Original Thread: Commonwealth
Published on 6/14/2023
One of the discussions which keeps popping up as soon as features from Osmosis (incentives, SFS, …) is whether we want unlimited exposure to LSTs or not. Everytime the discussion is closed with “this doesn’t belong in this thread”, but not getting to a conclusion for that specific question creates a void which is undesirable.
One of the latest threads around this can be found here:
In the past we have spoken about the desire to:
- not make a difference between LSTs for the same asset from different providers
- work with a cap of LST exposed native assets on our chain
Both have not been fully enforced and require patching on a case-by-case basis. This thread is to finally come to a conclusion and I invite everyone to weigh in.
@John_Galt @RedRabbit33 @Johnny Wyles @RoboMcGobo
Happy to see this deep discussion about liquid staking! Many good points have already been made. Let me add a few small comments.
Stride contributors fully support the idea of liquid staking caps. We’re working on the “liquid staking module” (LSM) with Iqlusion, which would limit total liquid staking on Cosmos Hub to 25% of all staked ATOM. The mechanism used is this: since all liquid staking on the Hub uses interchain accounts (ICAs), LSM introduces a hard cap on staking from ICAs such that ICAs can only hold up to 25% of all staked ATOM. After that, it’s impossible for ICAs to stake ATOM.
LSM also includes instant liquid staking and the validator bond mechanism. As this discussion has pointed out, these two features are a bit more complex and nuanced than the liquid staking cap. Perhaps it would be best if Osmosis governance implemented the simple liquid staking cap from LSM and not the other features - at least to start.
So what cap should Osmosis governance set? In my view, it should be 25%.
The reality is, if OSMO is to have sustainable onchain use-cases aside from staking, then it needs to be liquid staked. Forfeited staking rewards make any OSMO use-cases aside from staking prohibitively expensive, due to the opportunity cost of forfeited staking rewards. So stOSMO is needed for:
- The stOSMO/OSMO pool
- Collateralization on Umee, Shade, Demex, and soon Mars
- Inclusion in index tokens, like stIBCX
- Potentially trading NFTs
- And people who just want to hold stOSMO
If the liquid staking cap for OSMO were only 5%, that may not be enough to meet demand for these use-cases. For instance, in a scenario where stIBCX takes off and becomes popular throughout the Cosmos, if there isn’t enough stOSMO available because of a low cap then the percentage weight of stOSMO in the basket would have to be reduced, which wouldn’t be good for Osmosis.
For these reasons, I think 25% would be a good cap. Low enough to be safe, but still high enough to meet the expected demand for liquid staked OSMO. In the competitive game of crypto, users prefer to hold tokens that are the most useful, and for high staking reward tokens liquid staking is the key to usefulness.
luisqa | Interbloc
Support what John said. 25% is a good number that allows LST to be useful without being an issue in terms of governance or security.
Why do you believe 25% would be a good initial cap?
Currently, of the 598.9 million OSMO that is in circulation…
- 42.5% (or 254.7 million) is being staked.
- 12.2% (or 31.1 million) is from SFS
- 15.2% (or 90.2 million) is held by the Community Pool (source)
- 14.8% (or 88.2 million) is in a liquidity pool on Osmosis (source)
- 35.2% (or 31.1 million) of OSMO that are in a liquidity pool is SFS.
- 5.2% (or 31.1 million OSMO) is being SFS (source)
- 1.6% (or 9.8 million) is being liquid staked with Stride (source)
- 1.2% (or 7.2 million) is staked (source)
- 0.4% (or 2.3 million) is in the process of being unstaked (source)
- If there was as much OSMO being liquid staked with Quicksilver (which is a rather generous assumption), 3.2% of OSMO (or 19.6 million) would be currently liquid staked.
Personally, I think an initial 25% cap is too high and see little downside to starting with a lower cap based on the figures above. An initial 25% cap also worries me given Stride’s current delegation practice, which may not be ‘bad’, but at the same time isn’t all that great either. Setting a lower initial cap could be used to effectively incentivize Stride to adopt a better delegation strategy. An initial 25% cap would essentially give up some of the little leverage that Osmosis voters have over liquid staking providers to choose to manage the risks of their delegation practices more appropriately as liquid staking becomes more popular.
You do make some good points on why a 5% cap may be too low, but just because they are good reasons why a 5% cap may be too low, doesn’t mean that they are good reasons to set the initial cap at 25%. Just because Atom’s is set at 25% isn’t a good reason either. Channeling my mother, if Atom decided to jump off a cliff, should Osmosis jump off the cliff as well?
