Gaia v12 Upgrade: Validator Instructions for Liquid Staking [ACTION REQUIRED]

These are instructions for Cosmos Hub Validators regarding the v12 Cosmos Hub upgrade expected September 13th.

What is this?

Validators must validator bond roughly 300-700 ATOM before September 13th, to participate in liquid staking. This is part of LSM’s design and strengthens PoS by having validators put some “skin in the game”. On September 13th, these tokens must be validator bonded.

The liquid staking module will go live on the Cosmos Hub as part of the v12 upgrade on September 13th.

In order to accept liquid staking delegations from liquid staking providers like Stride after LSM is live, Cosmos Hub validators will need to put some “skin in the game” by validator bonding a small amount of tokens. Even if you have self-bonded ATOM to your node, you still need to validator bond. For each ATOM bonded, validators can accept 250 ATOM from liquid staking protocols like Stride. Only validators with validator bond can accept liquid staking delegations!

This requires action on the part of each validator immediately after the upgrade. The necessary steps are below. If a validator has not validator bonded, they will be ineligible for delegations from liquid staking providers and delegates who wish to liquid stake may redelegate away to another validator so that they can liquid stake.

TLDR; you should be prepared to “validator bond” (this is similar to self-bond) roughly 300-700 ATOM on September 13th if you wish to receive delegations from liquid staking providers.

What will I need to do?

Step-by-step instructions for validators

Before September 13th:

  1. Create a new Cosmos Hub wallet valBondAccount. We recommend you should not use an existing wallet (see FAQ below for details).
  2. Determine how many ATOM you will validator-bond using our tool, or based on your own calculations.
  3. Send the number of ATOM you would like to validator-bond to valBondAccount
  4. From valBondAccount, delegate these ATOM to your validator.

On September 13th (as soon as possible after the v12 Cosmos Hub upgrade):

  1. From valBondAccount, ValidatorBond the delegation you made to your validator (see detailed instructions below).
    • The ValidatorBond transaction will mark your existing delegation as a validator bond and make your validator eligible to receive liquid staking delegations.

Congratulations, you are now eligible to receive delegations from liquid staking providers! :sunglasses::droplet:

How to validator bond (detailed instructions)

To remain eligible to receive new delegations from liquid staking providers, validators must validator bond ATOM. Even if you have self-bonded ATOM to your node, you still need to validator bond.

A delegator (or validator operator) can convert a delegation into Validator Bond by signing a ValidatorBond message. The ValidatorBond message is exposed by the staking module and can be executed as follows:

gaiad tx staking validator-bond ValidatorAddress --from mykey

If you’d like, you can rehearse this transaction ahead of time on the Cosmos Hub testnet. Here’s an example of a successful validator bond transaction on Cosmos Hub testnet:

Here’s the transaction that was submitted on the command line:

gaiad tx staking validator-bond ValidatorAddress 
  --from MyKey 
  --fees 1000uatom 
  --chain-id theta-testnet-001

You can confirm your conversion to a validator bond succeeded by querying the delegation.

> gaiad q staking delegations DelegatorAddress

- balance:
    amount: "N"
    denom: uatom
    delegator_address: cosmos123...ABC
    shares: "1.000000000000000000"
    validator_address: cosmosvaloper123...XYZ
    validator_bond: true  #<---- You should see this field = true :)

FAQ for validators

Q: How much should I validator bond?

A: For every 1 ATOM you validator bond, you will be eligible to receive up to 250 ATOM from liquid staking providers. For example, if you validator bond 1,000 ATOM, you will be eligible to receive 250,000 ATOM in delegations from liquid staking providers. Read more in the code or the ADR.

We built a tool that recommends how much you should validator bond.

:point_right: Recommended Validator Bond Tool :point_left:

When LSM goes live, a large amount of ATOM may be liquid staked. As much as 10 or 20 million ATOM could be liquid staked in the first few days. In order to receive their share of the liquid staking delegations, validators should prepare to receive double the delegations they currently receive from liquid staking providers, or an additional 100,000 ATOM, whichever is greater.

The tool recommends you validator bond an amount that would accommodate these projections.

As an example, we recommend Imperator should validator-bond 755 ATOM.

Q: When do I need to validator bond?

A: We recommend validator bonding immediately after the v12 Cosmos Hub upgrade on September 13th, 2023 (see the countdown). In the hours following the upgrade, many users will attempt to liquid stake using the liquid staking module. At that time, if a validator has not validator bonded sufficient ATOM, users will not be able to liquid stake with them, and may choose to redelegate to another validator in order to be able to liquid stake.

Q: Which wallet should I validator bond from?

A: We recommend validators create a new wallet to validator bond. This can be a new seed phrase, or a wallet derived using an existing seed phrase and a new account index. New wallets are preferred for separation of delegations marked validator bond and regular delegations. There are no partial Validator Bonds: when a delegator or validator converts delegation to a particular validator into Validator Bond, their entire delegation to that validator is converted to Validator Bond. By creating a new wallet to validator bond, an existing delegator can mark part of their delegation as validator bond (by transferring those funds to the new address and marking it as validator bond from that address), while leaving their existing delegation unchanged.

Q: What if I don’t validator bond?

