Delegation Tokenization Summarized

This post is summarizing the recent delegation tokenization discussions in the community and suggest the most agreeable design.

The original document is available here :

Delegation Tokenization on Cosmos-SDK

This post explains about delegation tokenization on Cosmos-SDK.
The contents are composed of 1) Context, 2) General Effects and Risks, 3) Possible Design Options, and 4) Technical Specs.

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

Fungibility : Extracting the Fungible Part from Delegation Assets

  • Delegation assets have below multiple risk/return sub-profiles
    • Staking Return
      • Inflationary(or non-inflationary) staking token rewards
      • Gas fee distribution
    • Staking Fee
      • Validator commission fee
    • Risk
      • Slashing risk : double signing, down time
  • Non-fungibility of delegation assets across validators
    • Each validator has different staking return, staking fee, and slashing risk
  • Non-fungibility over same validator
    • Different beginning/ending block height for staking
    • Different reward withdrawal activities from delegators
  • Fungibility of delegation assets over same validator
    • For given identical staking period, all risk/return profiles are fungible over same validator
    • Standardization of staking periods will allow the modules to make delegation fungible over same validator

2. General Philosophy

Providing Minimal Building Block from Cosmos-SDK Modules for Staking Derivatives

  • Simplest design possible
    • The base layer Cosmos-SDK feature should have the most minimal and simplest design
    • The model should allow most other blockchains, which utilize Cosmos-SDK, to adopt the feature without problems
    • The model should not demand strong assumptions on staking environment for maximal generalization
  • Transferable fungible tokens from delegation assets tokenization
    • The delegation tokens should be transferable not only inside the Cosmos Hub, but also to different networks via IBC
    • The delegation tokens should be fungible tokens for better trading standard and liquidity

Validator-Based Fungibility

  • Staking returns and risks are fungible for delegations upon same validator
  • The base layer should provide validator-based fungible delegation tokens for a minimal building block
  • Further synthetic process from staking derivatives can create more fungible delegation tokens over multiple validators

Standardized Reward Distribution Period

  • Even though staking returns and risks are fungible over same validator, they are not fungible over different staking periods
  • Therefore, we need to have a standardized staking period so that the returns are fungible inside the selected staking period

3. Possible Risk Vectors

Functional Errors on Base Layer

  • Attack vectors on minting/burning delegation tokens
  • Malfunctioning upon slashing events

Unexpected Economic Consequences

  • Validator set centralization
    • There will exist some staking derivatives products which amplify the difference of staking returns from different validators
    • It might lead to accelerate validator set centralization towards low or free commission fee
  • Governance vote buying
    • Some staking derivatives products can allow users to buy/sell governance voting rights

Hacking or Manipulation on Staking Derivatives

  • Staking derivatives products
    • After we have base layer delegation tokenization, lots of staking derivatives can be provided from different blockchains
  • Migration of delegation tokens to different networks
    • Some of the delegation tokens will be transferred to different networks to use such new staking derivatives products
  • Hacking risk on staking derivatives
    • New staking derivatives in other blockchains can be hacked or manipulated so that significant amount of delegation tokens can be stolen
  • Threat to the Cosmos Hub security
    • Stolen delegation tokens can threat the security of dPoS on the Cosmos Hub

4. Suggested Model : Delegation Tokenization Module


  • Every delegation share becomes transferable fungible token called DelegationToken
    • Fungibility is over same validator

Periodic Tokenization/Redemption

  • TokenizedDelegation and RedeemDelegation are only happening at DelegationTokenizationBlock
  • TokenizationPeriod
    • This is a governance parameter representing the frequency of DelegationTokenizationBlock
    • The default value can be 400,000 blocks(about a month)

Tokenization and Redemption of Delegations

  • TokenizeDelegation : DelegationToken minting
    • DelegationToken minting happens at next DelegationTokenizationBlock
    • MsgDelegationQueue : queue tokenization at next DelegationTokenizationBlock
  • RedeemDelegation : DelegationToken burning
    • Redemption of delegation is calculated from the proportion at last DelegationTokenizationBlock
    • MsgUnDelegationQueue : queue redemption at next DelegationTokenizationBlock

Periodic Rewards Pool

  • Periodic rewards withdrawal from module account
    • At every DelegationTokenizationBlock the module withdraw all accumulated rewards in every TokenizedDelegation
  • Bonding-token rewards management
    • Periodically auto-rebonded at DelegationTokenizationBlock
  • Non-bonding-token rewards management
    • PeriodicRewardsPool : The module stores the withdrawn non-bonding-token rewards to each PeriodicRewardsPool
      • PeriodicRewardsPool exists for each validator and each TokenizationPeriod
    • RewardCoupon : The rights to pull periodically accumulated non-bonding-token rewards
      • RewardCoupon is fungible over same validator and same period
      • The RewardCoupon for this PeriodicRewardsPool is minted and sent to DelegationToken owners
  • Reward withdraw request from RewardCoupon holders
    • RewardCoupon holders can request immediate withdrawal of rewards stored in PeriodicRewardsPool
    • Used RewardCoupon is burnt

Validator Addresses Cannot Tokenize Delegation

  • Validator addresses have additional reward factor : commission rewards
  • Therefore, it is not fungible with other delegations → Prohibit delegation tokenization by validator addresses

Maximum Delegation Tokenization Ratio

  • MaxDelegationTokenizationRatio
    • DelegationTokenizationRatio = total tokenized delegation amount / total delegation amount
    • If DelegationTokenizationRatioMaxDelegationTokenizationRatio
      • Any TokenizeDelegation is failed

5. Changes in Existing Modules

Staking Module

  • New function needed : ChangeDelegatorAddr()

    • Upon tokenization and redemption, the ownership of delegation is transferred between users and module account
    • So, there should exist such function so that the new module can handle the ownership of delegation
    • This function also should handle necessary delegation merge process if the changed owner already has delegation from same validator
      • withdraw all rewards
      • merge delegation to one object
  • New function needed : SplitDelegation()

    • When remeption is requested from DelegationToken owner, a proportion of total delegation in the module account should be transferred to the redemption requestor
    • In this process, the delegation in the module account should be splitted so that only the proportion of delegation ownership can be transferred