stDYDX - Inter Protocol Vaults Collateral Onboarding Discussion
Introduction
As part of onboarding of new collateral types for Inter Protocol Vaults, it is suggested to have a discussion period where the community can evaluate and comment on any proposed new collateral type. This post is to kick off that discussion for stDYDX and will be open for 10 days to determine whether or not the community feels that moving forward with adding stDYDX as an Inter Protocol Vaults collateral type is warranted.
DYDX
dYdX is a decentralized crypto derivatives exchange with margin trading and perpetuals options. The dYdX Chain is a proof-of-stake blockchain network built using the Cosmos SDK and leveraging CometBFT for consensus. The DYDX token is the L1 protocol token for the dYdX Chain, as agreed by the dYdX community through dYdX governance (Snapshot vote and an on-chain vote). The chain is supported by the DYDX Foundation and recently migrated to the Cosmos ecosystem as their own L1 chain.
DCF is proposing to onboard stDYDX as collateral to mint IST. stDYDX is a liquid staked token of DYDX chain’s DYDX token issued by Stride.
As of January 30, 2024, DYDX has a circulating supply of over 330 million tokens, a price above US$2.80 and a total market cap of over US$1 billion. DYDX is available on several exchanges, including Osmosis, and has a daily transaction volume of over US$9 million on the native DYDX chain and over US$73 million on Ethereum (as of January 30, 2024).
Now migrated to a L1 Cosmos chain, DYDX is an exciting addition to the ecosystem: Liquid Staking DYDX allows holders to continue earning DYDX staking rewards while maintaining liquidity of the underlying token, allowing participation in DeFi activities across Cosmos.
stDYDX just launched, and there is an stDYDX/DYDX pool on Osmosis as well as several DYDX pools.
About DCF
The Decentralized Cooperation Foundation’s (DCF) mission is to unite people and entities in the spirit of cooperation with web 3.0, blockchain and decentralization as a binding fabric.
At this point in time, we are focusing our efforts on Agoric’s proof-of-stake chain and the Cosmos-focused IBC environment. Engagement with — along with the acceleration of — those ecosystems is our purpose. As time passes, we will expand our purview to provide support for taking the technological foundation that Agoric’s chain and IBC are built on to other chains, and even for non-blockchain ecosystems.
Onboarding new collateral types
Most collateral onboarding discussions are initiated by members of the Inter Protocol community and led by a Proposal Champion from start to finish. Typically, they are supported by technical assistance from Agoric Systems (Agoric OpCo), risk management by the Economic Committee (EC), and with DCF helping to analyze business value / expenses to the protocol.
For this collateral type, there is a hypothesis that having stDYDX available soon after its launch would be a strategic business opportunity for Inter Protocol. Instead of stDYDX gaining tracking first and being added to Inter Protocol after it is used in many other places, the idea is to have Inter Protocol be one of the first utilities for using the stDYDX minted on launch.
To facilitate this, the DCF is beginning this discussion immediately after the stDYDX launch.
About Stride
The collateral in question, stDYDX, is issued by the Stride blockchain. The Stride blockchain has been processing blocks since September 2022. stDYDX is a liquid staked token representing staked DYDX, and is fully backed by DYDX 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 (as of January 29, 2024).
User Benefits
Additional collateral assets integrated into the Inter Protocol ecosystem help to enhance the protocol’s security and stability as per the overcollateralization thesis.
Inter Protocol vaults provide users a novel way to extend their DeFi strategies. When a staked asset serves as the underlying collateral, users can continue earning yields from the staking protocol. Simultaneously, they can utilize their minted IST to engage with other protocols, maximizing the potential of their underlying asset.
stDYDX on Agoric
As an ICS-20 token minted on Stride chain, stDYDX, or any other Stride liquid staked token, (represented by stXXX) can be bridged to Agoric through IBC. The transfer channels are: Stride channel-110, and Agoric channel-48.
Token Economics
Supply
The supply of stDYDX is currently low as the launch has just occurred with US$1 million being minted in the first few days.
There is no supply schedule and no allocations; rather, stXXX is minted and burned by users - similar to IST. In order to mint stXXX, users must deposit XXX. When stXXX is burned, users redeem the underlying XXX token. Users must wait for the underlying XXX token’s unstaking period before redeeming the underlying XXX token. As such, stXXX is fully backed by XXX at all times.
Functionality
The staking rewards earned by the staked XXX underlying stXXX are auto-compounded and accrue to the value of stXXX Due to this feature, the amount of XXX redeemable by burning one stXXX constantly increases. And so the value of stXXX against XXX continually rises. At launch, of stXXX, 1 stXXX can be used to redeem 1 XXX. Handling staking rewards this way makes it easy for applications to integrate stXXX.
The way stXXX works has never changed. As a crucial building block of Cosmos DeFi, it’s likely that stXXX never will change.
As a representation of XXX, stXXX inherits the properties of XXX. Since XXX is a top cryptocurrency with high confidence and minimal volatility, these properties are passed down to stXXX, making stXXX likewise very suitable for collateral.
stXXX control
The Stride blockchain - and by extension the stXXX tokens - are 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.)
Stride documentation
Stride Documents: Stride: The Liquid Staking Zone 1
Stride Audits: GitHub - Stride-Labs/audits
Stride Labs Github project: GitHub - Stride-Labs/stride: Stride: Multichain Liquid Staking
Proposed parameters
The proposed parameters for stDYDX in Inter Protocol Vaults would be determined by the EC:
- Debt Limit - X million
- Stability fee - (all other collateral types are at 0.75%)
- Collateralization Ratio - xxx%
- Liquidation ratio - yyy% (usually 10-20% below the min collateralization ratio)
- Minting Fee - (all other collateral types are at 0.5%)
Conclusion
We’re hoping for a positive response from the community to progress with this strategy and proposal to expand the supply and utility of IST in the wider Cosmos ecosystem and beyond.
We are eager to hear the community’s discussion regarding stDYDX and would invite the community to not only reply but to step up as the Proposal Champion and post an on-chain signaling vote, when appropriate.