[DRC] dYdX Community Staking with pSTAKE Finance

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

Overview

In the interest of further enhancing economic security, diversification of the dYdX Community Pool’s risks, and decentralization of the dYdX network, it is proposed that 5M DYDX tokens be liquid staked with pSTAKE Finance.

This is a separate discussion from our previous suggestion to split the potential dYdX Community Staking with Stride and pSTAKE Finance equally, as the authors of the original proposition have chosen to ignore the dYdX community’s feedback.

There are no deadlines for this discussion and the consequent on-chain proposal. We believe that such matters of high significance warrant ample time for the following outcomes:

  • The community isn’t rushed to make decisions and considers all aspects carefully
  • The involved fee and its possible effects are evaluated thoroughly
  • The suggested amount is proposed in a staged manner as compared to a hostile takeover

Proposal

We propose that 5M DYDX tokens be liquid staked with pSTAKE Finance to bolster the dYdX Chain’s economic security further, diversify the risk of the community pool, and decentralize the network with pSTAKE Finance’s custom-built delegation solution.

Liquid Staking DYDX on pSTAKE Finance can be done 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.

As highlighted in our previous post too, to further align with the dYdX community, we propose the following (subject to PSTAKE governance):

  • pSTAKE Finance will take a 0% fee for liquid staking 5M DYDX from the Community Pool (~$3.5M rewards will be directly realized by the dYdX Community Pool)

  • 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. This will go into effect if, and only after, PSTAKE governance decides to introduce any protocol fee. The DYDX Liquid Staking fee on pSTAKE Finance is 0% for all users.

To summarize, stkDYDX TVL will have two components: The dYdX community pool and non-community pool.

The community pool component will enjoy 0% fees.

If and when a fee switch is turned on, 20% of the revenue from non-community pool TVL will be shared with the dYdX community pool.

The proposed 0% fee for the dYdX Community Pool comes after considering various suggestions and concerns raised by dYdX community members and validators in previous forum discussions on this topic.

Furthermore, we propose that the dYdX Community liquid stakes DYDX with pSTAKE in a staged manner based on milestones:

  • 3.5M DYDX is liquid staked at the beginning
  • 0.75M DYDX is liquid staked after the dYdX Community has performed a security overview of the stkDYDX implementation, which Halborn, Oak Security, and Notional have already audited.
  • 0.75M DYDX is liquid staked after total stkDYDX TVL crosses $20M

Such a milestone-based approach aligns the dYdX and pSTAKE Finance communities stronger than ever before as the success of each gets directly intertwined.

The dYdX community can evaluate liquid staking more DYDX with pSTAKE Finance depending on the positive results it brings to the dYdX Ecosystem in the future.

Final Thoughts

This proposal advocates improving economic security, derisking the dYdX community pool, and enhancing network decentralization.

Further, it considers all active suggestions provided by the dYdX community with the proposed 0% fee and a milestone-based approach of liquid staking DYDX with pSTAKE.

pSTAKE Finance is committed to being a community-first dYdX liquid staking provider. We believe in and act accordingly to be a net positive to the dYdX Ecosystem.

We kindly request the dYdX community’s feedback and look forward to engaging in active discussions.

10 Likes
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Stakewithus fully supports pSTAKE’s proposal:

  • 0% fees on liquid staking on inception, so no dilution to staking APY; and a 20% fees share in future if fee switch is turned on.
  • best-in-class and most neutral LST delegation model that does not gatekeep validator curation, which helps with decentralization of the network and removes conflict of interest entirely.
  • Milestone based DYDX staking approach is well thought out.
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Big Yes. Long-term commitment to security and decentralization ideals is vital to ensure the health of the dYdX network.

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I am a bit worried about now having 2 separate proposals…
20 million DYDX from Stride / Reverie + 5 million from Persistence.

That means that the APR for investors will go down even further, whilst getting a bigger share from the community pool.

Imagine that also QuickSilver will now join the party and asking an amount as well. What will that do for the normal investor?

I totally understand the proposal though, looking at how Reverie looks at the feedback given. In that light I agree with this prop, also taking into account that this prop has a tiered plan for how and when the stkDYDX is created.

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More locked tokens and a lower interest rate will stimulate the price of the dydx itself so no one will lose and potentially gain.

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I think this proposal is much improved from the previous Persistence proposal, as the amount of DYDX is lower and it has a staggered deposit schedule.

But I still think Persistence’ low economic security should be discussed.

