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February 07, 2024

The Future of Staking: Stride's Rise in the Cosmos Ecosystem

Leading the Charge in Liquid Staking

The world of staking crypto has been revolutionized by the entrance of Stride, a Cosmos-based blockchain platform that's swiftly capturing the market with its innovative approach to liquid staking.

The recent buzz about Stride is justified, not least because of DBA's leadership in the project's latest fundraising efforts. This report unpacks the inner workings of Stride's technical framework and explores the market potential that has industry watchers abuzz.

Stride's Impressive Market Performance

Stride isn't just another blockchain project; it is a specialized chain within the Cosmos ecosystem that issues liquid-staking tokens (LSTs) for IBC-enabled chains. Boasting significant dominance over traditional markets with offerings like stATOM and stOSMO, Stride's real excitement stems from its expansion prospects. With the emergence of several new IBC-enabled chains like Celestia, dYdX, Dymension, and others, the platform's growth potential appears limitless.

Backing Talent and Execution

DBA's investment strategy goes beyond technical specs, placing substantial emphasis on the people behind the projects. A testament to this philosophy is the team of contributors at Stride, including Aidan, Riley, and Vishal, who have demonstrated exceptional operational skills, community leadership, a commendable work ethic, prudent risk management, and remarkable execution. It's this combination of talent and vision that DBA is keen to support.

Behind Stride's Success

Technical Backbone: Stride's Architecture

Stride's system rests on a sophisticated array of technical innovations, including Interchain Accounts (ICAs), Interchain Security (ICS), and the Liquid Staking Module (LSM). These components work in conjunction to solidify Stride's position as a leader in the liquid staking space.

Analyzing the LST Market

Unlike the structure observed with Ethereum's LST market, Cosmos chains present a different set of opportunities and challenges that Stride has skillfully navigated. The insightful analysis put forth in this report sheds light on how Stride's approach sets it apart from its competitors.

Identifying Growth Avenues

The focus on market penetration and expansion forms the core of Stride's growth strategy. By broadening horizons within existing markets and establishing a footprint in emerging ones, Stride looks forward to an even more influential role in the ecosystem.

A Closer Look at Celestia and stTIA

Celestia stands out with its unique architecture, core principles, governance model, and the utility of its assets. As such, the issuance of stTIA, Stride's liquid staking token for Celestia, requires a particularly tailored approach that recognizes and respects these distinct characteristics.

Staking in Numbers: Stride's Market Data

Stride's Expanding Suite

With a total value locked surpassing $100 million and a diversified suite of liquid staking products including stATOM, stOSMO, and several others, Stride has cemented its reputation in the Cosmos ecosystem. The recent launches of stDYDX and stTIA have only solidified this status, with stTIA gaining an impressive $12 million TVL within just a single day of launch.

Future Horizons

Stride's ability to issue LSTs for any IBC-compatible chain is about to take the Cosmos ecosystem by storm. With plans to integrate with various upcoming projects like Dymension and Namada, Stride is not just building upon its current dominance—it's paving the way to become the leading index for all IBC-enabled chains.

In conclusion, Stride's innovative system, combined with its aggressive market expansion and a robust team of leaders, positions it as a forward-thinking giant in the realm of liquid staking. This report outlines more than just a success story; it presents a roadmap for the future of staking in the rapidly evolving cosmos of blockchain ecosystems.

Security, Governance, & Economics

Interchain Security Adoption and Impact

Stride's decision in July 2023 to integrate with Cosmos Hub's Replicated Security (RS), a part of the Interchain Security (ICS) framework, represents a significant milestone in its evolution. Transitioning from its independent set of validators to leveraging the security provided by Cosmos Hub's validators has conferred upon Stride one of the strongest validator sets in the cryptosphere, enhancing its security and decentralization.

Replicated Security and Its Variants

Replicated Security, also known as ICS v1, involves validators of a provider chain securing a consumer chain, accepting additional slashing conditions. It is a governance-heavy process, requiring consensus from the provider chain. Stride's implementation highlights a successful execution of RS, which is the first live form of ICS, paving the way for other security models like Partial Set Security and Mesh Security.

Governance Dynamics Post-ICS Integration

The governance structure has shifted with STRD holders becoming 'governors', who now have more significant influence over governance proposals. Despite this transition, STRD continues to be the primary governance token, and several checks and balances remain in place to ensure fair governance, such as deposit requirements, a quorum of staked STRD, and vetoing capabilities.

Economic Adjustments with ICS

Stride's adoption of ICS necessitated economic recalibrations, notably the halving of inflationary rewards. This reduction reflects the altered security dynamics where STRD stakers' role in chain security diminishes in importance. Stride compensates for the Hub's security through revenue sharing, maintaining the balance in incentives for both parties involved.

Concerns and Solutions Regarding Validator Economics

The implementation of RS brings with it questions about the economic viability for validators, especially smaller ones. The fixed costs of running additional consumer chains could outweigh the variable income associated with additional stake, potentially leading to centralization. To mitigate this, a 'soft opt-out' is in place for smaller validators, enabling them to reap rewards without bearing the costs associated with running consumer chains.

Protocol-Owned Liquidity Strategy

The Cosmos Hub's proactive deployment of ATOM as protocol-owned liquidity (POL) into liquidity pools symbolizes a strategic move to ensure liquidity and foster trading of stATOM. This act not only boosts Stride's market dynamics but also generates revenue for the Cosmos Hub through yield earning positions on liquidity provisions, showcasing a thoughtful approach to mutual ecosystem growth.

In conclusion, Stride's journey to ICS adoption entails significant changes across security, governance, and economic considerations. The complexity of these elements underline the importance of strategic thinking and careful planning required for the innovative leaps Stride is making. With robust security, empowered governance, and thoughtful economic balancing, Stride is well-positioned to continue forging a path of resilience and growth within the Cosmos ecosystem.

Interchain Accounts and Stride's Multichain Liquid Staking Architecture

Stride's adoption of a multichain strategy sets it apart from other liquid staking protocols that are typically tied to smart contracts on a single chain. This design choice allows Stride to act as a native blockchain dedicated to issuing liquid staking tokens (LSTs) for a variety of external chains, rather than hosting a range of native activities like DeFi.