A: If a validator has not validator bonded, they will be ineligible for delegations from liquid staking providers. Their delegates who wish to liquid stake may redelegate away to a validator-bonded validator, in order to liquid stake their ATOM. Liquid staking providers will delegate to validators who have validator-bonded.

Q: Can I undelegate my validator bond?

A: To convert validator bond back into standard delegation, simply unbond or redelegate the shares. Unbonding or redelegating a validator bond reduces the amount of validator bond associated with a validator. The following question outlines a case when delegating your validator bond. If unbonding or redelegating a delegator’s validator bond would cause the number of liquid staked ATOM delegated to that validator to exceed 250 times the validator’s resulting validator bond, then the unbonding or redelegation will fail. In this case, the delegator will not be able to unbond until the amount of ATOM liquid staked to the validator decreases, or the amount of validator bond to the validator increases.

Q: Are there any risks associated with validator bond?

A: In the event of a slash, validator bond delegations are slashed at the same rate as standard delegations. If the validator has little validator bond, relative to its delegations from liquid staking providers, undelegating the validator may be unsuccessful, as explained above.

Q: Is validator bond a centralizing force?

A: Hopefully not! Validators with less voting power require lower amounts of validator bond. For example, a smaller validator who wants to receive 50% of their stake from liquid staking providers requires less validator bond than a larger validator. The validator bond factor multiplier of 250 also means that the absolute size of the validator bond required isn’t too large, especially relative to the revenue validators can earn from additional delegations they receive from liquid staking providers.

Q: Why do I need to do this?

A: Please see the section “validator corruption risk” in the Appendix of the Liquid Staking Module Cosmos Hub forum post.

Q: Are validator bonded tokens the same thing as self-bonded tokens?

A: No, they are different. Self-bonded tokens are delegations made by a validator operator to their own validator node. Validator bonded tokens are delegations made from any delegator to a validator node, that have been marked as Validator Bond with the validator-bond message. Validator bond delegations have additional unbonding restrictions (see above: “Can I undelegate my validator bond?”) relative to validator bond.

Q: Do self-bonded tokens turn into validator-bond?

A: No, they do not. To designate a delegation as validator bond, the delegator must sign a validator-bond message.


What is the LSM?

The LSM is a form of regulation on liquid staking providers. It enacts a safety framework and associated governance-controlled parameters to regulate the adoption of liquid staking.

What is validator bond?

One of the LSM’s risk-mitigation features is the requirement that validators “validator bond” ATOM to be eligible for delegations from liquid staking providers or to be eligible to mint LSM tokens. This new “validator bond” mechanism is technically distinct from the current self-bond mechanism, but functions similarly.

The “validator-bond,” means that validators need to have “skin in the game” in order to be entrusted with delegations from liquid staking providers. This disincentivizes malicious behavior by the validator and empowers the validator to negotiate its relationship with liquid staking providers.

Technically speaking, the validator-bond is tracked by the LSM. The maximum number of tokens that can be delegated to a validator by a liquid staking provider is equal to the validator-bond multiplied by a parameter in the staking module, the “validator-bond factor.” The initial validator bond factor is set to 250, applies to all validators equally, and is configurable by Cosmos Hub governance.

With a validator-bond factor of 250, for every one ATOM a validator validator-bonds, that validator is eligible to receive up to two-hundred-and-fifty ATOM delegated from liquid staking providers or tokenized to their validator. The validator-bond has no impact on anything other than eligibility for delegations from liquid staking providers.

Without validator-bonding ATOM, a validator can’t receive more delegations from liquid staking providers than it already has. Existing delegations from liquid staking providers are unaffected. And if a validator’s maximum amount of delegated ATOM from liquid staking providers has been met, it would have to validator-bond more ATOM to become eligible for additional liquid staking provider delegations.

Why is the validator bond factor 250?

ValidatorBondFactor determines the degree of “skin in the game” validators must have in order to be entrusted with delegations from liquid staking providers. This disincentivizes malicious behavior and enables the validator to negotiate its relationship with liquid staking providers.

It’s important to note that the proposed 250 starting value is just a starting point. The Cosmos Hub currently does not enforce a minimum validator bond. In other words, there is currently no limit to the number of liquid staking tokens that can be minted against a validator’s stake, even if that validator has no validator bond. In practice, today most Cosmos Hub validators validator bond nothing, so this is a first step towards aligning validators and solving the principal-agent problem.

If the validator bond factor were set to 250, 3.4m USD of validator bond would be required to reach a 25% GlobalLiquidStakingCap. This seems like a reasonable amount of “skin in the game” that won’t dramatically hinder the Cosmos Hub’s capital efficiency, and the parameter can be adjusted by governance.

For a validator, the economics boil down to: is the commission revenue earned on an additional 250 units of stake from an LST provider enough to outweigh the cost of locking up 1 additional unit of validator bond? For example, on the Cosmos Hub, assuming a 5% validator commission, validator bonding 1 additional unit of ATOM can attract 250 additional units of ATOM stake from LST providers. The annual commission revenue on those additional 250 units of ATOM is 250 unit * 21% APR * 5% commission = 2.625 additional units of annual commission revenue.

In other words, the average validator can earn 2.6 units of commission revenue each year on each unit of validator bond they lock up, so it may be economical for validators to validator bond. The Cosmos Hub community, through governance, can vote to adjust to validator bond factor, to modulate the competitive dynamics between validators, liquid staking users and liquid staking providers.