Diversify potential dYdX Community Staking with Stride and pSTAKE Finance

Proposals
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This proposal is authored by core contributors to pSTAKE Finance (addressed as ‘we’ in this forum post).

Summary

  • This is a suggested improvement to Reverie’s dYdX Community Staking proposal by pSTAKE Finance Contributors
  • We support Reverie’s rationale and the need for more economic security and dYdX network decentralization
  • We propose that the suggested 20M DYDX token spend be split equally between Stride (stDYDX) and pSTAKE Finance (stkDYDX)
  • pSTAKE Finance will charge a 0% fee on the 10M DYDX liquid staked with pSTAKE and is also committed to sharing 20% of its entire DYDX liquid staking revenue with the dYdX Community Pool for the term of this proposal (12 months initially), subject to pSTAKE Finance governance approval
  • Key stkDYDX differntiators include pSTAKE Finance’s commitment to security, contribution to dYdX Network Decentralization, and an elevated liquid staking UX

Context

Firstly, we fully support Reverie’s commendable initiative to bolster the dYdX chain’s security and decentralization. The dYdX app chain’s adoption and rapid growth warrant mitigating potential risks associated with the network’s economic security. We firmly believe in ‘security abundance’ and ‘transparent decentralization’.

As rightly highlighted by Reverie, the dYdX network currently possesses security and centralization risks that are concerning and demand attention from the entire community:

  • Low (11.4%) DYDX staking ratio → Less economic security

  • Plateaued staking-to-deposit ratio on the dYdX chain → Stunted growth in economic security

  • Top ten validators control 66% stake → Centralization Risk

  • 3 (Nakamoto Coefficient) validators control 33.33% stake → Centralization Risk

Some reasons for this scenario include a high unbonding period, a lack of knowledge about staking (or liquid staking), and the merits of network decentralization.

Most delegators trust validators with governance rights to act in the network’s best interest. Choosing the right validator is highly dependent on brand recognition, low fees, etc., which can lead to network centralization.

This is where trusted liquid staking providers like pSTAKE Finance and Stride can abstract away making such decisions from a delegator to ensure the dYdX network sovereignty and promote decentralization.

Proposal

We echo that the proposed community pool spend to liquid stake 20M DYDX tokens in the original proposal is reasonable considering factors like total community pool and vesting balances, foreseeable spends, and economic security added to the dYdX network.

However, we advocate for an open and decentralized approach involving an equal split of the proposed 20M DYDX tokens between Stride (stDYDX) and pSTAKE Finance (stkDYDX).

We propose that 10M DYDX tokens be liquid staked with pSTAKE Finance through a multi-sig comprising community advocates. The multi-sig will be a mere executor with instructions to only liquid stake tokens and send stkDYDX back to the dYdX community pool, ultimately controlled by the DYDX governance.

We believe that such an approach empowers the adoption of DYDX liquid staking, aligns the network’s prominent liquid staking providers, and ensures no centralization risk is added.

To further align with the dYdX community, we propose the following, subject to PSTAKE governance:

  1. pSTAKE Finance is committed to offering a 0% fee for the 10M DYDX from the Community Pool that will be a liquid stake on pSTAKE (~$800k rewards will go directly to the dYdX Community)

  2. Additionally, pSTAKE Finance will share 20% of its entire DYDX liquid staking revenue with the dYdX Community Pool till the agreed-upon term of this proposal (pending pSTAKE Finance governance approval). This will go into effect if, and only after, pSTAKE governance decides to introduce any protocol fee. Currently, the DYDX Liquid Staking fee on pSTAKE Finance is 0% for all users.

The core DYDX liquid staking implementation between pSTAKE Finance and Stride is quite similar. stkDYDX and stDYDX have identical liquidity in Cosmos and are primed to be integrated everywhere in Cosmos DeFi. Some notable differences include Security, Decentralization, and User Experience.

pSTAKE Finance’s Commitment to Security

We have taken multiple significant measures to ensure that security is always a priority at pSTAKE Finance.

  • pSTAKE Finance has undergone 4 security audits for its Cosmos Liquid Staking implementation by leading security firms like Halborn, Oak Security, Hexens, and Notional.

  • pSTAKE Finance is one of the few liquid staking providers with an Immunefi Bug Bounty

  • pSTAKE Finance has deployed rigorous on-chain monitoring of its stkTokens, protocol redemption rate, supply changes, and other security parameters.

  • Notably, pSTAKE Finance’s stkDYDX implementation, including its auto-compounding feature (similar to Stride), underwent a dedicated additional audit before the launch.

pSTAKE Finance’s solution currently leverages DYDX liquidity on Dexter to auto-compound. To decentralize this, pSTAKE Finance has successfully integrated the Skip Protocol API to process auto-compounding USDC staking rewards through various DEXs like Osmosis to ensure users get the best capital efficiency.

pSTAKE Finance’s Contribution to dYdX Decentralization

We believe in being a net positive contributor to the DeFi ecosystem and in decentralizing the networks for which we provide liquid staking services. Instead of a committee or protocol contributor driven model of choosing validators, pSTAKE Finance’s stkDYDX relies entirely on transparent, on-chain data.

