[Proposal] Onboarding bATOM as collateral

Mechanism
1

TL;DR

Enabling bATOM as collateral on Anchor Protocol by onboarding wrapped stkATOM (built by pSTAKE Finance) to the Terra Ecosystem. Holders of stkATOM earn staking rewards while maintaining the liquidity of their staked ATOM.

At present, there are no major decentralized use-cases for borrowing against users’ ATOM holdings. This presents a great opportunity for Anchor Protocol to be the first major decentralized protocol to offer collateralized borrowing against staked ATOM and narrow the gap between deposits and borrows on Anchor Protocol (https://twitter.com/stablekwon/status/1486878323812700166).

Introduction

pSTAKE is a liquid staking protocol that unlocks the liquidity of staked PoS assets such as ATOM (with support for more Cosmos/Tendermint and non-Tendermint based assets expected to go live by Q2 of this year).

ATOM holders can stake their assets on the Cosmos Hub via pSTAKE to earn staking rewards and receive 1:1 pegged ERC-20 stkATOM, representing the staked ATOM. The stkATOM issued to users can then be used to leverage up or generate additional yields offered by other DeFi protocols such as Anchor Protocol.

pSTAKE mirrors the staking mechanism of the Cosmos Hub by following a dual token model which splits the staked ATOM and reward ATOM into two different tokens, namely stkATOM and pATOM (1:1 pegged ERC-20 unstaked ATOM) respectively. stkATOM holders earn staking rewards in the form of pATOM. Users holding stkATOM can redeem ATOM (1:1) by either using the pSTAKE protocol (unbonding period of 21 days applies) or through existing stkATOM liquidity pools on decentralized exchanges (DEXs).

bATOM

bATOM is the wrapped version of stkATOM on the Terra blockchain. Holders of stkATOM will be able to convert their stkATOM to bATOM and vice-versa using the Wormhole bridge.

All holders of bATOM (uncollateralized) on Anchor will be able to claim their staking rewards in the form of UST. Anchor users who collateralize their bATOM tokens to borrow UST will forfeit their staking rewards, which will be distributed to UST lenders or aUST holders.

Why onboard bATOM?

Anchor Protocol has been built to offer stable yields on Terra stablecoin deposits. In order for Anchor to offer stable yields, it needs to onboard multiple yield-bearing liquid-staked PoS assets as collateral. Greater diversity in the collateral assets onboarded to Anchor would result in a more robust system that can better deal with the volatility of certain crypto assets.

The staking reward for stkATOM is currently ~12% APR (after protocol commissions and validator commissions), which will be the highest staking reward on any asset on Anchor Protocol at this stage. A high staking reward asset as collateral helps Anchor to continue offering the highest stable yields on stablecoin deposits in the market.

In addition to the diversity of collateral assets and higher staking rewards, the onboarding of bATOM as collateral would result in Anchor offering the first major decentralized borrowing use case for ATOM stakers, which would, in turn, facilitate the onboarding of new borrowers to the platform while allowing ATOM stakers to lever up on their staked token holdings. This would also increase the utilization ratio of the deposited UST and increase the demand for UST within the Cosmos ecosystem. pSTAKE plans on further incentivizing borrowers on Anchor to bootstrap bATOM adoption, the details of which will be published later.

About pSTAKE Finance

Stakers today need to lock up their PoS assets (such as ATOM, LUNA, ETH, SOL, etc.) on their respective networks to earn staking rewards. Staked assets are usually illiquid and cannot be put to any further use. pSTAKE solves this user-facing problem by issuing liquid staked representatives against assets staked via the pSTAKE protocol.

pSTAKE is a liquid staking protocol that unlocks the liquidity of staked PoS assets (starting with ATOM/Tendermint-based assets and subsequently launching for SOL, ETH 2.0, and other PoS assets).

PoS token holders can stake their assets via pSTAKE to earn staking rewards and receive staked representative tokens (stkASSETs) that can be used to leverage up or generate additional yields offered by other DeFi protocols.

Proposal

Whitelist and onboard bATOM, the base asset of the Cosmos ecosystem, as collateral on Anchor to increase the collateral value of the platform and raise the utilization ratio of the lent out UST deposits on Anchor.

Proposed Maximum LTV - 60%

Risks

  1. Smart Contract Risk: Similar to all smart contract-based decentralized applications, pSTAKE faces smart contract risks. All of the pSTAKE contracts in production have been audited by professional third-party security audit firms (Trail of Bits, ConsenSys Diligence, PeckShield, Solidified, and Oak Securities).

The audits conducted on pSTAKE’s smart contracts can be found here.

  1. Slashing Risks: The pSTAKE protocol delegates ATOM staked via pSTAKE to validators that secure the Cosmos Hub. This exposes users to risks of slashing if any of the below-mentioned validators are not operating their validator nodes with secure infrastructure, monitoring, and utmost care. To alleviate this risk, the pSTAKE protocol has whitelisted 6 validators who receive delegations via the assets staked by pSTAKE. pSTAKE has been live for about 9 months now with no slashing events.

The core team building pSTAKE remains committed to resolving the risk of slashing for end-users and will use treasury resources to refund users for any slashing event by staking ATOM on users’ behalf until such a time when active on-chain slashing insurance is built out.

The current set of validators has been carefully chosen. These validators run enterprise-grade infrastructure and have been long-term participants of the Cosmos Hub and the Cosmos ecosystem. Below is a list of the validators that receive delegations via pSTAKE:

  1. Stake.fish
  2. Cosmostation
  3. Chorus One
  4. Figment
  5. Everstake
  6. AUDIT.one

The short-term goal of the pSTAKE protocol is to delegate assets to high-quality PoS validators that are also active participants in the Cosmos Hub’s governance. $PSTAKE token holders can vote to add or remove validators from the pSTAKE delegation-receiving validator set. The longer-term goal is to decentralize the validator onboarding process while also decentralizing the Cosmos Hub by adding validators to the set that do not have large voting power on the Hub.

