With the recent gain of popularity of Proof of Stake (PoS), we have found out that nearly all research focus only on the security aspects of it. Even though PoS vastly changes the economic fundamentals of a blockchain platform, the actual research done regarding the potential problems that could arise was found to be quite lacking compared to its severity. Through our own analysis of PoS, we have discovered quite a few that can be potentially damaging to the ecosystem. The ones found can largely the classified into three categories: Economic, Security, and Market. Economic: Users are given two choices to invest their tokens, staking and DeFi. This causes DeFi lending rates to rise to a level similar to the staking reward rate, decreasing the amount of social benefit generated from DeFi. It also disincentivizes the usage of DeFi, one example being CDP holders having to miss out on potential staking rewards. Interchain transfers of PoS tokens are also disincentivized, as tokens moved outside of their home chain cannot receive staking rewards. The Cosmos network, aiming to connect various different chains, is critically impacted by this. Security: The only way for delegators to hedge in the case of bear markets is to first go through the unbonding process. This also decreases the network security, creating a situation where the security of the network is impacted by the price fluctuation of tokens. Also, ATOMs being used in dApps cannot be delegated and thus unable to contribute to security. This forces token usage to compete with network security, and since less ATOMs will be bonded, this will also cause the Cosmos Hub to have higher inflation. Market: Users are unable to utilize their bonded ATOMs for hedging or speculation purposes. In addition, since the only entity with an incentive to not bond their ATOMs are centralized exchanges (to process withdrawals), a considerable amount of unbonded ATOMs might end up in the hands them. And since only unbonded ATOMs can be traded and contribute to token valuation, the risk of exchanges colluding with each other and manipulating the price might not be that difficult to pull off.
As a small addition to the above problems, developed economies have investment products with various amounts of risk and reward. However, for PoS networks, is not the case (Risk: Slashing Possibility. Reward: Delegation Rewards). Even if there are people who truly believe in the platform prefer to take more risks in exchange for a higher amount of rewards, they have no choice but to follow the same risk & reward profiles as everyone else.
What it does
With the use of Everett, delegators of the Cosmos Hub are able to mint bATOMs, a secondary shadow token backed by one’s delegation position. Two important features of bATOMs ensure them as an effective solution to the problems mentioned above. Soft Peg with ATOMs: bATOMs are designed to retain the same price with ATOMs. Just like most people treat WETH & ETH and DAI & USD as the same type of asset although they are completely different, by making bATOMs have the same price as ATOMs will minimize the adoption barrier for users and DeFi dApps. Validator Fungibility: Another important feature for maximum usability is issue the same type of tokens independent of which validator the delegator chose to delegate to. Compressing them to a single token ensures both maximum user simplicity and market liquidity. The eventual goal of bATOMs is to become the preferred token of choice for DeFi applications, so that delegators can utilize the bATOMs created using their delegated ATOMs and utilize them on various DeFi applications. This allows users to collect both the delegation rewards and the DeFi dApp interest, eliminating the competitive structure between those two, which in turn maximizes the social benefit.
What can I do with it
Hedging & Speculation: A delegator can now choose to utilize the locked value of their bonded ATOMs are applications like hedging or speculating. Stake & Invest: It is now possible to delegate ATOMs and lend the generated bATOMs through DeFi. Increasing profits for users without causing a decrease in network security. Interchain Staking: Delegators can stake on multiple chains with the same capital by trading bATOMs in exchange for unstaked tokens of other blockchains. Leveraged Delegations: bATOMs can be traded for more unbonded ATOMs, which can be delegated to generate more bATOMs. By repeating this process delegators can effectively leverage on their delegations. This application is further explored by tokenizing the leveraged position and making them available for trading.
How we built it
As the Cosmos Hub does not support smart contracts or token issuance, it was decided to develop a separate Cosmos Zone that takes care of the smart contract logic and bATOM issuance. To prevent events like slashing from creating undercollateralized LSPs, it was decided to keep 10% of the bonded ATOMs as the slashing collateral. Whenever the slashed amount goes over 5%, the Everett Zone automatically submits an unbonding request to the Cosmos Hub, therefore liquidating the LSP in the risk of undercollateralization. A previously suggested ICS proposal regarding interchain accounts was utilized. This proposal allows the creation of a special address on the Cosmos Hub, which is controlled by Cosmos Zone. This feature is crucial in order for forced liquidations to be triggered in the case of slashings that go beyond the threshold amount.
Simplified bATOM Generation Process
- Generate an Everett Zone controlled user-specific interchain address on the Cosmos Hub
- Transfer ATOMs to the newly created interchain address
- Send data including the validator to delegate the transferred ATOMs to
- A delegate TX is sent to from the Everett Zone to the Cosmos Hub via IBC
- If all is successful, excluding the slashing collateral of 10%, new bATOMs are granted to the delegator’s address
Simplified ATOM Recovery Process
- Requests the closure of one’s LSP by submitting a close TX to the Everett Zone
- The Everett Zone validates whether the user has enough funds in their account
- If the user’s account contains enough bATOMs, the bATOMs are locked and the ATOM retrieval process is initiated.
- An unbonding TX is sent from the Everett Zone to the Cosmos Hub
- If 4 is successful, the locked ATOMs in 3 are burned A LSP can only be closed by the delegator who initially opened it. The delegator is required to hold the same amount of bATOMs they first created.
TLDR of the add-ons done during the hackathon
- Swapped out our previous pseudo-IBC in exchange for the real thing
- Use of Interchain Accounts
- A better frontend for non-aliens
- Liquid Staking Position (LSP) NFTs, an additional token that has governance rights & receives rewards
- Tokenized Leveraged LSPs, allowing delegators to choose different risk & reward profiles (e.g. buy 3x leverage LSP tokens to receive 3x the rewards, while the money you lose when slashed also increases 3x.)
Challenges we ran into
Considering various scenarios that can happen with the introduction of LSPs.
Accomplishments that we're proud of
Made it to San Francisco in one piece.
What we learned
What's next for Everett Protocol
More research about the potential vulnerabilities that can arise from allowing LSPs to be traded in NFT form.