Here's a breakdown of how Stride leverages Interchain Accounts (ICAs) and interchain technology to facilitate its operations:

  1. Deposit and Minting Process

When a user wishes to deposit tokens (such as ATOM) to mint liquid staking tokens (such as stATOM), here is what occurs under the hood:

  • The user interacts with Stride, which simplifies the experience to appear as if it's happening on a single chain.

  • Stride then uses Interchain Accounts (ICAs) to manage cross-chain interactions. Essentially, ICAs allow Stride to control accounts (and thus, execute actions like staking) on the host chain (Cosmos Hub, in this case) from its own blockchain.

  1. Staking and Reward Automation

Upon minting stATOM, the deposited ATOM is periodically (every Stride epoch, or every 6 hours) staked on the Cosmos Hub:

  • Staking and reward distribution runs according to Stride's protocol logic at this regular interval.

  • Stride stakes the new deposits and automatically re-stakes the rewards to compound gains for the stATOM holders.

As a result, the value of stATOM should increase over time when compared to ATOM due to these accrued and compounded rewards.

  1. Diversified Rewards and Auto-Compounding

For tokens like stDYDX, the staking rewards are in a different token (USDC), and Stride has a process in place to:

  • Bridge USDC rewards to a DEX (like Osmosis) via the Inter-Blockchain Communication (IBC) protocol.

  • Swap USDC for DYDX.

  • Bridge DYDX back to its native chain for staking.

  • The entire process compounds rewards for stDYDX holders and adds buying pressure for DYDX.

  1. Redemption Process

When users want to redeem their stTokens for the underlying assets:

  • Users initiate a redeem request with Stride.

  • Stride manages the unbonding transactions on the host chain.

  • Following the chain specific unbonding period, users receive their original tokens (e.g., ATOM) back.

Due to SDK constraints, there is a limit on how many undelegation messages can be initiated per unbonding period, which can affect the frequency of redemptions.

Alternatively, users can choose to swap their stTokens for base tokens on decentralized exchanges (DEXs) like Osmosis for immediate liquidity instead of waiting for the unbonding period to lapse.

Through the use of ICA and ICQ technology, Stride is developing a nuanced and automated multichain liquid staking ecosystem that caters to a diverse range of assets and staking strategies. Its architecture and operations underscore the innovative use of interchain protocols to create a seamless, efficient, and versatile staking platform.

The Liquid Staking Module (LSM)

It is a framework aimed at enhancing the safety and efficiency of liquid staking tokens (LSTs) within the Cosmos ecosystem. Developed collaboratively by entities including Iqlusion and Stride, the LSM provides infrastructure to make the transition from natively staked tokens to liquid staked tokens more seamless, delivering a unified user experience whether one is converting unstaked tokens or those already staked.

Step One:

Here's an overview of how LSM works and its key features:

  1. Instant Conversion from Native to Liquid Stakes

Traditionally, converting staked tokens (like ATOM) to equivalent liquid staking tokens (like stATOM) would require going through the unbonding period, during which no staking rewards could be earned. LSM facilitates an instant conversion process by tokenizing natively delegated stake into semi-fungible LSM shares. This process bypasses the issue of losing out on rewards during an unwieldy unbonding period.

  1. Tokenizing Natively Delegated Stake into LSM Shares

Users can tokenize a portion or all of their natively delegated stakes into LSM shares, which:

  • Represent the staked position and retain information about the validator and reward recipient.

  • Are semi-fungible and tied to a specific delegation record.

These shares are technically fungible amongst themselves but carry unique identifiers that limit their fungibility outside of their specific delegation context:

  • Validator operator identifier - Each LSM share indicates the specific validator to whom the native stake is delegated. The returns and risks associated with LSM shares reflect the performance and security of the corresponding validator. If a particular validator faces slashing, only the LSM shares associated with that validator are affected.

  • Reward recipient tracking - LSM shares include a record ID for the validator operator, which keeps track of the specific delegation that the shares represent, as well as who will receive the rewards from that delegation. Hence, while transferring LSM shares is possible, the right to claim rewards generated by those shares is not automatically transferred along with them.Share

Example Scenarios with Alice and Bob:

  • Alice tokenizes some of her native stakes into LSM shares, obtaining tokens that represent her delegated tokens with the Coinbase validator. These shares are fungible among themselves but not with those of any other user, including Bob, who also has stakes delegated to Coinbase.

  • Bob does the same as Alice but his LSM shares, while identical in validator and risk, are not interchangeable with Alice's because they are linked to his own delegation record.

Ownership of rewards is decoupled from the LSM shares, and Alice needs to take additional steps if she wishes to transfer the right to claim rewards along with her LSM shares to Bob.

  1. Flexibility in Staking and Reward Management

The LSM operates under the assumption that Liquid Staking Providers (LSPs) like Stride will utilize the underlying structure to issue their own LSTs to end users. The LSM's design is intentionally flexible, allowing LSPs to choose whether to redeem the LSM shares for native tokens right away or keep them tokenized while claiming the rewards.

This modular approach empowers various staking protocols to operate on top of the LSM, giving them the creative space to design their products and services to meet different user preferences and market dynamics, all while fostering a safe and efficient liquid staking environment on Cosmos-based chains like the Cosmos Hub.

The Liquid Staking Module (LSM) provides a pathway for users to deposit their semi-fungible LSM shares into Liquid Staking Providers (LSPs) to receive in return fully fungible liquid staking tokens (LSTs).

Here's how this process works in greater detail, as articulated through key steps and components, including a practical example involving a user named Alice:

Step 2:

Users Deposit Semi-fungible LSM Shares into LSPs to Get Fungible LSTs

  1. Creation and Deposit of LSM Shares:

Alice, who has native staked ATOMs, employs the LSM to turn a fraction of her stake into LSM shares. These shares record both the validator (in this case, Coinbase) to which the original tokens were staked and who is entitled to the rewards (initially Alice herself).

  1. Transfer to LSP and Reward Ownership Change:

Alice then transfers her LSM shares to an LSP, such as Stride, using Inter-Blockchain Communication (IBC). She also initiates a transfer of reward ownership to Stride, which now can claim rewards on Alice's behalf and can redeem the LSM share for the underlying staked ATOM if needed.