A floating cap where the amount of OSMO that can be liquid staked with any one provider is capped at the amount of OSMO that is SFS, or capping the amount of OSMO that can be liquid staked regardless of provider at the amount that are in a liquidity pool on Osmosis may perhaps be a more appropriate way to manage the risks that are unique to each provider’s model, the overall risks of liquid staking, and maintain a healthy balance between SFS, liquid staking, liquid staking providers. Therefore, an initial cap of 10% or 15% seems appropriate to me given that 5.2% of OSMO is currently being SFS and 14.8% are in a liquidity pool on Osmosis.
Setting an LST cap by provider at the amount of OSMO that is being SFS for each will increase with the reduction of the SFS risk factor and as SFS is enabled for more pools. This could be a particularly effective mechanism to manage risks and help maintain balance if SFS is enabled on just the stOSMO/OSMO pool and not the qOSMO/OSMO pool, and if the option to immediate convert staked OSMO to an OSMO LST is ever offered.
Perhaps the ideas I have proposed have already been discussed, analyzed, and ruled out as viable options by individuals much smarter than I. If so, it might be helpful to know what other seemingly reasonable options have been already ruled out as unviable.
Cosmos Hub governance choose 25% as a liquid staking cap because it is as high as possible while being safely under the 33.3% threshold. The primary liquid staking risk is that a single liquid staking provider garners more than 33.3% of stake, since this would allow it to disrupt the chain. So by choosing 25% and by making that cap not apply to single liquid staking providers but instead all providers together - this risk is removed.
25% improves the safety profile of liquid staking considerably, while at the same time providing as much latitude to users and other protocols as possible.
Ultimately, in a free market the best product wins. If stOSMO has more restrictions and limitations than stATOM, users and other protocols may prefer stATOM.
As I suggested before, it’s helpful to think of things from - for example - the perspective of a protocol that provides index tokens composed of liquid staked tokens. If there’s uncertainty about the supply of stOSMO due to a low cap, the index protocol may not be able to include very much stOSMO in its basket, because a lack of stOSMO would impinge on users’ ability to mint the index token.
Good discussion here
Just to be sure; the 25% is compared to the total delegated amount right? So we don’t need to look at what is in the community pool or not staked by individuals. But we only need to look at the total delegated OSMO and take 25% of that as a limit?
Is this limit also flexible in scaling up and down? Scaling up is easy, because it opens up possibilities for new people to convert to liquid staked OSMO. Has scaling down been tested? How does reducing the total allowed amount of liquid staked OSMO? Who is thrown out of her/his position?
Furthermore; I am a bit searching for the method where in this early stage market we help competition a bit. Having 1 parameter for liquid staked OSMO in general can come with the price that the early adopter moves in and takes everything, whereas the competition can be hindered by the cap. So I think the cap is good, but there should also be some kind of incentive to promote diversification of liquid staking providers to minimize the risk even further.
Atom and Osmo have completely different use cases and tokenomics though. I don’t see either ATOM or OSMO, nor stATOM or stOSMO being in direct competition with one another. Rather I see stOSMO being in direct competition with qOSMO, and both indirectly competing with SFS. That being said, with less than 4% of OSMO being liquid staked, I still don’t see any justification for there being an initial 25% cap other than it is what Atom is doing. I see more justification for a 5%, 10% or even 15% initial cap given the amount of OSMO that is SFS and are in a liquidity pool on Osmosis. Even an initial cap of 15% per provider, and 30% in total, would allow the amount of OSMO being liquid staked with Stride to increase by nearly 1,186%; an additional 83 million OSMO could still be staked with Stride before it reached a 15% provider cap. Given the current growth rate of OSMO LSTs, it doesn’t seem likely either Stride or Quicksilver could reach a 15% provider cap in the next 12 months. Do users really need that much more initial latitude?
I also see a cap by provider as a compromise to allow there to be an initial higher cap that would help ensure a fair and competitive market exists between current and potential OSMO LST providers, as evidence suggests that the ‘best’ products rarely ‘win’ in a free market, but do so usually in a free, fair, and competitive market.
Index tokens are also only just beginning to emerge. Since index tokens that are partially or fully composed of LSTs are inherently more complex than index tokens that are not, following the general rule of thumb that more complex financial instruments are risker than less complex financial instruments, I don’t believe it would be such a ‘bad’ thing to be a little more risk averse and set a lower initial cap, especially as being a self-proclaimed ‘Boglehead’, the current state of index tokens has me rather concerned.
