Interchain Liquidity for stTokens

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Hello Lido community,

Lido DAO has introduced plans to bring the Lido liquid staking protocol to the interchain of Cosmos ecosystem blockchains. But so far there has not been an initiative to bring Lido’s existing stTokens to the rapidly growing ecosystem of interchain defi apps.

I think this could be an opportunity to significantly grow adoption of stTokens at comparably low cost, and potentially have additional benefit of increasing brand recognition among Cosmos ecosystem users in the lead up to the launch of Lido protocol’s interchain native liquid staking tokens.

Overview

I envision a 3 step process to integrating Lido stTokens across the interchain defi ecosystem:

  • Integrate LDO and Lido protocol liquid staking tokens with Cosmos bridge protocol(s)
  • Offer modest liquidity incentives for Cosmos DEX protocols to bootstrap minimum viable liquidity
  • Pursue collateral integrations integration to Cosmos based lending and stablecoin projects

Integrate LDO and stTokens with Bridge Protocol(s)

Axelar is the most natural choice for bridge integration partner for a few reasons:

  • They serve not only Ethereum, but also other relevant chains including Moonbeam (for wstDOT) and Polygon (for stMATIC)
  • They are preferred/canonical bridge for many Cosmos chains including Osmosis, Juno, Umee, Kujira, and Comdex, and have non-exclusive integration with additional chains including Crescent and Agoric (the only chain to date to exclusively integrate Gravity Bridge is Canto)
  • For lending and stablecoin protocols in particular, Axelar is much more broadly integrated and these protocols may prefer to limit their bridge risk to a single provider

Gravity Bridge is a very good alternative protocol, with the benefit of greater decentralization vs Axelar (no multisig, Ethereum bridge contract is immutable). But currently they only serve Ethereum and have less integrations, which limits integration potential somewhat.

Because integration of LDO and stTokens could drive significant bridging volume to Axelar, I assume they would be happy to integrate Lido’s tokens on request.

Offer Incentives to Achieve Minimum Viable DEX Liquidity

Lido protocol stTokens are already highly liquid on their host chains via DEX liquidity pools and redemption (where available). But, this is likely not sufficient to support broad adoption and high value collateral integrations in the interchain, due to cost and time bridging through Axelar (particularly bridging to or from Ethereum L1).

To improve liquidity and usability of stTokens in the interchain ecosystem, Lido DAO could offer limited liquidity incentives to achieve “minimum viable liquidity.” I define this as the minimum required amount of liquidity needed to support (1) typical retail size trading volumes and (2) efficient arbitrage between the interchain and stToken host chains.

(1) is somewhat subjective but I think targeting market impact of <1% on trade sizes of $10,000 is probably good enough. Alternatively, targeting lower impact on smaller size (eg <0.5% trade cost on $1,000 size) could be considered as well.

(2) can be determined based on a few factors including fixed bridging costs (primarily Axelar fees, which mirror source and destination gas costs) and trading costs on the relevant interchain DEX. Basically, we’d want to support enough liquidity to ensure that arbers can scoop up enough size to cover the fixed costs of bridging, while keeping prices closely aligned between interchain and host chain DEXes.

As long as these conditions are met, retail end users and collateral integrations should have enough liquidity they need to function, with any overflow needs supported via arbitrage to the much deeper liquidity sources available on respective host chains.

I believe that Crescent Network currently offers the most suitable DEX for achieving goal (1) of minimum viable liquidity via their range / concentrated liquidity pools. This could allow retail users to trade decent size with relatively lower market impact. Osmosis xyk (standard) pools could be suitable for achieving goal (2), as this would allow price to diverge a bit more giving arbers enough of a discount to cover their fixed bridging costs. Alternatively, both concentrated and broad range pools could be offered on Crescent to keep liquidity centralized to a single platform. Osmosis also offers stableswap liquidity pools (based on xy^3+x^3y=k solidly invariant) but these are not well suited to stTokens because they expect a constant 1:1 price ratio.

Pursue Collateral Integrations

The Cosmos defi space has recently begun to accelerate with the launch of several lending and stablecoin projects. These are likely to be the core value anchor for stTokens within the interchain ecosystem.

Notable protocols include:

  • Umee: A P2Pool lending market similar to Compound
  • Mars: P2Pool lending, currently deployed on Osmosis chain
  • Comdex: Defi appchain featuring an AMM DEX, CDP stablecoin protocol, and pairwise lending protocol similar to Silo
  • Kujira: Defi appchain with CLOB DEX and CDP stablecoin protocol
  • Agoric: Cosmos L1 hosting CDP stablecoin protocol (CDPs yet to launch)

Among these protocols, Umee, Comdex, and Kujira are currently in the most advanced state of development, with lending capabilities live across a variety of collateral assets. Umee has $150k of borrowable ETH liquidity and growing, and would potentially be usable for levered staking strategies as capacity grows. Kujira has both ETH and DOT accepted as collateral, indicating potential openness to integrating wstETH/wstDOT as additional assets. Comdex also integrates ETH and MATIC and could similarly be interested in integrating staked versions of these assets.

