In the Staking Hub telegram channel, Gavin (from Figment) asked this interesting question - is there any social utility to bonded, but unslashable, stake in a world of staking derivatives? This post dissects the problem and presents my view on the topic. It would be great to hear alternative opinions.
Detailing the question
In recent days, Solana announced its intention to have 100% of staked capital slashable. That policy is a radical departure from the design of the Cosmos Hub. On the Cosmos Hub:
- Delegators bond ~70% (~180 million atoms) of the supply.
- Only 5% of the bonded amount is slashable. Therefore, 9 million atoms are slashable.
- 171 million atoms are locked up but at no risk of slashing.
There might be an alternate design to the Cosmos Hub Alt, which makes all of the bonded capital slashable. It might end up at an operating point, such as:
- 25% of the supply - 65 million atoms - are bonded. All of the bonded amounts are slashable.
- 75% of the supply exists as liquid atoms.
The question is whether the 171 million atoms that are locked up, but at no risk, produce any utility. They provide social disutility due to the reduction in delegator options.
This question has existed for a while, but staking derivatives contribute a new flavor to the problem:
- Staking derivatives allow for the representation of locked up, but not at risk, bonded atoms as liquid assets. Everett bATOMs, delegation vouchers, and BHarvest delegation trading bring liquidity to this capital via derivatives.
- Is there something circular about this future? The Hub locked up 171 million atoms, only for them to be made liquid via derivatives. Why lock them up in the first place?
There is utility in locking up atoms, without slashing risk, even if the supply were to be made liquid by staking derivatives. Consider the efficiency from the perspective of 3 different derivative inventions - delegation trading, delegation vouchers, and delegation tranches.
Probably the most straightforward derivatives system implemented by BHarvest in the Berlin Hackathon. They created a mechanism by which delegations are transferable from one account to another. An order book atom-delegation trading system exists atop the device. It enables one to sell Figment delegations for atoms via the BHarvest DEX.
Let’s think from an attacker’s perspective. The cheapest, but consequential, attack on the network is a 33% censorship attack. The attacker is somehow able to route 33% of voting power to validators controlled by them and censor the chain. They could benefit from short positions on the atom opened up before the attack. (Note: It’s hard to execute this attack with known validators due to insider trading and criminal liability rules).
In the standard Cosmos Hub, such an attacker would need to buy delegations worth 60 million atoms (1/3rd of 180 million), re-delegate them to a malicious validator set, and then execute the attack. In Cosmos Hub Alt, with a 100% slashing rate, the attacker would need to buy delegations worth 21.66 million (1/3rd of 65 million) to execute the same attack.
Hence, even though 171 million are unslashable, they have produced utility in making it harder for an attacker to garner enough voting power.
Delegation Vouchers are an extension of delegation trading - they tokenize delegations into validator-specific vouchers. As such, the same argument from earlier stands for delegation vouchers. Unslashable atoms make it more expensive to mount an attack by buying up delegation vouchers.
The bATOM system represents the 171 million bonded, but unslashable, atoms as a new liquid asset - the bATOM. The system is dependent on the existence of unslashable bonded atoms and does not generalize to the Solana proposal.
Since bATOMs are viable only on the current Cosmos Hub, not Cosmos Hub Alt, the creators of the system will strongly favor the current configuration.
There would be utility in locking up atoms without slashing risk, even if such assets were to be made liquid via staking derivatives. For Delegation tranches, the existence of bonded but unslashable atoms is a necessary pre-condition. Overall, the Hub’s current policy is future-proof.