  1. Receipt of LSTs from LSP:

In exchange for her LSM share, Alice is issued an amount of fully fungible LSTs (stATOM) based on the prevailing exchange rate, abstracting away the complexity of the LSM's workings.

Redelegation and Active Management by LSP:

Each LSP has discretion over how to manage the received LSM shares. While a simple LSP strategy might collect LSM shares and issue LSTs without further action, a more proactive approach, as adopted by Stride, involves redelegating stakes according to a preferred validator distribution strategy. This active rebalancing is a crucial aspect that distinguishes different LSTs from each other.

Additional Benefits:

Aside from facilitating liquid staking, the LSM offers users other advantages, such as the ability to transfer staked tokens between wallets securely without needing to unstake, thus improving operational security practices for users.

25% Global LST Cap:

The LSM imposes a cap that limits the amount of liquid staked ATOM to 25% of the total staked ATOM supply. This is a safeguard to prevent any possibility of LSPs amassing enough stake to disrupt the governance or consensus of the chain by staying well below the one-third threshold associated with a chain halt due to Byzantine faults.

The cap is enforced by:

  • Restricting the stake that LSPs can hold to 25% and

  • Limiting LSM tokenization to maintain this overall percentage.

If the cap is reached:

  • LSPs are barred from further staking, and

  • Tokenization of more delegations is prohibited through the LSM.

Changes in Native Stake Dynamics:

While the global cap is fixed, fluctuations in the native stake due to mass unbonding could unintentionally increase the relative percentage of liquid stake. However, starting at a 25% cap allows a margin of safety, and governance mechanisms can adjust this limit if LSPs demonstrate reliability and benefit the network.

Governance and Adjustment of Cap:

The decisions regarding the cap, such as potential adjustments to increase the permissible share for LSPs, are governed by the host chain's governance processes (e.g., the Cosmos Hub). This is not controlled by LSPs but by the broader community through governance proposals and voting.

Step 3:

Validator Accountability and Equity

In the complex and dynamic world of delegated staking, a fundamental risk rests at the core of the relationship between delegators, who contribute tokens, and validators, who are responsible for maintaining the integrity of the blockchain. This principal-agent problem arises because it is the delegators who suffer the consequences of any malpractice by the validators, such as slashing due to offenses like double-signing.

Striking a Balance in Self-Bonding

To mitigate this risk and to align the interests of validators with those of their delegators, the Liquid Staking Module (LSM) introduces a necessity for validators to self-bond a certain amount of tokens. The amount is proportional to the volume of tokens delegated to them by other participants. Yet, this policy creates a delicate balance — it must ensure validators are sufficiently invested ("have skin in the game"), without setting the bar so high that it discourages participation or encourages avoidance of the rules through alternative agreements.

Protocol Design: From Total to Zero Self-Bond

The spectrum of protocol approaches to validator self-bonding is wide. On one end is Ethereum's implicit 100% self-bond requirement, which discourages in-protocol delegation and leads users towards external mechanisms such as Liquid Staking Providers (LSPs) or centralized services. On the other end, certain Proof of Stake (PoS) chains operate with no self-bond requirements, allowing validators to act with impunity.

Validator Selection in Liquid Staking

When it comes to the selection of validators, the role of Liquid Staking Providers becomes a focal point. These intermediaries choose validators on behalf of their users, dispersing risk equitably but also potentially increasing the distance between the delegator and the delegate.

While the LSM tries to mitigate the principal-agent problem by enforcing ATOM self-bonding for validators to qualify for LSP delegations, critics argue that the additional layer can introduce new vulnerabilities and complexities, such as LSPs potentially manipulating the market or varying the risk across stakers.

Economic Incentives and Self-Bonding

The LSM has designed the self-bond requirement with economics in mind. Validators must weigh the cost of the self-bond against the potential commission revenue from additional stakes. With a proposed bond factor of 250:1, a validator can attract significantly more delegated stake from an LSP in proportion to their own bonded ATOM, leading to an increase in potential commission income.

It's a set-up that seems favorable for validators but remains under constant review by the community, who have the power to adjust the bond factor to maintain balance and fairness in the ecosystem.

Future Considerations

As the platform evolves, discussions are ongoing about how to fine-tune the self-bond mechanism. This could involve tiering the slash risk, protecting the interests of delegated stakers, or even removing the slashing penalty for them entirely. Such considerations reflect the community's commitment to improving the alignment between validators and their delegators, enhancing security, and fostering a more equitable staking environment.

The path forward must navigate the intricate dance of incentivizing responsible validator behavior while maintaining a welcoming threshold for new entrants, ensuring that the chain's guardians are motivated and equipped to protect the network without placing undue financial strain on their operations.

How Much to Enshrine?

The ongoing conversations around liquid staking within the blockchain space, especially between Cosmos and Ethereum ecosystems, revolve around the concept of “enshrinement,” which refers to the degree to which a blockchain protocol should incorporate liquid staking into its core infrastructure. The discussion becomes a policy question of how much of the liquid staking system the protocol should formalize and control. There are generally two approaches being discussed:

  1. Full Enshrinement:

    1. This would involve the blockchain protocol itself managing the entire liquid staking system, including the issuance of Liquid Staking Tokens (LSTs) to users. Essentially, the protocol would take over the functions currently provided by out-of-protocol Liquid Staking Providers (LSPs). This approach would imply creating an "enshrined" liquid staking solution that is built into the blockchain protocol itself.

  2. Minimal Enshrinement:

    1. Under this model, the protocol would provide foundational infrastructure that regulates and oversees the out-of-protocol LSPs, enhancing their safety and competitiveness. It would not replace these LSPs but rather create a regulated environment in which they operate. This is closely aligned with the current design of the Liquid Staking Module (LSM) in the Cosmos ecosystem.

The author favors the second approach for several reasons:

  • LSTs represent a large and innovative market in the crypto ecosystem. Fully enshrining the system and removing the competitive market of out-of-protocol LSPs might stifle innovation and could potentially be harmful.

  • Even if a protocol can mitigate slashing risks (where validators are penalized for misbehavior), liquid staking benefits from improved asset fungibility and evenly distributed rewards. Validator-specific LSTs would yield divergent rewards based on the validators' performance, which could create a disjointed user experience.