Mars and Agoric are promising future targets for integration, but currently have either limited functionality or guarded launch caps which preclude immediate onboarding of stTokens.

Cost vs. Benefit

Costs of this initiative include LDO incentives required for minimum viable DEX liquidity, along with any contributor efforts required to land bridge, DEX, and collateral integrations. We can expect partner protocols to be helpful and receptive to integration considering potential benefits of hosting stTokens on their platform, so the most significant cost is likely to be DEX liquidity incentives.

Assuming a target LP return of 2x base staking yield on $100k of liquidity (ballpark estimate of TVL required for minimum viable liquidity) for each of wstETH, wstDOT, and stMATIC, this would amount to roughly ~$43,000 in total annualized liquidity incentive costs (~15,000 LDO per year, or 1,250 LDO per month).

Calculations:

Incentives cost = 1.5 * [ (0.051 * 100,000) + (0.063 * 100,000) + (0.171*100,000) ] = 42,750

Note that total incentives to be issued are 1.5x base staking rewards of the assets, as together with staking return earned on 50% of LP assets this would sum up to LPs earning 2x base staking yield.

How much in additional TVL would this initiative need to drive to be positive on an earnings basis? Considering Lido DAO takes 4-5% of staking yield depending on the asset, we can conservatively estimate a minimum required interchain TVL to reach breakeven:

  • wstETH ~= $3 million
  • wstDOT ~= $3.8 million
  • stMATIC ~= $3.8 million

Note that these figures assume above incentive targeting on $100k of DEX TVL per stToken. It may be appropriate to target higher DEX TVL for ETH and lower TVL for DOT/MATIC, considering higher fixed bridge/arbitrage costs for Ethereum vs Matic or Moonbeam (which have fairly low gas costs and Axelar bridge fees).

The above analysis doesn’t account for potential benefits of user brand recognition and building relationships with interchain defi protocols, which could become more valuable as Lido for the Interchain launches.

Conclusion

I believe that integrating and distributing existing stTokens across as many chains as possible will help cement Lido protocol as the leader in liquid staking. With the interchain defi ecosystem beginning to take off, and Lido DAO’s own foray into native interchain LSTs around the corner, I think pushing integrations here offers an attractive r/r and should be strongly considered for contributor BD efforts as well as funding from the reWARDs committee.

Appreciate any feedback on this proposal!

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Hi @monet-supply, thank you for raising this proposal!

Osmosis seems like a logical first step to build minimum viable liquidity on, but I would perhaps consider twice before centralizing the liquidity on Crescent. While the pool types may be more suitable, the project does not seem to enjoy the same degree of adoption and trading flows and seems less likely to successfully attract an ecosystem of applications to integrate and build around the derivatives. Osmosis has been dedicating significant efforts in this regard and an integration with Mars seems like an actionable step to provide utility to the positions beyond holding and LP’ing.

Our team, which previously implemented and ran Lido on Terra, has been hard at work building Neutron and laying the groundwork for bringing stAssets to the Interchain. In our experience (bridging stSOL to Terra for example), “foreign” assets tend not to perform as well as native assets within their ecosystems. I believe that, beyond tribalism, this is largely attributable to lack of liquidity and opportunities to deploy these assets in DeFi relative to their local counterpart. In the case of Neutron and the Interchain though, I believe we have a strong shot at overcoming these limitations.

The first opportunity is the relative underdevelopment of Cosmos DeFi so far, which kept the integration/liquidity gap between native and foreign asset narrow. Now that the tide seems to be turning, there is an opportunity to still be “early” in providing base assets for the Interchain economy.

The second opportunity is capitalizing on Neutron. A diverse ecosystem of dApps (Curve v2 concentrated liquidity AMM, Money Markets, Perps,…) and ecosystem wide treasury management infrastructure such as the ex-ATOM 2.0 Allocator are looking to launch on Neutron over the following months. These applications will inevitably need an initial roster of assets to provide services around. Building around Lido’s derivatives is a competitive advantage and a mutually beneficial relationship: it allows these protocols to avoid direct competition with existing offering and to provide services build around a more attractive set of reward-bearing assets. Ensuring that Lido’s derivatives are part of the initial mix of assets available on Neutron should greatly reduce the integration disparity, help sustain long-term liquidity and reduce reliance on incentives long-term, especially if the conditions are met for these derivatives to find their ways into the treasuries of the various protocols across the Interchain.