Currently, Persistence’ has $60M of economic security, of which ~$40M is needed to execute a 67% governance attack which would give attackers full control of the chain and all tokens on it. And the total amount of DYDX being requested by this proposal is 5M, or roughly $20M worth. This deposit would bring Persistence’ full TVL to about $35M. With full TVL so close to the ~$40M needed for a governance attack, token volatility could easily cause TVL to surpass economic security.

When TVL is near or greater than the value of economic security, it creates perverse incentives for validators and token holders; the security assumptions around PoS begin to break down.

So here’s my suggestion:

Given Persistence’ economic security, ~$40M is currently required to execute a governance attack, as this is 67% of the value of all staked XPRT. So I would suggest that Persistence aim to keep its TVL at $20M - which is half of the $40M needed to execute a governance attack. That way, even if token prices move TVL will hopefully stay below the level of value needed for a 67% attack.

Since Persistence currently has $15M TVL, I think $5M of DYDX liquidity could be safely added. Which is roughly 1.5M DYDX.

In my opinion, proposing a deposit of 1.5M DYDX would be safe. And as Persistence increases its economic security, potentially via the Alliance module and Babylon, more DYDX could be safely added.

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Following our comment on the Reverie post, we are in favor of an additional 5M DYDX tokens to be delegated to pSTAKE.

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Thinking about this, is it not dangerous that Stride is secured by the same token there is a stAsset for?

I mean, the stATOM is controlled by the Liquid Staking protocol on Stride. Those are staked on the Hub. But the same staked assets secure both the Hub AND Stride. So there is a conflict of interest for those staked assets, where there is the risk of being used (direct of indirect) to embody the interest of Stride as a protocol.

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There are several flaws in your reasoning that I’ll describe in detail below:

-First of all, in cometBFT is safety over liveness, this means that a 1/3+ attack is enough to halt the chain already so this is the first risk to consider before the 2/3+ attack

-It is important to consider not only the value staked but how decentralized this stake is, ie. a chain may have $1B in staked value but most of this in a few validators, while other chain may have $100M staked distributed in many validators. Therefore to consider the security both the value staked and how decentralized this value is must be taken into account

-In the Cosmos Hub around 6 validators control 1/3+ of stake while on Persistence it is around 10 validators. Also, in the Cosmos Hub around 25 validators control 2/3+ while on Persistence around 37 validators

-Persistence has one of the highest staking ratio with around 75% of circulating supply staked, significantly higher than the staking ratio of the Cosmos Hub

-You are missing in your reasoning one of the key security features of the PoS design: on Persistence most of the circulating supply is staked, around 75% of the circulating supply so only 25% of the supply is not staked, and you are suggesting that for an attacker acquiring 67% of the circulating supply is something simple, this is totally incorrect. First of all, any attempt to acquire a large amount of the ~25% supply not staked will drive the price of XPRT exponentially high making buying additional XPRT prohibitively expensive and this is one of the core security designs of the PoS system. In the case of Persistence, since 75% of supply is staked even a 1/3+ attack will be extremelly challenging since only 25% of supply is not staked. In contrast, the staking ratio of the Cosmos Hub is around 62% meaning that 1/3+ of supply is not staked, and given the recent reductions in the inflation parameters and minimum commission the staking ratio is likely to decrease further

-Furthermore, pSTAKE similarly as Stride was approved by the Cosmos Hub governance to receive a similar amount of ATOM to boost stkATOM, so pSTAKE is trusted by the Cosmos Hub governance like Stride

Considering all the above I fully support this proposal which is significantly more conservative than Stride’s proposal since pSTAKE is requesting 5M DYDX rather than 20M DYDX

3 Likes
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In support of the liquid staking of 5m $DYDX via pStake.

Also looking forward to other initiatives (via existing/new incentives or other means) for natural growth of the stkDYDX to acquire higher number of holders and staked tokens.

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Glad to see the pSTAKE Finance adapt & address the community’s feedback with this new proposal.

It’s smart to opt for a staged liquid staking approach with pSTAKE, ensuring we’re not rushing into decisions & are taking the time to carefully consider our steps. The commitment to a 0% fee and sharing revenue shows a real partnership stance. This move towards further decentralization and risk diversification is exactly the kind of initiative that can strengthen the dYdX chain.
Plus, tying success milestones directly to the community’s interests is a thoughtful way to align with our collective goals. Looking forward to seeing how this unfolds and the value it adds to the dYdX ecosystem

A yes from me when voting comes onchain

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Thanks for engaging! I think it’s vital to discuss these issues.

While there are many aspects to economic security, I think the key thing is the ratio of economic security to total value locked. After all, the whole point of staking DYDX from the dYdX community treasury is to ensure the economic security of the chain remains greater than TVL.