  • Effective LSP governance is necessary to avoid issues like Maximally Extractable Value (MEV) exploitation and to ensure rewards are pooled properly.

The LSM approach that Cosmos is exploring is seen as a good compromise. It provides a structured framework that seeks the middle ground—retaining the innovative and competitive spirit of the open market while introducing a safer and regulated mechanism for liquid staking. The LSM allows various LSPs to build upon this foundation, without asserting full control over the creation and management of LSTs.

With this infrastructure in place, future developments could further enhance safety and diminish unfair competitive advantages among different LSPs operating on top of the LSM, thus fostering a more balanced and robust liquid staking ecosystem.

Default Validator Selection Process for Stride

  1. Centralized Exchange (CEX) validators are ineligible for delegations because aligning with them could centralize control and undermine the network's security.

  2. Validators charging commissions greater than 15% are also ineligible, as high fees might be seen as detrimental to the economic interests of stakers.

  3. Stride then delegates stake to the top 30 validators based on their stake weight, excluding those disqualified by the above criteria.

  4. Stake distribution among these validators is proportional to their existing stake weights within the host chain, imitating the chain's native delegation preferences.

This process is a starting framework that intends to quickly provide stable LSTs while respecting the host chain's user preferences and promoting decentralization and economic fairness.

Customized Community-Led Selection Processes

For larger and more mature networks such as the Cosmos Hub and Osmosis, Stride developed more nuanced selection processes with community involvement:

  1. Advisory councils with community members evaluate validators based on various criteria, such as uptime, commission rates, governance participation, and duration in the active validator set.

  2. Interested validators can apply to be considered for delegation by detailing their technical and social contributions to the chain.

  3. Each council member evaluates the applicants independently, scoring them from 1 to 10, with necessary abstentions for conflicts of interest. The scores are then averaged.

  4. Validators are sorted into quartiles based on their existing stake weight, and the top 8 validators from each quartile with the highest scores are selected, amounting to 32 validators in total.

  5. These 32 validators are then assigned delegations based on the scores they received, divided into cohort rankings with a weighted allocation system.

  6. The advisory council's recommendations are subject to confirmation by Stride's governance, and the process is revisited every six months for larger chains.

Impact on the Validator Ecosystem

Stride's approach to validator selection is praised for mitigating the risk of vote power concentration. By distributing staked assets evenly across different layers of validators ranked by their existing delegated stake, Stride helps maintain a balanced power distribution among validators.

These community-led processes create a dynamic and inclusive validator ecosystem, where performance, reliability, and contributions are rewarded. Validator diversity and decentralization of staking power remain focal points, ensuring that the blockchain network remains secure and decentralized.

Stride's policies serve as a potential model for other liquid staking providers to emulate, aiming to provide a responsible and decentralized staking service that aligns with the principles of blockchain governance and fairness.

Custom Process - dYdX

Stride's custom process for validator selection on the dYdX Chain reflects the unique challenges and early stage of the network. The dYdX Chain, only having launched a few months prior to the launch of stDYDX, presents a different scenario compared to more established chains like the Cosmos Hub or Osmosis.

Here are the key points concerning Stride's validator selection process for the dYdX Chain:

  1. Top-Heavy Validator Set: dYdX has a highly concentrated stake distribution, with the top two validators controlling almost 40% of the total stake, posing centralization risks.

  2. Lack of Performance Data: Since the chain is new, there is limited historical data on validator performance to accurately assess their reliability and effectiveness.

  3. Dynamic Validator Set: The composition of the active validator set is frequently changing, with some validators dropping out due to insufficient stakes.

Given these circumstances, the approach for stDYDX is as follows:

  1. Curated Initial Validator Set: Stride's initial proposal involves a curated list of 10 validators to start with. This list was crafted with input from the dYdX Foundation, incorporating their validator best practices guidelines.

  2. Even Stake Distribution: The initial stake is evenly divided among these 10 selected validators, all of which are positioned outside the top two by stake weight to avoid amplifying the existing top-heavy distribution.

  3. Gradual Expansion: In the weeks following launch, the validator set will gradually increase by adding 3-4 validators at a time until reaching the target number of 32. This method aims to reduce the risk of validators dropping below the threshold needed to remain in the active set.

  4. Temporary DAO Oversight: The Stride DAO delegated temporary authority to the Stride Association to oversee the dYdX validator selection. This measure is anticipated to be an interim solution until a more decentralized approach can be adopted.

In the future, Stride envisions transitioning to a more community-centric selection process that actively involves the dYdX community. This would likely resemble the council-based frameworks used for the Cosmos Hub and Osmosis, adjusted for the specific characteristics and needs of the dYdX Chain.

A more participative approach could further decentralize the process, empowering the community to take an active role in governance and ensuring validator selection aligns with the chain's broader objectives and health.

The Rising Tide of Liquid Staking: Ethereum vs. Cosmos

The landscape of liquid staking tokens (LSTs) is undergoing a seismic shift, with Ethereum and Cosmos at the forefront of this burgeoning sector. The concept of LST, which began as a brainchild within the Cosmos ecosystem, has rapidly evolved into a multi-billion dollar industry. One can gain deeper insights into the history and potential future of LSTs by tuning into informative resources like the Bell Curve podcast featuring insights from pioneers such as Aidan and Felix.

Liquid Staking: Why Ethereum Took the Lead

Despite Cosmos birthing the idea of delegation vouchers, Ethereum has been the hotbed for LST activity. Here's an exploration of the factors that fueled Ethereum’s dominance in the LST domain:

The Merge Catalyst

The anticipation surrounding Ethereum's transition to proof-of-stake, coupled with the uncertainty of when staked ETH would be withdrawable, thrust LSTs into the spotlight. They offered the only recourse for maintaining liquidity during this undefined hiatus— a contrast to the Cosmos situation.

No Native Delegation in Ethereum

Unlike Cosmos, which enables straightforward native staking within its protocol, Ethereum skips this option. This pushes users to seek out-of-protocol means like LSTs for staking ETH without the hassle of running their own validators.

DeFi's Gravitational Pull

A significant pull towards LSTs comes from the allure of simultaneously harvesting staking yields and engaging in DeFi activities with staked assets. Ethereum's vibrant DeFi scene has furnished a fertile ground for LST utilization; in contrast, Cosmos has witnessed a slower DeFi engagement, lessening the urgency for its LSTs.