I wouldn’t be opposed to implementing something similar ATOM LST module. I think it would wise to evaluate whether any of the parameters need to be adjusted, replaced with an alternative, or new ones added before permanently implementing it as is though. For example, the 1:250 self bond to delegation eligibility ratio is a parameter I would want to look at and think could be adjusted higher if we were to require any and all validators that are interested in receiving delegations to have X amount or Y% of tokens self bonded on every chain they validate for. I would also be interested in the potential effects of setting ratios by quartile rank, with the top quartile of having a marginally lower ratio (eg 1:225) and the lowest quartile having a marginally larger one (eg 1:275) not just in the interest of decentralization, but more importantly to help level the playing field as just as workers with annual incomes that are in the top quartile have the ability to ‘pay to play’, so should validators in the top quartile,
I also don’t mind, Governance implementing the ATOM LST module temporarily, as I believe it would provide an opportunity for Governance to to see if iqlusion (which led the ATOM LST working group) would be interested in leading a group of Osmosis community members and replicate the working group model used to design the ATOM LST module to conduct a fair and timely evaluation of which paraments need to be adjusted for Osmosis’s needs, a risk assessment regarding SFS for both the stOSMO and qOSMO pools, and what steps governance should take to mitigate those risks if it wanted to enable SFS. I believe this would provide an opportunity for each working group to learn from the experience of the other and recommend to their respective governing bodies whether any changes to the module on their chain should be made…
I also don’t believe stakers should receive preferential treatment and be allowed to convert their staked OSMO immediately to stOSMO or qOSMO and be able to access it without having to wait the 14 days to unbond.I dont have a problem with the immediate conversion. It’s the immediate access that unsettles me. Immediate access in my opinion is something that is reserved for emergency situations. I wouldn’t be completely opposed to allowing stakers a short window of opportunity to do this though if it coincided with the first seven days of the launch of some new pool such as qATOM:qOSMO pool, stATOM:IST , or qOSMO:CMST for example. I also wouldn’t be opposed to immediate access if we charged a 0.3% ‘convenient conversion’ fee to be able to immediately convert staked OSMO to a liquid staking OSMO token and have immediate access to it. If this is something that STRD and QCK are better suited to collect on our behalf , and would do so if they could collect a 3-5% processing fee like what credit card companies charge retailers from the revenue they collect for us I think that would be fair. ’
Personally, with all the changes that are coming down the line that goes into August or September I believe that if this was to be enabled sooner rather than later, that the cap be set to no more than 10% above what the current percent is at rather than just leaving it at 25% especially if we are going to allow immediate conversion and access. So if 8% of OSMO is being liquid staked the cap would be set to 18% and if 10% of OSMO is being liquid staked the cap would be 20%. Or are we already at like 15% OSMO being liquid staked and the cap be be 25%? Anyway, just as Mars and Umee manage risks when they add a new borrow/lend asset by starting low and slowly raising it, I believe that is how we should approach this new LST module immediate conversion and access feature. And if the argument is that is easy to lower the cap if needed, I see no reason why it isn’t just as easy to raise the cap when needed.
Imo, the only reason not to allow for immediate conversion to LSTs is the risk that everyone will do it at once and sell. They’re mitigating this on the Hub with the self-bonding requirement for validators, which should cause conversion to LSTs to roll out in a more staggered fashion over a longer period. I think it makes sense to do something similar on Osmosis.
A working group or task force that monitors the LST module and adjusts caps and such accordingly is a great idea. Similar to the incentives working group, I think having a collective of people that monitor LST risk and adjust the caps upwards or downwards would be a great way to roll this out.
Direct conversion is not a direct risk coming from validators only, is it? It sounds like the mitigation measures are set for validators, but that leaves the delegators to be free to play.
Where can I read more on this mitigation measure? Can’t find it right now ^^
I agree with @luisqa | Interbloc
Right now a lot of Cosmos chains have a decision to make. There’s a tradeoff to be made between the risks and benefits posed by LSTs. It’s becoming increasingly clear that the next bull market will be driven by liquid staking and the massive impact that this will have on Cosmos DeFi.