As TVL approaches the level of economic security, it creates perverse incentives for token stakers and validators.

In a 2/3 governance attack scenario, it’s simplistic to assume the attacker would acquire tokens on the market. Realistically, a potential attacker may already have a large amount of tokens. And if he requires more to get to the 2/3 threshold, he may try to buy validator keys from validators, thereby gaining control over all their staked tokens.

Discussing stake distribution is interesting, but it’s ultimately very difficult because it’s impossible to know if validators are controlled by the same entity. For example, on Osmosis the entity Paradigm controls three separate validators, each with a large stake.

Ultimately, the key thing is: how much do validators / stakers have at sake and how much could they gain by taking over the chain? And as a rule of thumb, I think it’s a good security practice to ensure that the TVL of a chain does not exceed the amount of stake necessary for a 2/3 governance attack.

For this reason, I’m looking forward to Persistence increasing its economic security through the Alliance module and maybe Bitcoin staking. The greater the economic security, the greater value the chain can securely hold.

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As outlined in our comments on the forum post of Reverie and Stride Labs, we support the prospect of allocating Idle DYDX to Liquid Staking Protocols

The initial proposal mentioned two key reasons to utilize DYDX as LSTs. Our view is that both these benefits are further increased by diversifying LST exposure, rather than concentrating everything in one protocol.

  1. Increased chain security: pStake deposits to 37 dYdX chain validators, while Stride deposits to 28 validators. Diversifying LST exposure will further decentralize validator voting power (as shown in simulations by pStake here).

  2. Value accrual for DYDX treasury: pStake terms are 0 fees and 20% of revenue sharing on all staked DYDX from the non community pool: These terms are substantially better than those proposed by Stride (7.5% fees). DYDX would benefit from the value accrual of both staking on Stride and pStake.

Additionally,

  • Diversifying into both LST protocols align with our idea of decentralisation.

  • The terms laid out by pStake (0% fee + 20% revenue share of all additional liquid staked DYDX) are attractive for the value accrual of the DYDX treasury. To highlight this difference, 20m DYDX staked on pStake would save the protocol close to $1m in fees compared to Strides proposal. When pStake turns on their fee switch, DYDX treasury will accrue revenue from the pStake non community pool.

  • In pStakes previous proposal for 10m DYDX, we raised concerns about pStakes low current total value of DYDX staked ($180k). We feel more confident with lowered amount and outlined onboarding process.

  • Based on the previous discussions, we feel confident that the economic security is high enough to justify 5m DYDX.

We see value in converting Idle DYDX to LSTs, and feel the fees and terms proposed by pStake are fair and reasonable. This decision would increase chain security, improve decentralization, and accrue value to the DYDX treasury. For this reason we support the proposal.

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You are discussing the risk for a 2/3+ attack in the case of Persistence or the Cosmos Hub (Stride), but the highest risk for this attack is in the dYdX v4 chain itself, where just 2 anonymous validators control almost 1/3 of staked DYDX and could easily halt the entire chain and dYdX v4 DEX at any moment, this is a serious and obvious risk and to mitigate this increasing the decentralization of staked DYDX is of paramount urgency and priority, and here both Stride and pSTAKE are helping and not only they should be supported but additional ideas to increase the decentralization of dYdX v4 should be discussed immediately.
Again, you only consider ‘economic security’ or ‘staked value of DYDX’, but this is not correct and it has to be considered in combination with the decentralization of stake, otherwise what you are saying is: 2/3+ of stake is with just one validator, but the chain is very secure because it has high value staked/high economic security. No, economic security is total value staked and how decentralized this stake is. In the case of dYdX v4 the stake is hypercentralized, in the case of the Cosmos Hub is more decentralized and in the case of Persistence even more. The Nakamoto coefficient of Persistence is greatly higher than the Nakamoto coefficients of dYdX v4 or the Cosmos Hub

This is also inaccurate. Persistence has existed for many years already and there is an ongoing delegation program, each validator on Persistence is well known and due diligence has been done by the foundation several times. In contrast, dYdX v4 is a very recent chain with many anonymous/unknown validators and especially 2 anonymous validators controlling almost 1/3+ of staked DYDX with the ability to halt the chain, previously a single validator had control for certain periods of time of over 1/3+ of the staked DYDX. The solution for this is greatly increasing the decentralization of stake in dYdX v4 by initiatives such as this one by pSTAKE.