ETH: The Money Magnet

ETH operates as a widely accepted medium of exchange, traversing multiple applications and blockchains far more extensively than other tokens. This ubiquity and "money-like" characteristic magnify the desirability of LSTs based on ETH, a trend not as stark in the Cosmos ecosystem.

As cross-chain functionalities and market vigor resuscitate, the use of Cosmos assets might follow a similar trajectory. With improving cross-chain infrastructure and growing validations (like Neutron's approval of diverse gas tokens), the playing field may begin to level.

The Incentives Behind LST Use

Delving into Ethereum and Cosmos' unique ecosystems, the incentives driving LST adoption become clearer:

Ethereal Auto-Compounding

In Ethereum, limitations imposed by the fixed validator balance underscore the appeal of pooling stakes through an LSP to expedite reward compounding—an advantage that might change with proposals like EIP-7251 in motion.

Tax Efficiency or Confusion?

Tax implications vary widely, but some users perceive non-rebasing LSTs as potentially offering a tax-efficient route by framing returns as capital gains rather than income, a consideration heavily affected by jurisdictional laws.

The Liberty of Liquidity

The intrinsic value of instant asset sales in a PoS system cannot be understated, and long unbonding windows (like those in Cosmos) bolster the argument for LSTs, allowing stakers to bypass wait times and maintain liquidity.

Struggle for DeFi in Cosmos Ecosystem

  • High Staking Yields: The Cosmos ecosystem currently faces a cycle where high staking yields deter engagement in DeFi activities since the yields represent an opportunity cost for potential DeFi users.

  • Liquid Staking Solutions (LSTs): Are presented as a way to break this cycle by allowing users to participate in DeFi without forfeiting staking rewards.

The Virtuous Cycle Facilitated by LSTs

  • DeFi Activity and ATOM's Utility: The growth in DeFi activity has led to increased demand and improved liquidity for ATOM, thus driving up its price and leading to even more DeFi activity.

  • Enabling ATOM as Collateral: Liquid staking makes the use of ATOM in DeFi economically feasible, as it allows users to earn staking rewards while using their staked assets as collateral.

  • Role of stATOM: Stride's liquid staked ATOM (stATOM) has been crucial in developing the DeFi ecosystem within Cosmos.Refer a friend

Common Use Cases for stTokens

  • Borrowing/Lending: Users can earn yield by depositing stTokens in lending protocols; popular tokens include stATOM and stOSMO.

  • DEX Liquidity: stToken/Token pools attract liquidity providers due to the predictability of returns.

  • Perpetuals Collateral: stTokens are used for trading and as collateral in perpetual exchanges.

  • Gas Tokens: stTokens become viable for paying transaction fees, with recent examples including stATOM and the anticipation of stTIA.

Institutional Adoption Challenges

  • Risk Aversion: Institutional investors have lower risk tolerance, preferring regulated custodial solutions, which LSTs currently lack in comparison to native staking.

  • Stride's Safety and Security Emphasis: Stride focuses on institutional-quality security, using a minimalist design, regular audits, and implementing safeguards like the IBC Rate Limiting Module.

  • Economic and Sovereign Security: Being secured by Cosmos Hub validators and Stride's sovereignty provides robust security.

  • Institutional Custody: Stride has made strides in instituting custodial support for its STRD and stTokens, benefiting institutions and other Cosmos chains.

Regulatory Considerations

  • Uncertainty: The regulatory landscape for staking and liquid staking remains unclear, potentially inhibiting growth, but there is hope for increased regulatory clarity over time.

Market Dominance

  • Stride has a significant market share (85-95%) for its LST products on Cosmos assets like ATOM, INJ, OSMO, EVMOS, and JUNO, indicating a winner-take-most dynamic in its current markets.

  • Other Cosmos-based LST providers such as pStake and Quicksilver have minimal market share compared to Stride.

  • Comparatively, Lido holds a substantial market share (~75%) for Ethereum LSTs, but the Solana LST market is more evenly distributed with Marinade and Jito leading at around 40% each.Share

Network Effects and Market Share

  • Security: Users gravitate towards LST providers with a strong operational track record and battle-tested protocols to reduce risks such as smart contract bugs or compromised keys.

  • Liquidity: The liquidity of stToken/Token pairs is crucial, as it enables users to swap positions with minimal price impact, enhancing the value proposition of LSTs.

  • Integrations: Users prefer LSTs that can be widely used across the ecosystem, like paying for transaction fees (gas tokens) or being accepted as collateral in various DeFi protocols. Smaller LST providers often struggle to achieve the same level of integration.

  • Trust and Brand Value: Success in the LST market is also a function of the Lindy effect, where the longer a service exists without issue, the more it is trusted. Reputation and brand are significant for LSTs when they compete with native tokens as a form of money.

Implications for LST Providers

This part implies that for LST providers to compete effectively in the Cosmos ecosystem or broader blockchain environments, they need to focus on security, liquidity provision, broad integration with other platforms and protocols, and the building of brand value over time. These factors contribute to the strong network effects that make it challenging for new entrants to gain significant market share despite the open and competitive nature of the blockchain industry.

Given these dynamics, it becomes clear why established providers such as Stride and Lido have been able to secure major portions of their respective markets, with consumers valuing the reliability, liquidity, and integrations that these larger providers offer. For new entrants, overcoming these barriers requires innovative solutions, impeccable security, and strategic partnerships to gain the trust and business of users in the ecosystem.

Celestia Liquid Staking

Celestia's Architecture

  • Minimalist Design: Celestia follows a less-is-more philosophy, lacking native smart contract functionalities, which necessitates that Liquid Staking Tokens like stTIA must be developed by off-chain providers such as Stride.

  • Absence of ICAs: Celestia has not implemented Interchain Accounts (ICAs), meaning Stride cannot use its standard architecture for issuing stTIA.

  • Core Values: The Celestia community prioritizes a simple chain architecture, off-chain over on-chain governance, and credible neutrality. Any LST solution must align with these principles.

Potential LST Approaches for Celestia

  • Enshrined LSTs: Integrating LSTs directly into the protocol might seem like a solution, but it contradicts Celestia’s ethos. It would complicate on-chain governance, add unnecessary complexity to the base layer, and could show preference towards certain applications, thus reducing neutrality.

