Summary
This proposal aims to onboard stINJ as collateral for IST. stINJ is a liquid staked token (LST) of INJ, 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 INJ, 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 stINJ has the most users, most integrations, and deepest onchain liquidity out of all the INJ LSTs. Furthermore, the Stride blockchain has numerous advanced security features, such as interchain security (ICS). Adding stINJ 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, stINJ, is issued by the Stride blockchain. The Stride blockchain has been processing blocks since September 2022, which is also when the first stINJ was minted. stINJ is a liquid staked token representing staked INJ, and is fully backed by INJ at all times.
The first Stride testnet was launched in July 2022, and mainnet followed shortly after. stINJ quickly became a popular and trusted Injective token. 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.
stINJ on Agoric
As an ICS-20 token minted on Stride chain, stINJ can be bridged to Agoric through IBC. The transfer channels are: Stride channel-110, and Agoric channel-48.
Token Economics
Supply
There is no supply schedule and no allocations; rather, stINJ is minted and burned by users - similar to IST. In order to mint stINJ, users must deposit INJ. When stINJ is burned, users redeem the underlying INJ. As such, stINJ is fully backed by INJ at all times.
Functionality
The staking rewards earned by the staked INJ underlying stINJ are auto-compounded and accrue to the value of stINJ. Due to this feature, the amount of INJ redeemable by burning one stINJ constantly increases. And so the value of stINJ against INJ continually rises. At genesis, 1 stINJ could be used to redeem 1 INJ. But due to the aforementioned auto-compounding staking rewards, today 1 stINJ can be used to redeem 1.193 INJ. Handling staking rewards this way makes it easy for applications to integrate stINJ.
The way stINJ works has never changed. As a crucial building block of Injective DeFi, it’s likely stINJ never will change.
As a representation of INJ, stINJ inherits the properties of INJ. Since INJ is a top-thirty cryptocurrency with high confidence and minimal volatility, these properties are passed down to stINJ, making stINJ likewise very suitable for collateral.
stINJ control
The Stride blockchain - and by extension the stINJ 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 Injective Hub validator set. If STRD holders pass obviously malicious code, validators can choose not to run that code. (Of course, the Injective Hub validators that run the Stride chain are constrained by Tendermint Consensus. If a small group of validators attempted to act maliciously, its INJ stake would be slashed.)
stINJ documents
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
Legal characteristics
As a Injective 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
stINJ makes sense for Inter Protocol
There is a strong business case to be made for adding stINJ as collateral.
It boils down to this: stINJ is the best collateral available in Injective that does not 1) forfeit staking rewards and does not 2) entail bridge risk.
Unstaked INJ itself is of course the best collateral native to the Injective, having a large and stable market cap and Injective Hub being considered a serious and resilient blockchain. And this is why Inter Protocol’s first vault was for INJ. But the downside to using unstaked INJ as collateral is the forfeited staking rewards. Given INJ’s 20% APR staking the current 250% collateralization ratio for the INJ vault, $1 of IST minted with INJ 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 INJ 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 INJ as collateral. However, neither of these tokens are available natively within the Injective 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 stINJ is such a popular collateral token in the Injective - neither does it require users forfeit their staking rewards nor does it entail bridge risk. And stINJ inherits the properties of INJ that make it good collateral.
stINJ backing other Injective stablecoins
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 Injective it makes sense for IST to be backed by the premier LST of the main store of value token - stINJ.
stINJ collateral parameters across Injective
With regard to the proposed parameters for the Inter Protocol stINJ vault, it is useful to refer to the existing Injective DeFi landscape. Multiple different leverage applications operated by different teams have been facilitating stINJ 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.
What risk associated with stINJ’s parity to its underlying INJ may remain is further reduced when stINJ is only lent and not borrowed, which would be the case with Inter Protocol. When users can’t borrow stINJ, that means upward price manipulation poses zero risk. Finally, using a quality oracle that averages the price of stINJ over a period of time can further reduce risk.
Beyond the risk of stINJ’s price deviating from its underlying INJ, 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 Injective Hub. Since Stride only does liquid staking and nothing else, it has few moving parts and a low attack surface - relative to other Injective 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 stINJ as collateral for IST would be a good next step for Inter Protocol.
stINJ neither forfeits staking rewards nor entails bridge risk, and it inherits the qualities of its underlying INJ. For these reasons, stINJ has become a hugely popular collateral token for DeFi applications throughout the Injective.
By implementing safe and competitive parameters for the stINJ vault, Inter Protocol could possibly become a major destination for leveraging stINJ, 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 Injective DeFi.