We have developed an algorithm that optimizes dYdX decentralization based on parameters like validator voting power, commission, governance participation, uptime, slashing, and more.

The code filters validators based on the above and assigns individual weights in a model that optimizes overall network decentralization.

Currently, pSTAKE Finance delegates DYDX deposits to 37 dYdX chain validators, 61.6% of the entire active support. pSTAKE Finance’s delegation model directly incentivizes validators to act in the network’s best interest (parameters mentioned above) to receive delegations. This decentralizes the validator delegation mechanism, powered entirely by on-chain data and code.

In this sheet, one can view simulations of how the dYdX chain stake delegation would look.

  • Case 1 → Current Network State
  • Case 2 → 20M DYDX is liquid staked with Stride
  • Case 3 → 20M DYDX is liquid staked with Stride and pSTAKE Finance equally (10M DYDX each)

Technically, pSTAKE Finance can support delegations to 100% of the active set if all validators qualify for its delegation model criteria.

Elevating DYDX Liquid Staking UX

pSTAKE Finance presents unique differentiators with features like 0% fees and Flash Unstake.

  • For DYDX liquid staking on pSTAKE Finance, a 0% protocol fee for the first two months of launch as an added privilege for users (as approved by pSTAKE Finance governance)

  • Flash Unstake allows stkDYDX holders to unstake instantly by providing instant liquidity with a unique protocol mechanism that matches withdrawal requests with daily deposits

Term

We propose adopting the terms outlined in Reverie’s initial proposal, which suggest a preliminary duration of 12 months. The community will have the ability to unstake the DYDX at any moment and return the principal amount of DYDX plus any rewards back to the community treasury through a governance vote.

Final Thoughts

We are excited and committed to contributing to this next phase of growth in network security, decentralization, and utility for the dYdX Community.

This proposal aims to enhance security and voting power resilience, while also emphasizing the importance of ensuring liquid staking decentralization.

We request the community’s feedback on this proposed approach.

19 Likes
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Read both the proposals, it’s clear that while the initiative to stake 20M DYDX from the community pool is a step in the right direction for enhancing network security, as outlined in the other post.

However, the concentration of liquid staking power among one protocoll underscores the risks associated with centralizing too much power with a single entity or protocol.
This makes this proposal by pSTAKE to split the stake between Stride and pSTAKE particularly compelling.

Diversifying our approach to liquid staking by supporting two protocols not only mitigates these risks but also fosters a healthier, more decentralized ecosystem. The focus on security, decentralization, and user experience from both complements the community’s needs perfectly. I’m fully supportive of this initiative and look forward to seeing its positive impact on the dYdX community.

SuperEra

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Diversity is what dYdX needs

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Agree 100%, diversity is key!

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Now, this is one of those proposal that make so much sense. I can’t see any reason not to diversify the 20M DYDX with 2 Liquid Staking providers.

Giving all the power to one Liquid Staking provider (Stride) will give a lot of power to only one protocol. Also, I suggest that when more Liquid Staking providers launch DYDX LSTs, part of the 20M should also get liquid staked with them (given security is one of their main priorities).

Let’s not forget why we are here (apart from the gains) - decentralization should be THE main approach when doing ANYTHING.

Thank you for reading,
Dan from Cosmonaut Stakes

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We support #2444 and this proposal.

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diversification is great, will support pSTAKE on this proposal.

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100% supporting this push towards decentralization.

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Echoing what I just posted in the other chat:

pStake should at least be added, since they are working with an automated delegation. So that is quite a no-brainer.

I would personally also like to see an exploration at the inclusion of QuickSilver to make sure we diversify even further. I am aware that they work with intent signalling and is more difficult in that perspective compared to Stride / Persistence, but reducing systemic risk should be a core topic imo, since we are talking about considereable amounts of funds here.

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We support the push to further decentralise the 20M DYDX, and sharing 20% of the entire pSTAKE DYDX liquid staking revenue with the community pool makes this a valuable proposition for all users of the chain. Full support here.

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In full support of this proposal,
diversification lowers risk :shield:

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Hey, everyone. John from Stride here.

I’m happy to see Persistence offer to join this initiative to improve the economic security of dYdX chain. In the abstract, DeFi processes should always be designed with redundancy in mind.

However, given the facts of this particular situation, I do not think depositing half the proposed 20M DYDX with Persistence would make this initiative more secure. In fact, splitting the amount between Stride and Persistence could increase the risk.

The most crucial security aspect of a proof-of-stake (PoS) blockchain is its economic security, represented by the dollar value of staked tokens. Every other aspect of security is ultimately dependent on economic security. When considering blockchains to provide services for dYdX, the dYdX community should give thorough consideration to their economic security.

In Stride’s case, economic security is provided by the Cosmos Hub blockchain, through interchain security (ICS). ICS is a battle-tested security arrangement whereby all staked ATOM on Cosmos Hub provides economic security for Stride chain (similar to Eigen Layer’s restaking). The current amount of ATOM staked is roughly $3B, meaning that Stride has $3B of economic security.