  • Trust Minimization: While ICAs offer a more trust-minimized solution than multisigs, market timing is critical, leading Stride to consider launching stTIA using a multisig committee while ICAs are not yet implemented on Celestia.

Technical Workarounds and Long-term Strategy

  • Multisig Implementation: Stride is utilizing a multisig approach consisting of seven reputable validators to manage stTIA securely before ICAs become available.

  • ICA Advocacy: Stride is actively advocating for the implementation of ICAs in Celestia's next upgrade to enhance trust properties for TIA liquid staking and the interoperability of the network in general.

  • ZK-Rollup Vision: Long-term, Stride envisages a more sophisticated architecture that could involve Zero-Knowledge proofs for off-chain logic while maintaining minimal on-chain state. This is aligned with Celestia's desire to minimize on-chain state and avoid becoming a settlement layer.

Collaborative Efforts

  • Push for ICA: Stride is contributing to Celestia’s development by proposing a Celestia Improvement Proposal (CIP) to implement ICAs, which benefits not just Stride but other applications that might rely on ICAs in the future.

  • Partnerships: Stride has partnered with Sovereign Labs to explore and potentially develop a ZK-rollup solution for stTIA that would be secure and aligned with Celestia's core values.

Copy-staking Delegation

Stride chooses to implement a copy-staking model for its Celestia validator selection to respect the decisions and sovereignty of the Celestia community. This means they will replicate the existing delegation patterns of native TIA stakers.

Modified Validator Selection Criteria

To ensure optimal validator set health and performance, Stride excludes validators such as CEXs (Centralized Exchanges) and those with high commission rates (over 15%). The goal is to match the larger validator set of Celestia rather than imposing a cap as is done with other chains.

Handling Large Validator Sets

Normally, Stride limits its validator sets to 32 due to gas limits when using a single ICA transaction. They plan to refactor their code to allow batch delegations, removing this cap and potentially covering more validators without being bottlenecked by technical constraints.

Initially, for Celestia, since Stride cannot use ICAs, they utilize a multisig committee that can manage batch delegations to the entire eligible validator set. Once ICAs are enabled, Stride plans to migrate to this system and continue to support the full validator set.

Benefits of Copy-staking

It directly reflects the preferences of the Celestia community, thereby maintaining a decentralized and sovereign validator set congruent with the native TIA stakers' choices.

This method contrasts with other approaches like that of MilkyWay, which whitelists a smaller set of validators.

Potential Issues with Copy-staking

The approach could potentially be less decentralized if a significant portion of TIA is staked via stTIA, thus allowing a minority of native stakers to disproportionately influence the validator set distribution.

A future hypothetical issue could arise if stTIA represents the majority of TIA staking, allowing only a small percentage of native TIA stakers to influence the whole validator set.

Limitations on User Selection of Validators

To prevent manipulation of validator weightings by attackers, Stride does not allow stTIA holders to pick their delegates directly. This safeguard is necessary to prevent principal-agent problems typically found in liquid staking, where someone could game the system by repeatedly minting and selling stTIA while changing delegates.

Staking Logic Cadence

Currently, the staking logic for stTIA runs every 24 hours, slower than the standard 6-hour interval that Stride uses for other stTokens. This slower pace is temporary and a result of deviating from the typical ICA-based setup, but Stride aims to align it with the normal cadence in the future. The difference in yield due to the slower refresh rate is considered negligible.

Host Chain Alignment

The staking landscape is undergoing a significant transformation as liquid staking tokens (LSTs) gain traction, and the competition is heating up between platforms like Ethereum and Cosmos. But what's at the core of this shift, and could the innovative approaches to alignment within these ecosystems pave the way for a smoother staking experience?

Ethereum: A Lucrative LST Frontier

Ethereum's leap into proof-of-stake with 'The Merge' has set the stage for the rise of LSTs. Staked ETH showcased a unique proposition as it tackled the hurdle of liquidity during the staking hiatus — a perfect fit for the Ethereum ecosystem due to its lack of native delegation capabilities and its prosperous DeFi environment.

DeFi Synergy

The DeFi ecosystem acts as a magnet for LSTs on Ethereum, providing an opportunity to leverage staking yields while participating in DeFi activities, further underscoring ETH's utility across various applications.

Market Dynamics and ETH's Ubiquity

ETH's deep integration as a means of exchange in various blockchain applications amplifies the attractiveness of Ethereum-based LSTs, making them a preferred choice over similar options in the Cosmos ecosystem.

Cosmos: A Story Yet to Unfold

While Cosmos pioneered the concept of delegation vouchers, its journey in the LST market is just beginning. With a smaller fraction of its native tokens, ATOM and OSMO, being liquid-staked, there is a significant potential for growth, given the ecosystem's maturity and the increase in validator support.

Compelling Validator Economics

The need for compounding staking rewards efficiently in ecosystems like Ethereum has created a demand for LSPs to pool stakes, a situation that might evolve as proposals to change this dynamic are introduced, potentially affecting the demand for LSTs.

The Taxation Equation

Tax considerations also influence LST usage, as some users view non-rebasing LSTs as a means to achieve more favorable tax treatment. However, this is a complex area subject to different interpretations depending on local laws.

Liquid Assets in PoS Systems

The possibility of instant asset liquidity in a PoS system drives the need for LSTs, particularly for tokens like ATOM or OSMO, which have lengthy unbonding periods.

Host Chain Alignment: The Dilemma and Solutions

Creating robust Liquid Staking Providers (LSPs) that align with their host chains presents a unique set of challenges. How can a protocol like Celestia be sure Stride acts in its best interest and not solely in its own? Original concepts like copy-staking and Host Chain Councils, where Cosmos Hub and Osmosis influence validator selections for LSPs, aim to keep the two entities' interests aligned.

Stride's Dual Path

Stride has innovated by mirroring Celestia's validator set for its delegations, showing its respect for the host community's decisions while maintaining the autonomy to adapt its validator set as needed.