  1. Liquidity Risk: The distribution of staking rewards to lenders of UST on Anchor and liquidations of stkATOM is largely dependent on the liquidity of stkATOM on decentralized exchanges. This risk is common to most DeFi products.

With the launch of $PSTAKE imminent, the community will be allocating $PSTAKE rewards to liquidity mining campaigns to bootstrap liquidity for stkATOM and other stkASSETs.

For staking reward liquidations and conversion to UST, pSTAKE also offers users the ability to redeem ATOM in a 1:1 manner for the staking rewards accrued on stkATOM (staking rewards are accrued as pATOM) and bATOM holdings without relying on the liquidity of stkATOM in secondary markets.

In the case of insufficient liquidity in the stkATOM pools on Decentralised Exchanges, the alternative approach would be for Anchor Protocol to convert pATOM rewards to ATOM using pSTAKE, instantly followed by swapping ATOM for UST on a DEX such as Osmosis, which can then be distributed to UST lenders on Anchor and the yield reserve.

The flow for this would be:

  1. pATOM rewards are converted to ATOM by withdrawing from pSTAKE
  2. ATOM is sent to Osmosis via IBC transfer
  3. ATOM is swapped for UST via the ATOM-UST pool on Osmosis
  4. UST is sent back to Terra via IBC transfer
  5. UST is distributed to stakeholders on Anchor Protocol

This fall-back option provides Anchor with a flexible way to distribute UST irrespective of the liquidity of stkATOM.

  1. Wormhole Bridge Risk: stkATOM is wrapped into bATOM using the Wormhole bridge which, if compromised, can result in a loss of funds for all users.

pSTAKE - Anchor Protocol Integration Audits

The smart contracts for supporting the conversion of stkATOM to bATOM and enabling collateralization of the asset on Anchor Protocol have been audited by PeckShield and Oak Security, thus reducing the risk of unknown attack vectors surfacing.

Other Resources:

Users can read more about how pSTAKE on docs.pstake.finance. A dedicated user guide will be shared with the Anchor Protocol community on how ATOM holders can mint stkATOM and use it on Anchor Protocol to borrow UST.

13 Likes
2

I am in . You have my vote.
Disclaimer i also voted yes for juno prop 16.
I m deep IBC grids.
For some, this response will be seen as an upside and even an evolutionary path – a significant step, in particular, toward decentralized autonomous organizations (DAOs) that have real enforcement power and are willing to flex it.

2 Likes
3

Same here this is as good…I’m in

4

Uhm, why does pStake use an ethereum erc20 token for staked ATOM? Terra chain has implemented IBC, why not a native Cosmos form of staked ATOM? Aside from this, I am all for bATOM. An erc20 bATOM adds unezsary complication and uswr end fees no?

1 Like
5

I am fully on board with getting bAtom onto anchor
However, it should release with 80% liquidation LTV
Giving up 12% yield to borrow makes having an LTV at like 30-40% super inefficient
We need to allow people to have 50-60% from the offset

2 Likes
7

Hey, that’s a great question.
When we started building out pSTAKE, IBC wasn’t live, there was no DEX in the Cosmos ecosystem, no DeFi, etc. The goal was to enable staked assets to be liquid from the get-go which required stkASSETs to be trading on a DEX. Keeping this in mind, the team chose to issue stkATOM as an ERC20 token.

For now, for folks using stkATOM on Anchor, there would be no major implications. Minting stkATOM would only require a small ATOM fee (same as making any send coin txn on the Cosmos Hub). Once stkATOM is issued, to wrap it into bATOM, pSTAKE is integrating with Biconomy to make transactions gasless for end-users (thus making the first conversion step also free of cost). The Biconomy integration is already live in testnet and will be live from the moment bATOM gets accepted on Anchor Protocol.

Only redemption of bATOM on the wormhole bridge would require some ETH fees for end-users but the upside of this using bATOM on Anchor Protocol offsets this fee. Hopefully, this addresses your concerns.

2 Likes
8

Awesome! Nice to see multiple audits are already done as well (got a link handy?).

I am wondering why we are only starting with 6 validators? I think we should shoot for starting with 10% of the current validators. As of now, those 6 listed above include mostly the top current delegated-to validators on Cosmos. We should add others that have an excellent track record, as I am sure there are more. Just to note, currently the list of 6 includes the #1, #12, #13, #15, #28, #49 validators on the network. I think we should add more not in the top 20 as well to promote decentralization, as long as their records are up to snuff of course.

ATOM staking rewards are currently ~15.8% but stkATOM rewards are 12% so we’ll use that (why the large difference?), the current average Anchor borrow LTV is ~46%, and Borrow APR is 11.8%. This means that as long as bATOM depositors took out an average LTV and simply put it in Earn, then Anchor would gain 8.2% towards the protocol (100% x 12% + 46% x 11.8% - 46% x 20%).
This has a positive effect on the Yield Reserve.

However, as @KashHurley mentioned above, if the Max LTV is set to only 60% users may be less likely to take on fees/opportunity cost amounting to 17-20% (only 13-16% if you include ANC rewards). It is worth noting that with ATOM’s staking rewards, as shown above, a higher LTV would still contribute to the Yield Reserve and make it more worth the opportunity cost. I don’t know if 60% was selected due to the more complicated redemption process post-liquidations though, so that should definitely be considered as well.

1 Like
9

Yes read above in the original post