Announcing stDYDX and Stride’s Initial Host Chain Validator Set

In a previous post, we gave a comprehensive overview of Stride, the largest liquid staking protocol in the Cosmos Ecosystem, and outlined the numerous benefits of liquid staking for the dYdX chain, including increasing the chain’s economic security, organically decentralizing the validator set, and increasing token efficiency. Since that time, Stride and dYdX contributors have worked together to bring the interchain accounts module to the dYdX chain in order to make liquid staking available to the community.

With the launch of liquid staking just around the corner, this post will outline the implementation details of stDYDX and seek community feedback on the initial set of validators to which Stride will delegate DYDX tokens staked with the protocol.

Overview of stDYDX

stDYDX will be dYdX’s first liquid staking token (LST). At launch, token holders on the dYdX chain can liquid stake their DYDX with Stride using https://app.stride.zone/.

In exchange, holders will receive stDYDX, which will allow them to continue to earn staking rewards while keeping tokens liquid. This will allow users the flexibility to simultaneously earn staking rewards and use these tokens in DeFi protocols, or to exit their position instantly without waiting for dYdX’s 30 day unstaking period.

stDYDX Implementation

As with all of Stride’s stTokens, the stDYDX token is non-rebasing, meaning that the number of stDYDX in an individual’s wallet does not increase as staking rewards are earned. Instead, the redemption rate of 1 stDYDX token increases over time as staking rewards accrue and Stride permissionlessly compounds those rewards. DYDX holders need only stake their tokens with Stride once, and the protocol handles the rest.

The novel feature of stDYDX is its compounding mechanism. Because DYDX has no inflation, and earns staking rewards in USDC from trading fees, rewards are first swapped to DYDX before being compounded into the existing DYDX position. This helps ensure that additional stake is continuously added to the dYdX chain, thereby increasing economic security of the protocol while providing for a continuous source of purchasing power for the DYDX token. Here’s how it works:

  • Step 1: DYDX is transferred from the user’s dYdX wallet to the user’s Stride wallet, where the tokens are deposited in a module account on the Stride chain. The user receives stDYDX tokens in return.

  • Step 2: Every epoch (6 hours), Stride stakes all tokens stored in the module account to a preselected set of validators on the DYDX chain.

  • Step 3: Additionally, every epoch Stride claims rewards from staked tokens and stakes them with the host chain validator set, effectively compounding them. All USDC trading fees collected as staking rewards by Stride are transferred to Osmosis, where they are swapped for DYDX and returned to Stride to be staked with the rest of the collected tokens.

This entire process is handled fully in-protocol and in a non-custodial manner thanks to interchain accounts. DYDX stakers who don’t liquid stake through Stride would have to execute these swaps to DYDX and re-stake manually, which comes with the potential for tax consequences and results in a lower-overall yield.

stDYDX holders can similarly elect to redeem their tokens and the collected rewards at any time by either unstaking with Stride (subject to the unstaking period) or by trading stDYDX on a DEX like Osmosis or Astroport (no unstaking period).

Host-chain Validator Set

As mentioned above, DYDX tokens liquid staked with Stride are delegated to a set of validators on the dYdX chain, which Stride calls its “host-chain validator set.” Normally, when Stride launches liquid staking for a new chain, it launches with a default host-chain validator set composed of the top 30 validators, to whom it delegates its tokens according to existing stake weight. In the case of dYdX, which is in the process of bootstrapping economic security and diversifying stake weight, this mechanism is suboptimal as it would contribute additional stake to the top 33% of vote power.

Instead, the Stride Association, with feedback from the dYdX foundation and several members of the dYdX and Stride communities, has curated an initial set of host chain validators that aims to optimize for factors that are most important to the health of the protocol in this bootstrapping phase. These factors were inspired heavily by the dYdX Foundation’s published guidelines on best practices for dYdX validators and stakers. A few non-exclusive examples include:

  • The validators’ respective contributions to dYdX in testnet and mainnet so far, including node and infrastructure operation, testing, maintenance, bug reporting, engineering contributions, dashboard and tooling maintenance, and more.

  • Validator operations and security, to the extent that this is easily discoverable using publicly available means.