Dual Governance and Community Voice

Lido's approach to potential conflicts of interest—by letting stETH holders veto LDO governance decisions—exemplifies a balance between not overloading token holders with governance responsibilities while giving them power to prevent detrimental decisions. This idea of dual governance is now being examined for its applicability to stTIA tokens, potentially granting holders veto rights on STRD governance choices.

Scaling and Governance Across Chains

The challenge goes beyond simple host chain alignment—it extends to the provision of cross-chain governance rights for stToken holders, even when locked up in DeFi. Stride's ongoing initiatives to enable stATOM holders to participate in Hub governance is just one example of tackling this multi-faceted issue.

Forging Ahead: Celestia and Stride's Path Forward

The relationship between Stride and its host chain Celestia sets the tone for future engagement models for LSTs. Through incremental changes and fostering open dialogue with its community, Stride seems poised to deliver an aligned, responsive, and community-driven governance model, embracing concepts like Inter-Blockchain Communication (IBC) and future technical architectures. As the Celestia community and Stride continue to navigate this journey, the emphasis remains on maintaining a balance that ensures the well-being of both the LSTs and their host chain ecosystems.

The discussion here evaluates the prospect of liquid staking tokens (LSTs) serving as a form of money, specifically within the context of TIA (Celestia's native token) and stTIA (Stride's liquid staking representation of TIA). It revolves around the concept of "modular money," suggesting that modular money can be enhanced through liquid staking.

Core Ideas

  • Utility of LSTs as Money: The moneyness of LSTs is an important aspect, meaning they can be highly fungible, widely accepted, and serve as a store of value, a medium of exchange, and a unit of account.

  • TIA as Modular Money: The idea of Celestia's native token, TIA, as "modular money" suggests it's divisible and can be manipulated to suit various uses across different platforms, akin to programmable money.

  • Wrapped and Bridged Representations: Considering the multi-chain nature of modern blockchain ecosystems, the native asset (TIA) isn't itself competing as money. Instead, its wrapped and bridged versions facilitate its use across different chains.

  • LSTs in Ethereum's Ecosystem: The example of Ethereum and stETH is used to illustrate how LSTs can become a dominant form of money, especially with the advent of Layer 2 and rollup technologies where base layer assets like ETH will become less prominent in their native form.

  • Advantages of stTIA: Using stTIA in Celestia rollups, by extension, offers potential benefits such as yield generation and usability, which could make it more appealing than native TIA.

Requirements for Moneyness of LSTs

  • Safety and Alignment: LSTs need to be built to be safe (secure against attacks, loss, or failures) and aligned (keeping the interests of token holders and validators in sync).

  • Mimicking Base Asset Features: An LST like stTIA should emulate the moneyness of the base asset it represents, such as being decentralized, accessible, and resistant to censorship.

  • Constrained Governance: The system governing the LST must incorporate mechanisms to prevent centralization or power abuse, possibly through dual governance structures that ensure decisions require broader consensus.Share Coin Club

Stride's Vision with stTIA

  • Focused Approach: Stride aims to build stTIA in a way that it mirrors the desirable monetary attributes of TIA, building on its inherent modularity and enhancing its features as an LST.

  • Decentralization and Accessibility: Stride seems committed to ensuring that stTIA maintains a decentralized validator set and equitable access, reinforcing the underlying qualities essential for something to function as money.

  • Censorship Resistance: By building on Celestia's values, Stride appears to aim for stTIA to be censorship-resistant, which is a fundamental property for an asset to serve reliably as money.

Stride's Unique Position

  • Asset Issuer: Stride is positioned as the direct source of stTIA for rollups, with the implication that obtaining assets directly from the issuer is preferable. This is due to stTIA's potential advantages, which may include yield-generating capabilities or other utilities that enhance its attractiveness compared to bridged TIA.

  • Safety and Security: The argument is made that Stride's focus on security, its well-audited and battle-tested code, and investment in economic and validator decentralization make it a trusted platform for asset issuance and bridging.Share

  • Operational Reliability: The platform's history of consistent performance is highlighted, with a contrast drawn to other Cosmos chains that may have experienced operational issues.

  • Neutrality in DeFi: Stride's restriction to LSTs and no native DeFi on its own chain makes it a neutral hub that avoids direct competition with rollups and other chains seeking to become DeFi hubs for TIA/stTIA.

Competitive Landscape

  • Avoiding Politics and Leverage: Rollups and chains looking to use TIA/stTIA would prefer not to rely on direct competitors as it could introduce political complications and give leverage to those competitors.

  • Osmosis and Neutron's Competition: The passage cites the competitive dynamic between Osmosis and Neutron, even leading to conflicts over similar offerings, thus making the case for Stride’s neutral position as a benefit.

  • Examples of Competitive Chains: It describes several projects and initiatives on Osmosis and Neutron that can be seen as entering into direct competition with one another, thus potentially detracting from the "grow the pie" mindset due to overlapping objectives and target users.

Stride as the Bridging Hub

  • The Argument for stTIA: stTIA is advocated as the better choice for rollups and L2s, looking to use TIA because of Stride's neutrality, security, and operational reliability.

  • Stride's Singular Focus: Stride's focused role as an LSP (Liquid Staking Provider) that issues LSTs is its strength. It deliberately avoids native DeFi activities to remain an impartial hub.

The Staking Atmosphere in Cosmos: Tensions and Opportunities with stTIA's Arrival

Buzz Over Airdrop Eligibility Fuels stTIA Adoption Discussions

In the world of cryptocurrency, where anticipation for free token drops—or "airdrops"—can dictate investment strategies, Cosmos' Liquid Staking Tokens (LSTs) are facing a notable dilemma. The fervor surrounding these potential windfalls has historically curbed enthusiasm for Cosmos LSTs. But the tides may be changing with the emergence of stTIA, which is rapidly becoming a central hub of airdrop attention. Protocols like Dymension, Saga, and AltLayer have signaled their preference for airdrop eligibility to include TIA stakers, with AltLayer even taking a step further by incorporating milkTIA holders.

Despite stTIA's recent launch—a move that came after the AltLayer snapshot—this inclusion presents an encouraging sign for LSTs, cultivating optimism that other projects will follow suit in expanding their airdrop criteria to embrace the liquidity that LST holders contribute.

