Comparisons for Different Approaches for Delegation Tokenization

Archived Cosmos-SDK
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1. Context

Delegated Proof of Stake : the Standard Concensus Mechanism for Next Generation Blockchains

  • Most newly born public blockchains adopt proof of stake, especially delegated proof of stake
  • dPoS has demonstrated the most stable and secure concensus mechanism for past several years

Liquid Staking : Unlock the Staked Assets for Great Potential Economic Value

  • Most staked assets in dPoS blockchains are locked in the blockchain protocols
  • Unlocking the staked assets have great economic potential to thrive growth of investment and use-cases in dPoS networks

Delegation Tokenization : Protocol Level Base Layer Support for Liquid Staking

  • There should exist very secure support from the core blockchain modules for liquid staking
  • Simple delegation tokenization feature on dPoS is necessary to
    • allow many staking derivatives applications to bring innovated financial utilities
    • with securely built base layer protocol as a building block
  • The base layer delegation tokenization should have simple and general design

2. Important Properties

Fungibility

  • Fungible over same validator or over all validators?
  • Fungible over staking time period?
  • Can we expand fungibility further with other mechanism upon this model?

Simplicity

  • Does this model require new functionalities to be adopted?
  • Is the process of the model easy to understand?
  • Is there many complex steps which might occur bugs?

Reward Distribution

  • Does delegation token holders need to deal with actual rewards?
  • Can users trade accrued rewards without rewards withdrawal?
  • Is the reward distribution mechanism creates complexity over handling delegation tokens in contracts?

Slashing Risk Responsibility Alignment

  • Is the slashing risk well utilized to secure dPoS concensus?
  • Is the model creating the “Tragedy of Common” problem?
    • Right person is responsible for slashing event? Good alignment of incentives and responsibility?
    • Do we have mechanism to prevent it?

Independency

  • Is the model requiring other modules or functionalities as dependency?
  • Does the model break down during the dependent functionality failures?
  • Does the model require significant logic changes on existing modules such as staking or distribution?

Generality

  • Is the model adoptable for most Cosmos-SDK based networks?
  • Is the model demanding strong assumption on staking environment?

IBC/Contract Compatibility

  • The delegation token can be transferred to different blockchains via IBC
    • Is there no problem on the model when the delegation token goes outside the origin chain?
  • Lots of delegation token will be held by contracts or modules, inside or outside the origin chain
    • Is there no significant complexity around handling delegation tokens by contracts or modules?

3. Delegation Decomposition Dimensions

Delegation Decomposition by Validators : Vertical

delegation_decomposition_1

Delegation Decomposition by Fungibility : Horizontal

delegation_decomposition_2

4. Design Options

design_option

Validator Tokens with Manual Delegation Owner Update

Concept

  • A delegation is tokenized to a validator token, redeemed from a validator token
  • The validator token owner can manually update the owner of the delegation share

Advantages

  • A technically natural approach to tokenize the delegation share
  • Simple adjustment on existing module without additional functionality

Limitation

  • Delegation share ownership update transaction on the origin chain
    • Possession of the validator token should be verified upon ownership update of the delegation share
    • Therefore, the validator token should be located in the origin chain for this transaction
  • Complexity arises on ownership update actions for modules & contracts on different chains

Validator Tokens with Periodic Reward Auction

Concept

  • A delegation can be tokenized/redeemed to a validator token at periodic block height
  • At every periodic block height, accumulated rewards are withdrawn to the reward auction fund
  • Tokens in the reward auction fund are sold for bonding token, via periodic auction
  • Incoming bonding tokens from the auction are auto rebonded

Advantages

  • Reward bearing
    • Interchain DeFi compatible
    • HODL : Validator token holders do not need to perform any action
  • Auto rebond
    • Accumulated rewards are periodically auto rebonded

Limitation

  • Tokenization/Redemption is allowed only at periodic block height : Que should be introduced
  • Auction functionality should be introduced : Multiunit auction

Fungible(F-Token) + NFT(Y-Token) with Delegation Auction

Concept

  • Delegation is tokenized into fungible(F-Token) and non-fungible(Y-Token) tokens with maturity
  • Redemption before maturity is possible by returning F-Token and Y-Token
  • At maturity, delegation ownership is sold by auction
    • F-Token is used as auction bid token for any matured tokenized delegation
    • Auction winner receives the ownership of the delegation
    • Y-Token holder gets partial amount of F-Token at maturity

Advantages

  • Completely fungible F-Token creation without any necessity of on-chain action
  • Decomposition of delegation into two financially distict types of tokens
    • More precise investment & trading options for users
    • Providing better DeFi building-block for further creative staking derivative products

Limitation

  • Y-Token is not fungible (NFT)
  • Delegation auction functionality should be introduced
  • Y-Token insolvency upon harsh slashing environment will cause F-Token dilution
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