You claim that a malicious entity on Persistence may already have a large amount of tokens and try to buy the keys of some validators. Remember that 75% of supply is staked on Persistence and 2/3+ is decentralized across 37 validators, it seems highly unlikely that 37 validators well known and public would suddenly become malicious because this would affect them not only on Persistence but on all the other chains they are validating.
You are saying that because there are some isolated cases of an entity running two validators on the same chain, then it is ‘impossible to know if validators are controlled by the same entity’, so according to this all validators in the Cosmos Hub or dYdX v4 might be controlled by the same entity? No, most validators are public, have website, twitter and due diligence was done by different foundations to ensure they are independent entities. Some of the 37 Persistence validators controlling 2/3+ are: Simply Staking, Citadel, P2P, CryptoCrew, Informal Systems, Stakecito, Smart Stake, Cosmosation, etc. According to you, it is impossible to know if these validators are controlled or not by the same entity?

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They are not anonymous. It’s not a public information.
Both are big VC’s. But you are right. At this moment its the biggest risk for dydx chain.

Everything further is my speculation and prediction, use it with a grain of salt:

I was wondering why Ex-Machina voted yes in this proposal while they are losing ~$3.5M per year because of the APY reduction. I am not sure if VC’s are allowed to stake vested tokens or not. But if you look at the accounts that delegated to Ex-Machina and purple fog they have staked 29M dydx while on these accounts there is like 30.7M liquid dydx.
So the have staked 48.5%.

According to https://token.unlocks.app/dydx right now dydx investors have ~50% of tokens unlocked. With the big unlocks till 1 june when 70% tokens will be unlocked

So top1 holder probably will increase his stake from 29M to 39.14M
So his loses in profit will be much less than 3.5M.

But we wont achieve much decentralization staking only with Stide, which investors and validator set are not really into decentralization according to signalling vote. While smaller holders revenue share will be dilluted.

In general problem could be solved if the biggest holder just staked his tokens into big set of validators (with reputation who are securing other networks)

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I addressed it in a previous post, but was ignored / missed apparently.

Don’t forget that this risk is imminently bigger for ICS, since acquiring voting power once makes you control it on 3 subsequent chains (Neutron, Stride AND the Hub). And with more chains upcoming it only becomes more interesting to do an attack on this, because the win is also much much bigger.

So yes, the Hub secures 3B on funds, but it also puts the funds on Stride + Neutron + the Hub at risk. So in terms of economic security you also need to calculate with the TVL of ALL 3 projects. And then the math becomes completely different and less positive for Stride.

Ongoing disclaimer: I have a Stride node and I also have a Stride bag so I also benefit from a strong Stride. But having a strong ecosystem is something which I will surely not ignore.

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Here are some of my thoughts:

  1. yes APR will go down further, but on the other hand the 20% of the rewards will go directly back to the community pool which helps to fund more projects/initiatives.

  2. The proposal improves the diversification of liquid staking providers. Yes, MCAP of persistence is much lower so a there is an theoretical attack vector on getting the control of the chain. On the other hand ~75% of the supply is staked and the liquidity on CEXs and DEXs is very low, which would lead to an enormous price increase, if funds are bought on the open market.

  3. As mentioned above, the 5M dydx wouldn’t change the validator set very much on the dydx chain - even it would be staked at one validator. 5M dydx is currently ~4.2% of voting power on the dydx chain.

I think this proposal is in general net positive for the overall Cosmos ecosystem (and for the dydx chain itsself).

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We think this proposal makes sense, because right now a decent amount of staked tokens will be controlled by a single entity (Stride).

Stride has so far never meddled in governance, but we can’t count on this forever.

Persistence’s validators selection process is also more transparent than Stride’s, another plus.

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Yeah, the dynamic set by the approval of the other proposal makes it such that this request also makes sense :stuck_out_tongue:

@pSTAKE any guess on when this will be on chain?

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We thank all community members for participating in the forum discussion and sharing active feedback and support.

Taking into account all points, here are the proposed next steps:

  • Proposing a 3/5 multisig implementation for facilitating on-chain transactions comprising of active community contributors and validators like Stakecito, Provalidator, Nocturnal Labs, StableLab, StakeWithUs.

The multisig will only facilitate the following transactions before stkDYDX is governed entirely by DYDX governance:

  1. IBC DYDX to Persistence One

  2. Liquid Stake DYDX with pSTAKE

  3. IBC stkDYDX back to dYdX chain

  1. Send stkDYDX to dYdX Community Pool
  • Adding an economic security criteria for the last 750k DYDX tranche to be liquid staked as “0.75M DYDX is liquid staked after total stkDYDX TVL crosses $20M and Persistence One’s economic security has a 50% increase to $90M”

We expect to put an on-chain proposal once the community has been updated with this and also done some mainnet testing around sending stkDYDX to the Community Pool.

1 Like