  • Position in the active set. Because 33% of vote power is currently concentrated in the top 2 validators, no stake will be delegated to the top 33% of vote power at launch. The initial host-chain validator set selected at launch is composed of a diverse subset validators representative of the bottom 66% of vote power

  • Node performance and latency. Note that for now this does not include uptime / missed blocks, as the shorter blocktimes for the dYdX chain tend to result in more missed blocks on average than other chains.

  • Governance participation.

The composition of the dYdX active validator set continues to fluctuate on a frequent basis, with validators falling out of the active set due to inadequate stake weight. In order to best serve dYdX chain, stDYDX will launch with an initial host-chain validator set of 10 validators, to whom it will delegate equally. Periodically thereafter (every 1-2 weeks), new validators will be added to the set 3-4 at a time until there are 32 validators in the set, utilizing the same criteria listed above. This method minimizes the likelihood that one or more host-chain validators will fall out of dYdX’s active set and ensures the best UX and value accrual for stDYDX holders.

Choosing to add validators to the host-chain validator set is usually the responsibility of STRD stakers, who have the final say on protocol governance. A governance proposal will be going live on the Stride DAO’s governance forum shortly to temporarily delegate this responsibility to the Stride Association for the dYdX Chain. If passed, this will allow for validators to be added to the set more quickly.

The proposed initial host-chain validator set at launch is:

The nascency of the dYdX chain means that there are insufficient data points to run Stride’s traditional host chain validator selection process at this time. Once enough time has elapsed and the default validator set has been put in place the Stride community will choose a host-chain validator set in a manner that continues to align with the dYdX community’s goals and values. Ultimately, the Stride DAO and STRD stakers will have the final say in this process.

Looking Ahead

In the days, weeks, and months following the launch of stDYDX, Stride contributors will look to take a number of steps aimed at increasing the proliferation of DYDX liquid staking throughout the Cosmos Ecosystem and beyond, including:

  • An airdrop to stDYDX holders
  • DeFi integrations with AMMs like Osmosis and Astroport (Day 1)
  • Collateral integrations with UX, Inter Protocol, Mars Protocol, and others
  • Implementation of an auction module to allow for compounding of DYDX rewards using alternative sources of liquidity
  • And much more

Keep an eye on the Stride twitter page for an announcement of the stDYDX launch date. If you want to learn more about Stride and Cosmos liquid staking, check out our website or join our discord server and introduce yourself! Liquid staking is set to supercharge dYdX’s Cosmos migration, and the Stride community is thrilled to join the dYdX ecosystem and be a part of that journey.

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Stride is a fantastic team and protocol and is the ideal partner for launching DYDX staking derivatives!! Excited for this collaboration

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Excited to see Stride building fast and getting ready to launch stDYDX. Looking forward to all the use cases stDYDX will enable for network adoption of dYdX.

Thanks for selecting Smart Stake in the initial cohort.

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Informal Systems audits both the DyDX chain & the Stride chain and has great respect for the quality of these two teams. Looking forward to become an stDYDX holder

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As a fervent staker and supporter of both Stride and dYdX, I welcome this collaboration.

The cherry on the cake is to have Crosnest be selected as part of the initial validator set.

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I was just wondering;

  • why only start with 10? And not for example 20, since that would then allow the protocol to move to the desired 32 in just 3 steps of adding 4 validators each.
  • 32 validators is over half of the validator set on dYdX, whereas on other chains the relative share is much much smaller. Will the pose a certain risk or does it not matter in general to how many validators the funds are being delegated?
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Carl here from Reverie. Full Disclosure, Reverie is an investor in Stride.

I’m thrilled to see Stride moving so quickly to launch stDYDX. Shout-out to the Stride team for contributing to ICA support in the upcoming software upgrade as well. Sharing some additional thoughts below in support of their approach.

1. Distribution of stake

Stride’s thoughtful process for delegating tokens across the active set can improve the distribution of stake. dYdX is facing a top heavy distribution at the moment with two validators controlling over 33% and seven over 67% (For reference, Osmosis has ten validators controlling over 33% and forty-two over 67%).

A lower distribution consolidates voting power, making the protocol less resilient and dependent on a few validators for governance decisions, software upgrades, and network restarts.

By delegating stake further down the validator set, Stride can improve the protocol’s resiliency against network halts and voting power concentration.

