much as possible. That said, using stATOM as collateral does carry certain risks - but they have all been substantially mitigated.
Though stATOM inherits the price stability of ATOM, there remains the risk of the price of stATOM deviating from its ATOM backing. While stATOM is always fully backed by ATOM, users must wait approximately twenty-one days to redeem the underlying ATOM. In extreme market conditions, this latency could lead to the price of stATOM diverging from the price of ATOM, making the former temporarily more volatile than the latter.
However, this risk is minimal. First, stATOM has deep liquidity on several DEXes throughout the Cosmos - by far the deepest of any ATOM LST. Second, stATOM is a popular, trusted, and well-known ATOM LST. This wide familiarity means that when stATOM falls slightly in value against its underlying ATOM, many small and large entities are quick to arbitrage the price of stATOM back to par. And as Stride and Cosmos DeFi continue to grow, it’s likely stATOM trading liquidity will continue to increase.
As proof of the above assertions, consider the following chart. It shows that the value of stATOM relative to its backing ATOM has been remarkably stable since stATOM’s launch last September:
What risk associated with stATOM’s parity to its underlying ATOM may remain is further reduced when stATOM is only lent and not borrowed, which would be the case with Inter Protocol. When users can’t borrow stATOM, that means upward price manipulation poses zero risk. Finally, using a quality oracle that averages the price of stATOM over a period of time can further reduce risk.
Beyond the risk of stATOM’s price deviating from its underlying ATOM, there is the risk that the Stride blockchain is somehow imperiled. But again, a wide array of precautions make this risk minimal. Most prominently, Stride has adopted interchain security, giving it an extraordinary level of economic security. Stride’s code-base has been fully audited by three separate security firms, and Informal Systems has been retained to provide continuous auditing. And Stride is a minimalist chain, like the Cosmos Hub. Since Stride only does liquid staking and nothing else, it has few moving parts and a low attack surface - relative to other Cosmos chains. Lastly, if something were to go wrong, Stride has IBC rate-limiting, which would strongly limit potential losses.
In addition, Stride currently checks invariants every block. If an anomaly is detected, the chain is halted to protect against malicious transactions. Every time a user liquid stakes, Stride checks that the exchange rate between native assets and liquid staked assets is within reasonable bounds. And Stride has a rigorous five-step deployment process for any mainnet changes, to ensure that upgrades work as expected and no core functionality is ever altered unexpectedly.
There is no way to change the code of Stride blockchain, aside from the open, transparent, and decentralized method of Tendermint Consensus. Stride’s liquid staking logic has no admin access and no multisigs.
Final thoughts
In conclusion, adding stATOM as collateral for IST would be a good next step for Inter Protocol.
stATOM neither forfeits staking rewards nor entails bridge risk, and it inherits the qualities of its underlying ATOM. For these reasons, stATOM has become a hugely popular collateral token for DeFi applications throughout the Cosmos.
By implementing safe and competitive parameters for the stATOM vault, Inter Protocol could possibly become a major destination for leveraging stATOM, expanding the supply of IST greatly.
Now… let’s discuss! Everyone is welcome to ask questions and share comments. Looking forward to a fruitful discussion about how Agoric and Stride can work together to advance Cosmos DeFi.