On the other hand, Persistence uses its own token, XPRT, as economic security. The current value of Persistence’ economic security is $60M. And due to the volatility of the XPRT token, within the last six months Persistence economic security has at times dipped as low as ~$25M.

The key thing about economic security is you want it to be as high as possible relative to chain TVL. When TVL begins to approach the level of economic security - and especially if TVL were to exceed economic security - it creates perverse incentives, and a governance attack becomes more likely.

If dYdX governance choses to liquid stake the proposed 20M DYDX with Stride, Stride’s $3B of economic security would be more than enough to handle it - even if the price of ATOM fluctuated. But in the case of Persistence, its economic security of just $60M may not be sufficient to prevent bad things from happening - especially given the volatility in the price of XPRT.

So given the critical factor of economic security, I believe the full proposed amount of 20M DYDX should be deposited with Stride. Economic security is the most fundamental aspect of security for a PoS chain; with low economic security, no other kind of security matters. And among Cosmos liquid staking providers, only Stride has the necessary economic security to handle this deposit.

If Persistence would like to pursue their proposal, I would recommend that they make a separate proposal that does not involve Reverie’s original proposal from last week. And ideally, the fact of the low economic security on Persistence chain should be addressed in any future proposals, as economic security is the bedrock of all security on a PoS chain.

4 Likes
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Stakewithus supports the proposal for splitting the community pool delegations into multiple Liquid staking providers.

We would like to avoid a Lido-liked situation where gatekeeping happens on the selection of validators. pStake’s automated approach is probably the most neutral way to keep the network decentralized.

4 Likes
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I strongly disagree with John_Galt. Centralization of LS providers is a huge risk, especially before bull run where LS seems to be one of a main narrative. Its never a good practise to hang your businnes on a single 3rd party service provider, especially for security and business stability reasons.
Persistence/Pstake proved their platform is roobust and well secured for years, continously audited and with even more security coming from BTC staking and restaking business. The TVL of the chain can easily surpass STRIDE tvl soon. I dont think that measuring tvl from bear market during app building phase is right approach.

We need to remember that Persistence is the oldest and most experienced in Team in LS area in Cosmos. They started LS business with Eth staking even before Cosmos has any DEX. STRIDE just recieved more support from Cosmos Hub on the beginning.

I don’t see the valid rationale behind John_Galt post. It’s a huge mistake and risk to eliminate centralize LS service and eliminate trusted Team with the best validator decentralization mechanism in the industry.

DYdX is before important decision. I hope the chain security, the business continuity and decentralization will win in that case.

I strongly disagree to give all the service to single LS provider only.

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It’s fantastic to see such engaged discussions around the economic security of the dYdX chain and the role of liquid staking in it. But on the points regarding economic security, particularly around the Persistence ($XPRT) ecosystem, there’s a bit to unpack. It’s true, the sheer dollar value of staked tokens is a pivotal aspect of blockchain security. However, it’s also essential to consider the stability and commitment of the community behind these tokens, which can provide a more nuanced view of ‘security’.

Also, a point to note here is that Persistence recently announced that they are gearing up to leverage $BTC security through its partnership with Babylon. This move is poised to significantly amplify its economic security, potentially outpacing the one by Stride by more than 100x.

I suppose it’s clear that this proposal by pSTAKE is beneficial to us. It not only spreads risk but also taps into the evolving strengths of various ecosystems, benefiting the dYdX community in terms of enhanced security and resilience.

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@John_Galt
I think it is good to explain why the argument about economic chain security would matter so much.

I do get the fact that a chain needs to be secured by as many funds as possible. However, the staking ratio of the Persistence chain is near 75%, which is extremely high. This also means that it is hard to obtain the necessary voting power to manipulate in the first place, since most XPRT is locked and bonded on the chain.

The TVL of stkAssets also does not contribute to chain security (yet), so in theory (imo) the chain security stays exactly the same whether the TVL is $1.000, $1.000.000 or infinity (knowing that with bigger TVL it becomes more interesting to do malicious behaviour).

However, with Restaking being worked on, it becomes all the more interesting to have stkDYDX in higher numbers as well. That will give opportunity for native LSTs and those from other chains to mingle to secure the Persistence chain, which will greatly enhance the economic security of the chain.

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Very interesting observation. Showing once more that putting all our eggs in one basket is not conducive of decentralization.

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Interesting thing to add to the whole economic security conversation; ICS also brings a systemic risk.

Because you effectively only need to manipulate 1 chain (the Hub) to mess with all consumer-chains as well :slight_smile:
So the risk imposed with ICS is not the 3B of the Hub, but also the value of Neutron, Stride and other ICS chains has to be added. And with Stride also the value of the stAssets, so the value goes through the roof. Imagine the amount of damage one can thus do with only manipulating the Hub itself.

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This is grow the pie in action.

Stakecito will support the Reverie proposal if the pie is shared.

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Is there a timeline for this?

1 Like