2. Staking utility

Stride’s plans to integrate stDYDX with other DeFi protocols can increase the utility from staking DYDX. Users might find extra reasons to stake their DYDX by using their stDYDX on other platforms. Additionally, users hesitant about the unbonding period can now exit their position through AMM pools, likely in a shorter time frame.

The increased utility could attract more DYDX staking, which in turn would increase the protocol’s economic security. Stride improves the protocol’s health by making the experience better for stakers.

Stride’s approach is a positive outcome for the protocol and DYDX stakers. I’m excited to see their solution deployed in the coming weeks!

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Richard here from 1confirmation. stDYDX is a great synergy between the leading Cosmos derivative DEX and the leading Cosmos liquid staking provider. Stride has a demonstrated track record with $100M in TVL and has the top liquid staking product for ATOM, OSMO, INJ, JUNO, STARS, EVMOS, and other Cosmos chains.

Disclosure: 1confirmation is an investor in both dYdX and Stride.

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Stride is a great team and we believe in their competence in launching a dYdX LST securely and successfully.

We would love to see stDYDX happening on Stride and be deployed across the Cosmos ecosystem

We also believe that LST competition is healthy and that there will be a few dominant players. This is why we support LST diversification and are excited to see both, Stride and pSTAKE, approaching the dYdX community.

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Really excited to see this - stDYDX makes so much sense, especially with the flywheel effect compounding USDC trading fees into dYdX will bring. The non-rebasing behaviour of stTokens can also be a huge benefit from a tax point of view.

We hugely appreciate the decision to include ECO Stake in the proposal for the initial validator set.

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We at Kingnodes are thrilled to be included in this initial cohort of validators for the stride integration to dYdX along with some other fantastic validators. We also look forward to further integration of more validators to the set, and there are a lot of great validators to choose from.

Stride joining dYdX chain is an important step towards further decentralisation of the dYdX chain, which has one of the lowest nakamoto coefficients in the cosmos ecosystem. Together with staker education and other initiatives, hopefully this metric can be improved over the following months.

stDYDX being available to stakers will give the opportunity to have a potentially tax effective way for stakers to grow their dydx holdings over time rather than undertaking compounding themselves, which can have adverse taxation consequences, and give the option to stakers to either grow their DYDX exposure, or stake themselves to receive stablecoin income from their investment.

null, kingnodes

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Huzmond from Enigma here,
Thanks to Stride for adding Enigma to the initial validator set.
We have confidence in Stride for successfully launching stdYdX, marking a significant step forward in increasing the decentralization of the dYdX chain. This also opens up further opportunities for DeFi usage.

Excited to see stdYdX deployed in coming weeks !

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Great Questions, and in a sense, you’ve answered your first question with your second one!

dYdX has a smaller validator set than most chains, and the set is extremely lively and competitive. Starting with a smaller number reduces the likelihood that one of the selected validators falls out of the active set, which would result in a lower overall APY for stDYDX holders.

We could have started with 20, but this would have increased the chances of a selected validator falling out of the set, whereas starting smaller has relatively few tradeoffs. Stride hopes to be a stabilizing force for the active validator set. As that vision is realized, we can open up more validator slots for delegation.

It may be the case that there is an ideal number that is smaller or larger than 32 validators. If that turns out to be the case Stride governance, with input from dYdX’s community, can adjust accordingly.

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What a great initiative. Very well thought out. We’re really looking forward to seeing more dYdX staked and securing the chain.

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As we expect @stride to take the most significant market share of the LST distribution in dYdX, it was very important to look for every aspect of this integration. Among those factors, the selection of validators to receive the LST application was a critical point to solve in order to get a broad support and approval from both communities.

In the specific context of dYdX, we’ve underscored the challenges stemming from the current concentration of voting power within the validator set. Opting for a distribution solely based on existing vote power would exacerbate these challenges. Hence, we endorse the proposed approach of an equal-weighted distribution among a refined set of validators, chosen through quantifiable quality metrics.

We have repeatedly advocated for quality data-driven distribution of stake. Inviting wallet providers to use quality metrics sorting instead vote power weighted display of validators is one thing, but we believe that LST providers can play an important role in that paradigm shift as well. This joint agreement between the Stride & dYdX team is following this model, and we hope this will serve as a baseline for future similar parterships between LST providers and sovereign chains.

Thank you for reading !
pro-delegators-sign

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