At the same time, I think it’s extremely reasonable to not want a majority of stake allocated to liquid staking providers. In my mind, the LSM is a perfect compromise for the issues at play here. I’ve spoken about this previously as well. https://twitter.com/RoboMcGobo/status/1648351708659998721?s=20
In exchange for a cap on LSTs, we should be seeking to implement policies that encourage liquid staking (up to the cap). The LSM provides this by enabling instant conversion of staked OSMO to a liquid staked form of OSMO, thus encouraging liquid staking while placing a safety parameter on it as well. Liquid staking is going to play a large part in the growth of DeFi moving forward. Osmosis can choose to help foster that safely, or stifle it and get left behind by competitors that are already actively embracing it (think Neutron / Astroport, Shade, Kujira, and White Whale).
It’s also worth noting that the cap amount of 25% is governance adjustable, so if Osmosis decides it is more risk averse or risk tolerant than the Hub, it can change that cap accordingly.
Tbh I’m impatient, and would like to see a proposal to onboard the LSM on Osmosis even before it goes live on the Hub. The longer we wait, the more unattractive Osmosis becomes as a LST DeFi hub as compared with Astroport on Neutron. But I can appreciate letting the Hub test this untested module in a real environment first.
Reading through the LSM it isn’t quite what I thought it was - it seems like a way for existing staked tokens to become liquid by staking them via a DAO model?
I’m looking here: GitHub - iqlusioninc/liquidity-staking-module
Looks like the fork on the cosmos hub is pretty old?
If I understand this correctly, liquid staking that is already implemented would have to adjust to comply with this. I.e. self impose participation.
If Osmosis and others such as Mars hold the LST providers to this by refusing incentives/listings etc unless they are participating then that would force LST providers to be held to the verification that the LSM provides.
However, this does feel like a roundabout way of doing the same thing as we could do now… I may be arguing in circles here.
Maybe we should just set a rather low LST usage target and remove incentives/superfluid if it goes above this as part of the initial proposals?
While not a hard cap which would totally prevent the cascade I worry about, it would still be a soft cap set far lower as an early warning sign.
As to what that cap should be - I think having a soft cap at around 5% for incentives removal and around 10% for SFS removal may be appropriate.
Current proportions of stake held by Stride are as follows:
I also want to record that, while the Terra collapse and subsequent total failure of security was mostly caused by the ability to mint additional LUNA as UST redemption, the bLUNA leverage loop is what enabled this. Since there is no stablecoin solely backed by OSMO it isn’t the same situation, but we do not want to take risks with security at all.
bLUNA at peak reached about 25% of LUNA stake but that is not to say this pattern would be repeated.
luisqa | Interbloc
The LS module for cosmos hub has a 25% cap on LSTs. Think that is worth exploring after it goes live on cosmos. We should analyze the results then.
I am definitely going to take the Liberty of an alternate position here
And what would your alternate position here? #curious ^^
So, the essence would be when there is a mechanism where LST earn less compared to native stakers we already would have the dynamic in place which would regulate it automatically?
Where some people might be ok with lower rewards as a trade-off for having liquid coins?
And some people might go for higher rewards with a trade-off for stickiness of the coins?
I would say that the 25% limit applied by the Hub is a well define safeguard. But when it comes to osmosis the supply dynamic is relatively different. Remember that ATOMs a mostly useless beyond providing security collateral. Sure LS will bring some additional liquidity features but this is estimated to remain economically minor in the general usecases for this token. Therefore the risk factor on ATOMs is actually centered around supply & demand balance between those willing to use the LSM to liquify instantly.
On Osmosis side the equation is somewhat different as the token’s usecase are. Most OSMOs are intended to be used in LP since the tokenomics revamp. As the new model is expected to push delegators to provide liquidity instead of conventional staking. Assuming that, rough estimates on our models shows that over a year, 1/3 of all OSMOs should end up in liquidity provision (either directly or indireclty via vaults, smart contracts, supercharged pools, etc…). Therefore the collateral risks here would also be different. The main impact factor would then be the volatility of pools containing OSMO tokens. Which greatly extends the surface area.
A general safe approach to better balance risk would be to align a long-term target at 25% but with a safer initial approach by gradually getting to this target, potentially starting with a 15% cap that would be raised via governance as we see how holders behave with their liquid staked OSMOs (are they holding them simply or do we see now liquidity providing use cases)
Anyway there’s no doubt this is going to be a interesting community debate on the matter !
It should be an interesting debate indeed, but that is exactly where this thread is for
I see a lot of people in here ok with 25%, but also with a slightly lower safer approach. Can we safely assume we are good to go to convert this slowly into a draft?