On the issue of pool types, beyond passive concentrated liquidity, we previously developed a “metastable pool” for Astroport which uses the Lido exchange rate to dynamically adjust the pool’s equilibrium price. While this was initially developed for Lido on Terra, it may be possible to adjust and relaunch the mechanism using data passed through Axelar for existing derivatives, to provide the best execution possible while minimizing IL. And, if/when the DAO approves Lido on Cosmos, metastable pools could be setup for Interchain liquid staked derivatives using simple queries to the Lido hub contract.

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I want to point to this specifically. The primary reason we saw such adoption to Terra for ETH/SOL was the 20% APR from Anchor offsetting the additional risk of bridging.

I fully support bridging to Cosmos generally and eventually having all Lido assets there if demand suggests it is worth the effort.

The 2nd issue is determining bridging paths and future upgrade ability. There are a number of issues:

  • The wstETH token is ‘simple’ to bridge but requires additional work around oracles due to the calculated price.
  • stETH is rebasing and usually not compatible with standard bridges
  • Keeping the door open for native staking on a foreign chain
  • Multi-chain governance
  • User experience. What happens if I bridge my ETH to Polygon via canonical bridge, then bridge my ETH via Axelar and finally come back to ETH via Axelar? This is a huge mess we saw with the Wormhole / Sollet bridging. imo this is compounded by the fact that Cosmos hasn’t found its standard or path to avoid this yet without explicit vendor lock in.

There are considerations about a bridging working group to research how to make this approachable more boadly. This is going to be a continued problem for EVMs and L2s as well as new L1s.

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Hi everyone, I’m Georgios from Axelar.

Thanks @monet-supply for initiating the discussion. At a high level, the Axelar community would be pleased to work with Lido DAO to bring Lido to the Cosmos ecosystem.

Integration of LDO and Lido protocol liquid staking tokens can be supported by the Axelar network.

See below for answers to questions brought up by both @monet-supply and @jbeezy:

1. Why Axelar?

As @monet-supply mentioned, the Axelar network currently supports 30+ chains, and is the canonical interoperability solution for major Cosmos app chains.

The network was chosen by the Osmosis community during their bridge-off, Polygon for their Supernets, and a partner by Circle to enable Composable USDC.

The Axelar team makes security its highest priority. A thorough writeup of how we think about security can be found here: https://axelar.network/blog/security-at-axelar-core

2. stETH is rebasing and usually not compatible with standard bridges
To resolve the rebasing issue, wrapped stETH should be bridged instead. The wrapping/unwrapping transaction will be abstracted away from the end user. This is similar to how Axelar’s Satellite bridge allows 1-click bridging of native ETH to Osmosis, which gets wrapped to WETH before bridging on the backend.

3. Multi-chain governance
Axelar can support multi-chain governance for Lido DAO. As an example, StakeDAO is currently implementing multi-chain governance utilizing Axelar’s General Message Passing (GMP) functionality, which allows for arbitrary payloads to be sent from one chain to another.

4. User experience. What happens if I bridge my ETH to Polygon via canonical bridge, then bridge my ETH via Axelar and finally come back to ETH via Axelar? This is a huge mess we saw with the Wormhole / Sollet bridging. imo this is compounded by the fact that Cosmos hasn’t found its standard or path to avoid this yet without explicit vendor lock in.

Axelar solves this through Squid (https://app.squidrouter.com/):

  • Squid enables cross-chain swaps, built on top of Axelar. The project launched on mainnet in February, and is in process of rolling out support for all networks supported by Axelar.
  • With Squid, users can swap between two heterogeneous assets on different chains utilizing the deepest on-chain liquidity, using Axelar General Message Passing.
  • As an example, users can swap from ETH on Polygon (bridged from canonical) into ETH on Osmosis via the following swaps, which will all be aggregated into a single GMP transaction on the Axelar network:
    • ETH on Polygon swapped into USDC on Polygon
    • USDC bridged from Polygon → Osmosis
    • USDC on Osmosis swapped into ETH on Osmosis
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Hey everyone. I’m a Gravity contributor and I figured I would drop some thoughts here.

Since Gravity is fully permissionless and decentralized you can bridge wsteth to any destination right now. Taking full advantage of existing auto-forwarding and frontends.

The incentives costs should be updated to take into account the efficiency of Crescent pools. While it’s true that Crescent does not have as many users as Osmosis it is heavily utilized for low cost IBC arbitrage within the Cosmos ecosystem. If you do the incentives cost math taking into account the higher liquidity efficiency it’s several times more expensive in terms of incentives to use Osmosis exclusively. Anyone with a large trade can make their way to the Crescent pools and the smaller less efficient Osmosis pool will be tightly arbitraged using the Crescent liquidity.

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Hi Justin, thank you for reaching out to this post! I’ve been meaning to get in touch. Could you DM me on Telegram please? @Spaydh

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