Historical Hesitations: LSTs and Airdrop Exclusions

One of the most significant barriers to LST adoption in the Cosmos ecosystem has been the fear of missing out on airdrops, a sentiment that has kept many asset holders steering clear of LSTs. In the past, preference has been shown towards native stakers when distributing airdrops. This practice has inadvertently discouraged the use of LSTs, potentially leaving their holders at a disadvantage.

LSTs: Overlooked but Overarching

Despite these reservations, stTIA stands as a potential turning point. The persistent exclusion of LST holders, particularly in a thriving environment like Cosmos, overlooks the true depth and vigor brought about by those engaging with their Liquid Staking Tokens. This omission could become increasingly impractical, especially given the growing market repute and systemic significance of stTIA, propelling protocols to reconsider who should benefit from their airdrops.

The paradox is clear: while early and locked-in native stakers, such as those holding TIA, are believed to rapidly divest airdropped tokens, those wielding their LSTs within DeFi are often passionate about their platforms, making them more strategic recipients of these assets.

Stride's Pioneering Role

Stride's proactive stance in navigating the quagmire of airdrop eligibility has set a precedent within the ecosystem. By liaising with projects like Neutron, Stride has ensured that LST holders, including those with stATOM, are not bypassed in their airdrop plans, recognizing the role these stakeholders play within DeFi communities.

Looking Forward in the Celestia Ecosystem

Optimism blooms around Celestia learning from Cosmos' airdrop oversights. The imperative lies in enabling a vibrant DeFi ecosystem to flourish, rather than strangling potential growth with undistributed capital earmarked only for short-term airdrop farming gains. The Celestia ecosystem is well-positioned to exploit this opportunity, provided they can unlock the 'dead money' that lies dormant in the hands of passive capital holders.

Final Thoughts: Balancing Speculation and Strategy

Investors looking to capitalize on the burgeoning world of airdrops are reminded to tread cautiously, as the stakes hinge on the whims of digital asset distribution. While the allure of airdrops is undeniable, protocols and token holders alike are advised to deeply contemplate their strategies. The precedent set by notables like Saga's phone airdrops should serve as a guide: incentives are crucial.

As this dynamic frontier expands, so does the need for calculated thinking on airdrop eligibility among protocols. Not only for the sake of growing their own platforms but also for the prosperity of an interconnected and diverse cryptocurrency ecosystem.

Stride Revenue Model

Stride generates revenues from several sources, specifically targeted towards contributing to the Cosmos Hub:

  1. STRD Inflation: 15% of the newly minted STRD tokens due to inflation are directed to the Cosmos Hub.

  2. Transaction Fees: 15% of transaction fees collected on Stride are shared with the Cosmos Hub.

  3. MEV Revenue: Stride is working on auctions for instant stToken/Token arbitrage redemptions, and 15% of such MEV revenue would also go to the Cosmos Hub.

  4. Staking Token Fees: Stride charges a 10% fee on all revenues generated from stTokens (tokens representing staked assets on Stride), and of this, 15% would be allocated to the Cosmos Hub.

After these revenues are allocated, Stride governors take their commissions, and a 5% community tax is collected and managed by the Stride DAO community pool. The remaining bulk of the revenues is then distributed to STRD stakers, who, as a result, not only get STRD rewards but also gain from the collection of stTokens, essentially earning an index on them.

Inflation and Rewards

The inflation rate for STRD is noted to be incredibly low, at less than 1% of the total supply per annum, with a halving event every year. While the Stride transaction fees are not particularly high, the principal revenue stream comes from the staking rewards of stTokens - highlighting that staking services can be highly lucrative, especially when associated with tokens that have relatively high inflation rates.

Token Distribution

The Max supply of STRD is capped at 100 million tokens. The original tokenomics post and subsequent DAO-approved sales have shaped the current distribution. There is a detailed breakdown of the STRD token allocations at genesis and the present, taking into account the minted tokens and those allocated to locked post-launch investors. The Stride Association has also diversified its holdings byselling some STRD from its Strategic Reserve.

New STRD tokens that are minted on a block-by-block basis are designated to fill particular allocation buckets such as the Incentives Program, the Strategic Reserve, and others, until they meet their respective caps. Even though the overall inflation rate might look around 4.58%, the actual inflation rate contributing to circulating supply is much less because most newly minted STRD tokens are directed toward DAO-controlled pools.

STRD Airdrops & Incentives

  • Earmarked Tokens: Stride has set aside more than 22 million STRD tokens specifically for incentives and airdrops. At the STRD/USD exchange rate of $4.20 at the time of writing, this amounts to over $94 million in value.

  • Control of Funds:

    • The Module Account, under direct control of the Stride governance system, holds these tokens.

    • The Incentives Distribution Multisig, managed by the Stride Association, is responsible for disbursing the funds according to decisions made by the Stride DAO (Decentralized Autonomous Organization).

  • Governance Actions: The DAO can transfer STRD tokens from the module account to the distribution multisig. There has been a recent transfer of an additional 9 million STRD for use in stToken incentives.

  • Usage of Incentives: The Stride DAO is currently behind its initial goal of distributing 20 million STRD within the first year. This undistributed reserve represents a significant "war chest" that Stride can use to promote the adoption of LSTs. An example given is the ongoing allocation of 5 million STRD toward incentives and airdrops for holders of stTIA, the staked version of Celestia's native token, TIA.

The distribution of tokens is not in the form of points or any abstract system, but in real STRD tokens, which can positively affect the incentives for participation and investment in Stride’s services.

Conclusion

Cosmos has consistently been at the industry's vanguard, pioneering numerous foundational advancements within the cryptocurrency space, with Liquid Staking Tokens (LSTs) being one of their leading innovations.

Nevertheless, Cosmos has faced certain practical challenges, possessing the technological prowess while historically falling short on user acquisition and trading activity, particularly when juxtaposed with the considerable intellectual influence it wields. The rising tide of modular blockchains, orbiting around Celestia, is anticipated to bring transformative growth to the platform.

Amidst this evolution, Stride occupies a critical juncture, connecting the legacy of Cosmos with its future trajectory. Stride's undivided attention to LSTs has allowed it to craft some of the most superior stTokens available, adhering to the principle of excelling in a specialized domain. Moving forward, this translates into Stride striving to emerge as the pivotal asset issuer and an impartial conduit for the flow of modular money.