Summary
This proposal aims to onboard stOSMO as collateral for IST. stOSMO is a liquid staked token (LST) of OSMO, issued by the Stride blockchain.
Stride’s stATOM, which was previously added as a collateral option, currently backs over 75% of all IST. This demonstrates a strong market demand for backing IST with LSTs.
stATOM’s popularity as collateral for IST suggests that stOSMO would be popular, too. Given the similarities between ATOM and OSMO, and also considering the large overlap between ATOM and OSMO holders - there would likely be strong demand to back IST with stOSMO.
Stride’s stOSMO has the most users, most integrations, and deepest onchain liquidity out of all OSMO LSTs. Furthermore, the Stride blockchain has numerous advanced security features, such as interchain security (ICS).
This proposal is being put forward by the Stride Foundation.
Introduction
History
The token in question, stOSMO, is issued by the Stride blockchain. The Stride blockchain has been producing blocks since September 2022. The first stOSMO was minted in October 2022. stOSMO is a liquid staked token representing staked OSMO, and is fully backed by OSMO at all times.
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.
After stATOM, stOSMO is the most widely used LST in the Cosmos ecosystem. It is integrated on most major Cosmos DeFi chains, and represents over 98% of OSMO LST market share.
stOSMO on Agoric
As an ICS-20 token minted on Stride chain, stOSMO can be bridged to Agoric through IBC. The transfer channels are: Stride channel-110, and Agoric channel-48. This is how stATOM currently gets to Agoric.
Token Economics
Supply
The supply of stOSMO is currently 19.65M. There is no supply schedule and no allocations; rather, stOSMO is minted and burned by users - similar to IST. In order to mint stOSMO, users must deposit OSMO. When stOSMO is burned, users redeem the underlying OSMO. As such, stOSMO is fully backed by OSMO at all times.
Functionality
The staking rewards earned by the staked OSMO underlying stOSMO are auto-compounded and accrue to the value of stOSMO. Due to this feature, the amount of OSMO redeemable by burning one stOSMO constantly increases. And so the value of stOSMO against OSMO continually rises. At genesis, 1 stOSMO could be used to redeem 1 OSMO. But due to the aforementioned auto-compounding staking rewards, today 1 stOSMO can be used to redeem 1.186 OSMO. Handling staking rewards this way makes it easy for applications to integrate stOSMO.
The way stOSMO works has never changed. As a crucial building block of Cosmos DeFi, it is likely stOSMO never will change.
As a representation of OSMO, stOSMO inherits the properties of OSMO. Since OSMO is a top one-hundred cryptocurrency with high trust and confidence, these properties are passed down to stOSMO.
stOSMO control
The Stride blockchain - and by extension the stOSMO 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. These validators serve as a check to the power of STRD holders, in that the validators must implement any new upgrades passed by STRD voters. 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.)
stOSMO documents
Stride Documents: Stride: Liquid staking for Cosmos blockchains
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 solution for the price of stATOM. That solution is described on the Inter Protocol website, here.
Given the similarities between stATOM and stOSMO, it is recommended that Inter Protocol use this existing oracle implementation to retrieve the price of stOSMO.
Financial characteristics
Distribution
To reiterate, stOSMO is a liquid staked token with an indeterminate supply. Users may mint or burn stOSMO at will. All stOSMO in existence has been created in the same way, namely through users minting it by depositing OSMO with Stride. The entire stOSMO supply is circulating.
Trading venues
stOSMO trades on the Osmosis DEX.
In October of 2023, Osmosis governance voted to deploy 20M OSMO to the stOSMO pool as protocol owned liquidity (POL).
With Osmosis governance as the largest stOSMO liquidity provider, users of stOSMO and DeFi apps that integrated stOSMO can rest assured that the trading liquidity will remain in place.
If Osmosis governance ever moves to reduce or adjust the liquidity in the pool, the Stride Foundation will promptly notify all users of stOSMO and DeFi apps integrated with stOSMO. But given the importance of the stOSMO liquidity in the pool and the ample financial resources of Osmosis governance, it is unlikely that the liquidity will ever be moved in a way that makes stOSMO vulnerable.
stOSMO history
Below is a chart of stOSMO denominated in OSMO. As you can see, stOSMO gradually appreciates against OSMO at the staking reward rate - due to auto-compounded staking rewards accruing to the value of stOSMO.
Any significant variance in the prices of stOSMO and OSMO is immediately arbitraged away. Given natural market incentives, a price variance of greater than 8% has never persisted for more than an hour.
And in the last six months, price variances have become much more limited.
Below is a chart of the stOSMO supply, denominated in OSMO. Note the large spike from the deployment of the 20M OSMO POL. But also, note that the stOSMO supply was increasing organically before the POL boost, and continues to increase organically after the boost. This shows a strong market demand for stOSMO.
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
stOSMO makes sense for Inter Protocol
There is a strong business case to be made for adding stOSMO as collateral.
stOSMO would allow users to mint IST without forfeiting staking rewards. As demonstrated by stATOM, which currently backs over 75% of the IST supply, users have a strong preference for liquid staked collateral.
stOSMO backing other Cosmos stablecoins
Notably, the two largest Cosmos CDP-stablecoins are already partially backed by stOSMO. This shows that there is strong product-market-fit for backing Cosmos CDP stablecoins with stOSMO. This data strongly suggests that the supply of IST would meaningfully increase if stOSMO were introduced as a collateral option.
Proposed parameters for stOSMO on Inter Protocol
A Gauntlet assessment would have to be performed on stOSMO, which would recommend appropriate parameters.
stOSMO risks
All DeFi entails risk. It is the job of DeFi applications to mitigate these risks as much as possible. That said, using stOSMO as collateral does carry certain risks - but they have all been substantially mitigated.
Though stOSMO inherits the price stability of OSMO, there remains the risk of the price of stOSMO deviating from its OSMO backing. While stOSMO is always fully backed by OSMO, users must wait approximately fourteen days to redeem the underlying OSMO. In extreme market conditions, this latency could lead to the price of stOSMO diverging from the price of OSMO, making the former temporarily more volatile than the latter.
However, this risk is minimal. First, stOSMO has deep liquidity on several DEXes throughout the Cosmos - by far the deepest of any OSMO LST. Second, stOSMO is a popular, trusted, and well-known OSMO LST. This wide familiarity means that when stOSMO falls slightly in value against its underlying OSMO, many small and large entities are quick to arbitrage the price of stOSMO back to par. And as Stride and Cosmos DeFi continue to grow, it’s likely stOSMO trading liquidity will continue to increase.
What risk associated with stOSMO’s parity to its underlying OSMO may remain is further reduced when stOSMO is only lent and not borrowed, which would be the case with Inter Protocol. When users can’t borrow stOSMO, that means upward price manipulation poses zero risk. Finally, using a quality oracle that averages the price of stOSMO over a period of time can further reduce risk.
Beyond the risk of stOSMO’s price deviating from its underlying OSMO, there is the risk that the Stride blockchain is somehow imperiled. But again, a wide array of security features 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 stOSMO as collateral for IST would be a good next step for Inter Protocol.
stATOM has already been hugely successful, with over 75% of IST now backed by stATOM. Adding stOSMO as a collateral type would likely further increase the demand to mint IST.
In the meantime, 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!